November 4 2008
A tax by any other name
Yesterday, we county councillors had a seminar on Section 106 agreements, or planning obligations as they are also known.
This is the system in which, as part of the planning permission, a developer agrees to provide facilities that help to "mitigate the detrimental effects" of the development.
This might involve the construction of a certain number of affordable houses; a financial contribution to meet the additional calls on the education system; improvements to the transport infrastructure; provision of recycling facilities; and reserving part of the site for public open space.
Pembrokeshire County Council is consulting on a system of fixed tariffs which include developer contributions to education: £6,500 per dwelling, transportation: £2,500 pd, public open spaces: £1,000 pd, and various other goodies bringing the total to to £11,000 pd.
This all begins to look like one of those free lunches which were claimed by my guru Milton Friedman not to exist.
Critics say these 106 payments are simply a stealth tax - a successor to the betterment levy and development land tax that went before.
But, however you describe them, it cannot be denied that they are an extra cost.
And I suppose the first question that the late Milton would have asked is: And who will pay this 11 grand?
"Oh! the developers, of course ", say the supporters of the scheme.
But it ain't necessarily so.
The two extremes are that the developers will absorb the costs from their profits or that house purchasers will meet the bill.
The more likely scenario is a bit of both.
Of course, in the present situation, with house builders issuing daily profit warnings and estate agents' offices resembling the Marie Celeste, this is all largely academic.
As they say: you can't get blood out of a stone, but, even if we turn the clock back 18-months, the economic case against Section 106 is not difficult to make out.
Most people understand the basic relationship between supply, demand and price: when demand exceeds supply prices go up and when supply exceeds demand - a glut - prices fall.
Less well understood is the effect of price on supply.
I should say that price is a bit of a misnomer because when economists use the term they are muttering "all other things being equal" under their breath, and a much better description is profitability.
So, if the price of a commodity rises because demand exceeds supply, then, all other things being equal, the profitability of its production will also rise.
That being the case, existing suppliers will increase their output or new producers will come in to exploit the opportunity.
Conversely, if there is a glut, reducing prices to unprofitable levels, production will be cut back until supply, demand and price return to balance.
The point is that, if a new charge is introduced which reduces profitability, suppliers will be unwilling to maintain present levels of production.
This principle also operates on a wider basis because levels of profitability also affect levels of investment.
Generally speaking, investors are looking for the best return they can get and, if dividends are cut because the profitability of an industry is undermined, they will move their money elsewhere.
With less cash at their disposal house builders will not be able to fund the level of activity required to meet the housing shortage.
So, whichever way you look at it, the house buying public eventually meet the cost either by paying directly for these planning obligations or through higher house prices caused by blockages in the supply chain.
In short, the law of unintended consequences ensures that someone picks up the lunch bill.
The government has recently announced a Stamp Duty holiday in an attempt to kick-start the housing market.
Surely, if having to pay Stamp Duty acts as a brake on the market, an £11,000 planning obligation must have the same effect.
Indeed, much as I dislike the idea, it could be argued that a public subsidy of £11,000 on every completed new house would be more appropriate in the present economic climate.
When I made my views known during the seminar, deputy leader Cllr Jamie Adams countered that the cost of planning obligations would not impact on house prices because they were set by the market.
This is a truism which does nothing to shed light on the problem at hand.
After all, the price of Rolls Royces is set by the market, but I still can't afford one.
The question to be asked is what sort of market are we operating in.
If I were to say that the price of milk is set by the market, Cllr Adams, as a dairy farmer, would no doubt respond that the market for milk is distorted by the monopoly buying power of the big supermarkets.
And, as a free marketeer, I would argue that the market price for agricultural land is inflated by subsidies because the normal return from growing things on the land is boosted by the cash received from taxpayers.
Similarly, if the government decided to pay publicans a pound for every pint they sold, the value of pubs would shoot up.
And if the government abolished excise duty on beer, it would have the same effect.
The fact is that all taxes and subsidies distort markets to some extent.
And Section 106 agreements are no exception.
One story from the recent county council meeting that didn't make it into last week's Western Telegraph was the granting of planning permission for a huge (65m x 37m x 8m high) building in the open country near Glanrhyd in the north of the county, even though the director of development said the proposal was against policy.
There was some confusion over the role of the Leader in this matter, with some of my colleagues under the impression that he had declared an interest before withdrawing from the meeting.
I don't think that was the case.
My recollection is that he said that, because he was the local member and leader of the council, he felt his participation would be inappropriate.
In any case, he can't have an interest to declare because he spoke at the site inspection.
What was also significant was that the two deputy leaders, Cllrs Jamie Adams and John Allen-Mirehouse, together with Cllr Ken Rowlands, spoke strongly in favour of the application.
Strange that three members of the Cabinet appear to think they have a better understanding of the council's planning policy than their £100,000-a-year director.
Cllr Allen-Mirehouse's contribution was particularly interesting because he argued that, as there was already a large building on the adjoining site, this was not really in the open countryside, though he went on to admit that it was in the open countryside so far as planning law was concerned.
It seems his training as a magistrate has not had the desired effect otherwise he would know that when acting in a judicial capacity, as members are when determining planning applications, the provisions of the law are to be preferred to personal opinions.
It seems that it is not only in Pembrokeshire that elected members have difficulty with the concept of the rule of law.
My attention has been drawn to the peculiar activities of Oswestry Borough Council which granted permission for a bungalow in the open countryside contrary to policy.
This case is complicated by the fact that the applicant had a disabled child and, it seems, members may have been swayed by their sympathy for the family's predicament.
The Ombudsman found the council guilty of maladministration because members had failed to give reasons for their decision as required by law.
The council is now refusing to implement the Ombudsman's findings because, it says, it believes the needs of the applicant outweighed those of the complainants.
But the Ombudsman says This response seems to me to miss the point. It is not a question of whether the needs of the applicant outweighed those of the complainants, but whether the requirements of the Councils policies were met. The Councils comments support my view that Members appear to have been influenced by the medical needs of the child rather than restricting themselves to the planning merits of the case as they should have done.
The full report can be read at http://www.planningportal.gov.uk/news/?1115316492596
Last Friday I received the following e-mail from Mrs Amintu Mohammed from Nigeria.
Good day, how are you today? I am writing to inform you that I have not yet received your reply to my e-mail. I have been expecting to hear from you since my boss traveled to Japan for investment projects and left a bank draft of $4,700,000.00 for me to forward to you as soon as you contact me for it. However Mr. Ahmed Zafa the Director of the issuing Bank informs me that that the bank draft is about to expire and if you do not contact me within the next 24 hours the transfer to your account will not be able to go ahead."
There followed a request for my bank details and other personal information.
Unfortunately, by the time I read the e-mail, time had run out.
Just shows how important it is to regularly check your inbox.
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