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Autumn Statement 2022: A very different fiscal statement
Another year of crises and turbulence has left us once again with yet another new Chancellor delivering a fiscal statement in ‘unprecedented’ times. The inter-related challenges of the war in Ukraine, COVID recovery, supply side inflationary shocks and concerned market analysts leave the country facing ‘eye wateringly difficult’ decisions to tackle inflation, restore stability and get debt falling.   So less than eight weeks since Kwasi Kwarteng delivered the now infamous “mini-Budget” which stood out as the largest tax-cutting budget for 50 years, his successor Jeremy Hunt pivoted sharply to measures that will mean the highest tax burden in the UK’s post-war history by 2027-28 – equivalent to some 37% of total GDP.   After the fallout from the mini-budget, the markets, the Bank of England (BoE), and now the OBR have all had their say: any talk of fiscal headroom has vanished. Far from the boosterism of previous statements, this government’s priorities are now stability, growth and public services.       Return to the orthodoxy To reassure markets after recent turmoil, we were left in no doubt that the Office for Budget Responsibility (OBR) are back in the centre of things, having been essentially ignored by Kwarteng. Their independent forecasts for the economy and the public finances arguably now have more weight than at any point in the OBR’s 12 years of existence.   The OBR forecasts are similarly pessimistic in the near term to the Bank of England (BoE) (announced earlier this month), with a 1.4% decrease in GDP forecast for 2023 (1.5% BoE) but are more optimistic that this will not be the long recession forecast by the Bank of England, rebounding to growth of 1.3% in 2024 (-1% BoE 2024) and 2.6% in 2025. Even in this scenario, the OBR forecast that the ‘output gap’ will not see the economy recover to potential output levels until mid 2027 (i.e. when energy prices and inflation are set to drop) assuming that monetary policy responds to the fiscal tightening with equivalent easing.   Comparison of forecasts for real GDP growth Source: OBR, November 2022 Economic and fiscal outlook  Much of the difference can be attributed to the policy measures announced, that the OBR have been privy to in arriving at their forecasts. The reaction of the Bank of England will at least in part tell us whether the fiscal and monetary policies are in lock step.   Similarly, historically sluggish business investment, already the focus of the Prime Minister’s Budget last year when Chancellor, is 8% lower than pre pandemic levels and set to stay lower until Q3 2025.    Business Investment levels Source: OBR, November 2022 Economic and fiscal outlook  The Chancellor has been clear that addressing the ‘fiscal black hole’ means that all spending decisions have to add up to the forecasts which will really put the OBR in control. Therefore in a marked reversal from the last fiscal event there were no ambitious supply side reforms or investments, although planning reform remains part of the agenda with announcements to follow.     Funding for local Government The Autumn Statement confirms that departmental budgets will be maintained at least in line with the budgets set at last year’s Spending Review, albeit inflation is eroding these in real terms. Under the previous period of austerity, local government funding saw a disproportionately high proportion of the overall cuts. According to Centre for Cities analysis, local government in England saw its budget cut by more than half between its peak in 2009/10 and 2015/16 and the Institute for Fiscal studies analysis of the Autumn Statement make clear that the cuts of the 2010’s will not be undone for the Department for Levelling Up Housing and Communities (labelled as Housing and Communities in the chart below).   Source: IFS Analysis of Autumn Statement, 2022   Local authorities – some of which are claiming they are close to bankruptcy including Kent and Hampshire – will therefore likely welcome the additional flexibility granted by the Chancellor to raise Council taxes, providing some of the fiscal devolution that local areas have asked for. However social care will consume much of this. The Chancellor has allowed Council tax to be increased by up to 5% including a 2% social care precept.     Levelling up Levelling up appears to be back, but under the austere spending expectations there were no ‘rabbits out the hat’. The second tranche of the Levelling Up Fund will be £1.7 billion – similar to the first tranche.   New and confirmed devolution deals for Cornwall, Suffolk, Norfolk, and the North East (which is awaiting confirmation of its constituents as to the inclusion of Durham) were announced.   Devolution was also mentioned as a driver of growth. In particular, the trailblazer deals for Greater Manchester and the West Midlands, with the potential for ‘departmental-style’ settlements at the next spending review with the suggestion that this is a move away from the much maligned competitive bidding processes.   The proposed Investment Zones – one of the flagship proposals in the mini budget – have largely been watered down and will be ‘refocused’ around universities but there will be no tax reliefs or budgets associated with them. The existing expressions of interest from local authorities will not be taken forward which will no doubt leave many frustrated.   The government has also scrapped the list of infrastructure projects that were flagged for acceleration in the Growth Plan but there was a return to more of the priorities of the levelling up era. The Chancellor recommitted to HS2, Northern Powerhouse Rail and East West Rail investments.   There was notably no mention of the Shared Prosperity Fund, which poses some technical questions about the ability for local areas to spend the expected £400m fund which was to replace EU funds.      Housing and planning The Autumn Statement offered little by way of specific measures on housing and planning, so industry minds will instead be focused on the upcoming planning reforms – likely being re-drafted given the changing priorities of the day, the return of Michael Gove to his former brief, and the levelling up and regeneration bill currently passing through the House.   The exception was the stamp duty cuts which are now scheduled to continue to April 2025, when they will be tapered. Despite this measure, the OBR house price forecasts are somewhat stark – with prices not forecast to return to current levels until 2027, this is likely due to the overwhelming effect of mortgage costs outweighing any fiscal benefits from the stamp duty relief.    House Price and Mortgage rates Source: OBR, November 2022 Economic and fiscal outlook  Away from the Autumn Statement, the Secretary of State has restated his commitment to the manifesto pledge of delivering 300,ooo homes a year. Building ‘beautiful’ homes has been retained as a priority, and as a way to achieve local support for house building. Howeverwith less funding and dwindling parliamentary time meeting this target will become increasingly difficult to achieve with the OBR forecasting that net additions to fall from current levels (NB this is for the UK not England).   Net additions to the housing stock, UK Source: OBR, November 2022 Economic and fiscal outlook    Conclusions The Chancellor’s priorities from the Autumn Statement were clear.   Top of the list was to provide stability, and the initial market response suggests the Chancellor has delivered on this. Many of the measures and the gloomy economic forecasts were expected, and the tax rises and spending constraint marks a significant – albeit well trailed – about turn from the ‘boosterism’ of the previous Prime Ministers.   In the medium to longer term, the Chancellor has acknowledged that growth will be key, it is encouraging that the Chancellor has maintained that levelling up will be part of this: more devolution deals, and further deepening of devolved funding to Manchester and the West Midlands as pilots. However without any real accompanying incentives of more funding and new infrastructure, the economic and political reality of how this growth conundrum will be achieved remains to be seen.   Maintaining and improving public services in a recessionary period will be difficult, and it is with trepidation that we await the funding agreements for local government already tasked with the overwhelming challenges of adult social care. The tight spending plans from 2025 onwards imply annual cuts for some budgets of 0.7% per year; for local government this is on top of a long period of ‘efficiency savings’ and could result in even more over-stretched services.   With Government and business investment at a minimum attention within the built environment sector now turns to the Secretary of State to see how planning reforms could contribute to the supply side boost that the economy so clearly needs, but acutely aware there will be less public money available to support it. The need to incentivise and provide a clear pathway for private sector investment has never been greater.       Disclaimer This publication has been written in general terms and cannot be relied on to cover specific situations. We recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Lichfields accepts no duty of care or liability for any loss occasioned to any person acting or refraining from acting as a result of any material in this publication. Lichfields is the trading name of Nathaniel Lichfield & Partners Limited. Registered in England, no.2778116   Image credit: Aswin Mahesh  

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What can the latest devolution deal tell us about the progress of levelling up? The Secretary of State for Levelling Up, Housing and Communities and the four constituent councils of Derby, Derbyshire, Nottingham and Nottinghamshire have agreed the first of the Mayoral Combined County Authority deals for the East Midlands (EMMCCA). After years of attempted devolution deals in the area, it is a notable achievement for the new model that the constituent authorities came together in February following the publication of the Levelling Up and Regeneration Bill. The devolution deal, is contingent on the LURB passing through in to law, and will become one of the first Mayoral County deals, a ‘level 3 devolution deal’ as proposed in the LURB’s framework. The deal covers an area that matches the D2N2 Local Enterprise Partnership – Derbyshire, Nottinghamshire and the two cities of Nottingham and Derby, this provides a significant scale for strategic decision making (2.2 million residents and a GVA of over £50.5 billion). Amongst urban geographers and economists, there has been some debate about whether the new deal matches the economic geography of this area, the same has also been said for the D2N2 LEP, pointing to the difficulties of managing two distinct city economies of a similar size under a single East Midlands deal. However, the experience of the West Midlands and its three cities (albeit with a clearer hierarchy of city sizes) provides a successful model to pursue. Supporters of the deal point to the new funding already agreed and ensuring the region has a ‘seat at the table’ for further funding rounds and new powers that are unlocked through this devolved governance structure. These benefits it is suggested will ensure that the East Midlands keeps up with their Midlands Engine neighbours, with the accelerated investment and decision making in the West Midlands Combined Authority. After a number of years of negotiations for differing devolution deals, it is useful to look into the details as to how this new model has been negotiated so that both the constituent authorities and the Government have signed up.   What is included in the East Midlands Devo deal? The deal agrees a long term (30 year) funding envelope of around £1bn investment, on a per capita basis, UK Onward analysis puts this at a similar level of per capita spending as the other devolution deals (around £17/18 per capita per annum). Interestingly it does not appear at this stage to vary between established ‘first wave’ devolution deals and the newer Mayoral Combined County Authority deals, whereas the powers that are devolved and the structure of the institutions does differ. The directly elected East Midlands Mayor will be a new high profile figurehead responsible for the area. Significantly, their new powers will include the power to designate a Mayoral Development Area and then set up a Mayoral Development Corporation. This could see the next stage of the East Midlands Development Company given a significant boost. The Mayor will also have housing and land acquisition powers to support housing, regeneration, infrastructure and community development and wellbeing. However the proposal is also careful to navigate the complex local governance tapestry, as such the EMMCCA is made up of the mayor, and eight elected members (two from each constituent council including each lead member). “Devolution of power and responsibilities will be to the two upper tier and two unitary authorities but the deal respects the importance of the continued role of the eight Derbyshire and seven Nottinghamshire district and borough councils. The deal principally devolves national powers ‘down’ rather than powers from across the constituent councils ‘up’. This means place making functions will be delivered through the existing local planning authority arrangements. This also includes the power of county members to ratify development corporations if any of the mayoral development area includes their area. Indeed the agreement makes clear: “No local authority functions are being removed from any local authority in the area, excluding transport functions as agreed with the Constituent Councils. Where existing functions or resources currently held by Constituent Councils are to be shared with the mayor and the MCCA, this must be agreed by the Constituent Council(s).” As our previous research set out, the importance of effective structures and institutions will be key to effectively targeting investment priorities.   What are the routes to growth for the East Midlands? The devolution deal comes with new regeneration, housing and land funding (Over £17 million for new homes on brownfield land in 2024/25, and £18 million capital funding committed over this Spending Review period to support the delivery of housing priorities). Alongside the funding, The Government has also committed to “using the platform of this deal to … unlock transformative regeneration and housing opportunities”, Previous Lichfields analysis of the need and opportunity for levelling up investments was set out in Routes to Growth. According to our ‘high level’ analysis, four of the 16 local authorities across the Combined Authority are in the highest of three priority groupings for both socio economic need and opportunity for investment. Although only designed to indicate a broad geography of need and opportunity, it is these areas which are both seen as a priority for ‘levelling up’ efforts, and might offer the opportunity to capitalise on new investment quickly due to higher commercial and residential vacancy levels and brownfield land opportunities. All these areas (Bolsover, Chesterfield, North East Derbyshire, Bassetlaw) are to the North of the EMMCCA and are neighbouring areas which also gives a strategic geography for where decision makers might choose to target some ‘levelling up’ investment.   Figure 1 Opportunity for Investment (Priority group 3, Blue areas have more opportunity for investment) Source: Lichfields 2022, Routes To Growth   Figure 2 Socio Economic Need Index (Priority group 3, Blue areas are more in need) Source: Lichfields 2022, Routes to Growth   Reflections Following the publication of the Levelling Up and Regeneration Bill, the incentive for more areas to come forward with plans for devolution deals is clear. Leaders of the East Midlands councils hope that the scale, funding and status of a new deal will ensure they are ‘at the top table’ for current and future rounds of devolved decision making and investment. As we reflected in February: areas will need to create new structures and political arrangements if they want to maximise the potential for devolved funding and powers to be agreed locally. Established and effective institutions will be better placed to make decisions and allocate funding more efficiently. The Government make the point that this is a first step: “This agreement is the first step in a process of further devolution. As institutions mature, they can gain greater responsibility, and the East Midlands MCCA will be able to deepen their devolution arrangements over time on the same basis as existing Mayoral Combined Authorities (MCAs), subject to Government agreement.” In practice, the EMMCCA deal, although long in the making could provide considerable positive outcomes for the region. Having a new Mayor and the first MCCA structure should help to win funding, drive investment and organise strategically to make the region more productive and competitive. As others have pointed out, it will be incumbent on the constituent authorities and all parties involved to strategically target resources effectively across the area, and build up their institutions to tackle the area’s strategically important priorities. The extent to which the new Prime Minister continues to prioritise ’Levelling Up’ through funding, political capital and devolution will be a key part of how they are scrutinised over the next few months, however, assuming that this new type of deal is ratified, it will also be important to continue to devolve more decision making and funding. The new MCCA deal clearly provides the East Midlands leaders with the (long awaited) model of devolution and potential new institutions and structures they believe are needed to deliver change for their area, whether this momentum carries on to new deals for more areas - is a key question for the next Prime Minister.  

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