Why Britain’s entrepreneurs need planning reform

It is easy to see the immediate consequences of Britain’s inability to build enough homes, offices, or infrastructure. Rents are too steep, retailers are closing, and the high cost of office space is preventing firms from expanding.

But look deeper and the situation is even worse. High rents are sapping dynamism from the UK economy. Though a third of young people want to start a business, there are massive barriers to risk-taking activity. Quitting your job to found a company will always be a big step, but it’s an even bigger step when you live from paycheck to paycheck spending up to half your post-tax income on rent. (And that’s before you’ve even looked at the cost of office space.)

Productivity is unevenly distributed throughout the UK. Cities in the South East are 44% more productive than they are in the rest of the country, but workers still don’t move to them because they typically barely earn more once rent is taken into account. No wonder almost every entrepreneur we talk to brings up talent shortages.

Workers in cities become more productive due to the benefits of agglomeration. Firms move to large cities knowing that they have a large skilled workforce to choose from, and workers move to cities knowing large employers will be there too. By creating larger markets cities allow for greater specialisation and workers end up matched to the jobs they are best suited to.

The sheer scale of untapped potential is staggering. One study analysed 220 US metropolitan areas from 1964–2009 and found that if restrictions on new housing supply cut aggregate US economic growth by more than 50 per cent between 1964 and 2009. As John Myers of the Yimby Alliance points out the situation is likely much worse in Britain.

Agglomeration also spurs on entrepreneurship. Companies typically aren’t founded alone and it’s much easier to meet someone with a similar mindset and vision in places like London, Oxford, Cambridge, or Manchester than it is elsewhere.

What’s the underlying cause of the problem? An uncertain planning system that releases too little land for development and empowers Nimbys to block new development. Research from the London School of Economics found that house prices would be 25% lower in the South East if planning restrictions were merely as restrictive as they were in the relatively less North East.

Cities with predictable and permissive development rules are able to meet housing need and keep rents low. Take Tokyo, in 2014 it built more new homes than the whole of England thanks to liberal rules on housing development. The result? As the FT’s Robin Harding puts it “In Tokyo there are no boring conversations about house prices because they have not changed much.” The UK should aspire to achieve the same to ensure that entrepreneurs aren’t priced out.

Our complex planning system also hurts business directly by pushing up office rents and disadvantaging retailers. Cheshire and Hilber find that “planning restrictions in England impose a ‘tax’ on office developments that varies from around 250% (of development costs) in Birmingham, to 400–800% in London. In contrast, New York imposes a ‘tax’ of around 0–50%, Amsterdam around 200% and central Paris around 300%.” Small shops suffer too. Raffaella Sadun found that planning restrictions designed to block out-of-town supermarket developments lead to a 15% decline in employment for independent retailers as extra demand for scarce high street space pushed up business rents.

The UK’s planning system is uniquely complex. Developers lack certainty, planning obligations are often not known till late in the process. Complexity functions as a fixed cost. As a recent Create Streets/Legatum Institute report states “regardless of the cost of actually complying with any regulations, discovering how to comply with regulations will cost a similar amount for

all firms. Why does this matter? Well, larger developers are able to spread that cost over a large number of projects. Smaller developers can’t.

Risk too is an issue. If permission can be withdrawn unexpectedly or planning obligations can be added suddenly, as often is the case, then the processes becomes risky. This creates a barrier to entry as larger developers can survive the odd setback, while smaller developers can’t.

At The Entrepreneurs Network our ambition is to make Britain the best place in the world to start and grow a business. To make that a reality, we will work with like-minded organisations and produce research focusing on three key areas.

  1. What is the impact of high housing costs on startup formation?
  2. What impact does complexity and uncertainty have on competition within the house-building market? And how can we simplify the rules?
  3. What impact do high office rents have on entrepreneurship in the UK? And how can we bring them down?

The bad news is that under the status quo planning policy is making Britain a worse place to start and run a business. But the good news is that we know the solutions and if we can develop politically viable solutions then the prize is massive.