Land value capture is an issue very close to my heart. I would say that, as Edward has said, there is often a lot of, frankly, wishful thinking around this area, and I guess that stems from the fact that there is just so much value that is created, particularly from new infrastructure provision, and it just seems like madness that we don’t have a mechanism for channelling that into public benefits. That, at a very crude, high level, is true. The problem is that it is quite complicated how you capture that value. There are different mechanisms.
Very roughly, very crudely, I would say there are three different types of mechanism. Firstly, there is the tax system. What the economists have always preferred, right back to Adam Smith, is land value taxation—ways of using tax to capture the unearned increment in land value. Unfortunately, in this country, we just don’t have property taxes, so the reason why tax increment financing doesn’t work in the UK is because we don’t have the tax to increment the finance on. There are no, essentially, property taxes that go up with land value. I note that the Welsh Government had announced a plan to completely reform council tax. That might have gone some way towards actually creating a property tax that would enable some capture of that land value, but that’s now been kicked into the long grass. Without that, we can just set aside the whole question of using the tax system, because we just don’t have the taxes.
The next mechanism is planning gain. As discussed, that has some merits, but it is inherently procyclical and dependent on market actors, so it has extreme limitations.
The really powerful one, as Nick was saying, is simply owning the land in the first place. Acquiring the land at pre uplift cost prices, then generating the uplift, means that you internalise all of that gain for public benefit. The problem there is that the simplest way of doing that, which is simply to buy the land without telling people that you’re about to put in a new phone line, isn’t really an applicable solution, in a way. There are still examples where this most simple form of land value capture happens. It happened recently at Otterpool Park, where the local authority bought a racecourse and then announced that it was going to use it for housing development. The landowner was absolutely outraged, and is trying to take them to every court in the land as some sort of swindle. But it was a perfectly fair, open-market transaction, in my view.
But that’s quite difficult in a modern world, especially where infrastructure provision has long lead-in times, and people want to go ahead and say, ‘Yes, we will build this train line’, and then we turn up with a cheque book and ask people how much they want for the site. Inevitably, we’re going to end up paying over the odds in those circumstances, which is why it always comes back, unfortunately, to compulsory purchase. It’s the only real guarantee of land value capture. You don’t always have to use it all the time, but unless you have a really fair and effective system of compulsory purchase, the land market will always see you coming, and will always extract most of that value before you’ve even turned up with a digger, let alone put a planning application in.