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Th The Loc e Localist t Solution How incentives can drive economic development (and make housing more affordable) Dr Oliver Hartwich The New Zealand Initiative Wellington, 28 November 2014 Concl nclus usio ion Many years ago, I was

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Th The Loc e Localist t Solution

How incentives can drive economic development (and make housing more affordable)

Dr Oliver Hartwich The New Zealand Initiative Wellington, 28 November 2014

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Concl nclus usio ion

“Many years ago, I was present at a meeting of students at Yale

  • University. Jim Tobin, who later was awarded the Prize in Economic

Sciences in Memory of Alfred Nobel, was also there. The discussion was freewheeling, and one question that came up was: Can one sum up economics in one word? Tobin’s answer was “yes”; the word is

  • incentives. Economics is all about incentives.”

(Robert J. Aumann, Nobel Prize Lecture 2005)

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A A ho hous use pr e price c conundru nundrum

House prices in real terms

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Bigger er B Bet etter er F Faster er More

Why Some C e Countries es P Plan B Bet etter ter T Than O Other ers

Two federal countries with a civil-law background:

  • Germany: The Ruhr (Essen,

Gelsenkirchen, Dortmund …)

  • Switzerland: Greater Zurich (Zurich,

Schwyz, Zug) Two countries with a British-style planning system:

  • Ireland: Dublin
  • Australia: Sydney and Adelaide
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Key h y hou

  • usi

sing stati tisti tics: G : Germany

Germany UK Average annual population growth (1970-2005) 0.16 % 0.24 % Decline in average household size (1980-2003)

  • 0.3
  • 0.3

Persons per km2 230.9 246.9 Average annual GDP per capita growth (1970-2003) 1.4 % 2.1 % Dwelling stock: Pre 1945 27.2 % 38.5 % Dwelling stock: Post 1945 72.7 % 61.5 % Average size: newly-built dwellings (m2) 109.2 76 Average annual real house price growth (1970-2003) 0.05% 3.87 %

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The R he Ruhr uhr

53 independent councils 5.3 million inhabitants 60 per cent of the land forests, fields, parks, gardens, rivers and lakes 4,200 parks

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Lev evel els o

  • f l

land-us use pl planni nning i in n Ger ermany

Federal level

  • Guidelines and principles

Länder

  • State development plans

Regional (Regierungsbezirke – government districts)

  • Regional development plans

Municipal

  • Preparatory land-use plans
  • Development plans
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Cons nstitutiona nal ba backgr groun und

Article 28 of the Grundgesetz (Basic Law): “Municipalities must be guaranteed the right to regulate all local affairs on their own responsibility, within the limits prescribed by the laws.” Article 14 of the Grundgesetz: “Property and the right of inheritance shall be guaranteed.”  Principle of Baufreiheit (The Freedom to Build)

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Feder ederal pl planni nning l g law

Section 1 (5) Baugesetzbuch (Federal Building Act): “Land-use plans shall safeguard sustainable urban development and a socially just utilisation of land for the public good of the community, and shall contribute to securing a humane environment and to protecting and developing the basic conditions for natural life. In the preparation of land-use plans, attention shall be paid in particular to the following: (1) … (10)” Section 1 (6) Baugesetzbuch: “In preparing land-use plans, public and private interests are to be duly weighed.”

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Fact ctors in f n favour ur of de devel elopment

Principle of The Freedom to Build Section 1 (6) Baugesetzbuch Local government finance system

  • Councils receive:

rates and duties, trade tax 15 per cent of income tax 2.2 per cent of VAT grants from state governments

  • Example: 40 per cent of Dortmund’s budget directly linked to local

figures

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Compe petitio ion i n in n pl plann nning

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Compe petitio ion i n in n pl plann nning

  • Councils are actively competing for inhabitants
  • Councils cannot vary tax rates, but can influence their tax base
  • Estimates for the city of Essen:

1,500 Euros in state government grants per inhabitant 18,000 in net-purchasing power per inhabitant

  • Good cooperation with developers
  • Building permissions typically granted within weeks
  • Councils have to make their cities attractive:

Attractive places to live and … places attracting people.

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Res esult: Af Affordable ho e hous using

Rents in the city of Essen (monthly rent per m2; Mietspiegel 2013)

Year of construction Minimum Median Maximum 1912 - 1948 5.25 € 5.40 € 5.60 € 1948 - 1974 5.60 € 5.70 € 5.75 € 1974 - 1994 5.75 € 6.15 € 6.50 € 1994 - 6.50 € 6.65 € 6.80 €

Example: 3 bedroom flat, 100 m2, built 1980 in an ‘ordinary’ suburb: €615 per month (about $226 per week)

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Summ mmar ary o

  • f Ge

Germa man p planning

  • Green cities
  • Large dwellings
  • No house price inflation for more than four decades
  • Competition between councils
  • Fast planning processes
  • Germany: A tenants’ paradise
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Key h y hou

  • usi

sing stati tisti tics: S : Switz tzerland

CH UK Average annual population growth (1970-2005) 0.45 % 0.24 % Decline in average household size (1980-2003)

  • 0.27
  • 0.3

Persons per km2 181.4 246.9 Average annual GDP per capita growth (1970-2003) 0.9 % 2.1 % Average annual real house price growth (1970-2003) 0.22% 3.87 %

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The he Swiss pl planni nning s g system

  • Almost a perfect copy of the German system
  • Guidelines at the federal level
  • Coordination at the cantonal level
  • Legally binding plans for individual plots of land at council level
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Cons nstitutiona nal ba backgr groun und

  • Art. 75 of the Bundesverfassung (Swiss constitution):

Land use planning

  • 1. The Federation lays down the principles of land-use planning which

is the responsibility of the cantons and serves the expedient and economical use of land and the ordered settlement of the country.

  • 2. The Federation supports and coordinates the efforts of the cantons

and work together with the cantons.

  • 3. The Federation and the cantons have to take into consideration the

requirements of land-use planning as far as the fulfilment of their tasks is concerned.

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Swiss tax tax st structure

  • Swiss taxes among the lowest in the OECD
  • Income tax on three levels: Federation, canton, local council
  • Tax rates vary between the cantons and the councils within the

cantons

  • Cantons and councils are comparatively small.

At a total Swiss population of 8.2m there are:

  • 26 sovereign cantons and
  • 2,396 largely autonomous municipalities

(New Zealand is almost seven times larger than Switzerland!)

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Swi wiss c canton

  • ns
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Swi wiss c councils

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Tax c x compe petition i n in n pr pract ctice ice

Annual income: 500,000 CHF (approx. $660,000)

City of Zurich: 175,189 CHF income tax City of Zug: 109,721 CHF income tax 20 km 65,468 CHF

http://www.homegate.ch/finanzieren/rechner/steuerrechner

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Dev evel elopmen ent o

  • f Greater

er Z Zurich

  • Population of the Canton of Zurich:

1950: 777,002 2013: 1,421,895

  • Population of the City of Zurich:

1950: 390,020 2013: 383,708

  • Neighbouring cantons:

Zug 1980: 75,700 2013: 118,000 Schwyz 1980: 96,600 2013: 151,400

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Dem Demand a nd and nd inc ncen entives

  • Increasing demand for spacious accommodation in green

environments

  • The Greater Zurich region was able to grow as neighbouring cantons

were competing for new taxpayers.

  • Nimbyism is unheard of: Existing residents often welcome new

development in their area

  • More development, less taxes: Schwyz could lower its income tax six

times in thirteen years because of additional tax revenue from new residents

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Sum ummary o

  • f S

Swiss pl planni nning

  • Highly complex federal planning system
  • Comparatively small political units
  • Tax competition

Stable house prices Increasing dwelling sizes Lower taxes No nimbyism

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Le Lesso ssons f s for

  • r N

New Zealand

  • Planning works best when it is decentralised / localised.
  • House prices can remain stable if cities are allowed to grow out.
  • Local planners and politicians need to face the full costs and benefits
  • f their decisions.

 The RMA certainly needs reform, but so does the system of local government finance.  Germany and Switzerland hold important lessons for such reforms.

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Appl Applying t the he les essons be beyond nd ho hous using

  • Residential development not the only kind of development
  • Business development also incentive dependent
  • Example: Germany’s Gewerbesteuer
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New ew Z Zealand’s c centralism

Spending by level of government 2010 (source: OECD)

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New ew Z Zealand’s c centralism

Spending by level of government 2010 in % of GDP (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Functional distribution of municipal spending (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Education (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Health (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Social Protection (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Housing and Community Amenities (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Environmental protection (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Recreation, culture and religion (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Economic affairs (source: OECD)

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New Z Zealand’s w weak k loc

  • calism

Participation of each level in government spending: Public order and safety (source: OECD)

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Local gover ernment’s r rev evenue s e situation

Revenue composition for municipalities (source: OECD)

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Local gover ernment’s r rev evenue s e situation

Share of sub-central government in total personal income tax revenue (source: OECD)

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Local gover ernment’s r rev evenue s e situation

Share of sub-central government in total goods and consumption tax revenue (source: OECD)

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Local gover ernment’s r rev evenue s e situation

Share of sub-central government in total corporate income tax revenue (source: OECD)

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Local gover ernment i in New ew Z Zealand

  • Functionally weak
  • Heavily dependent on property taxes
  • No revenue from personal income taxes, corporate income taxes or

sales taxes In other words: Local government does not participate in the proceeds of economic development. Is it any wonder that local government does not go for growth?

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Towards a a new w localism

To be continued …

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Concl nclus usio ion

“Many years ago, I was present at a meeting of students at Yale

  • University. Jim Tobin, who later was awarded the Prize in Economic

Sciences in Memory of Alfred Nobel, was also there. The discussion was freewheeling, and one question that came up was: Can one sum up economics in one word? Tobin’s answer was “yes”; the word is

  • incentives. Economics is all about incentives.”

(Robert J. Aumann, Nobel Prize Lecture 2005)

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Thank y you

  • u

Dr Oliver Hartwich

  • liver.hartwich@nzinitiative.org.nz

www.nzinitiative.org.nz