Memorandum by the HM Treasury (UWP 118)
RESPONSES TO QUESTIONS FROM THE COMMITTEE
1. Which of the fiscal proposals made by the
Roger's Task Force the Government considers to be likely candidates
for implementation and which they have already ruled out
The Government has welcomed Lord Roger's report
on encouraging an urban renaissance and is giving careful consideration
to all 105 of Lord Roger's recommendations.
The Government will be setting out its strategy
for achieving an urban renaissance in the Urban White Paper which
will be published later this year.
Budget 2000 has already announced that the Government
is exploring whether fiscal measures—both taxation (national
and local) and publish spending—including those recommended
in Lord Roger's report, could help meet a number of objectives.
For example:
— to encourage the clean up and re-development
of brownfield land;
— to help make the private rented sector
work better and make investment in rented housing a more attractive
proposition;
— to provide an added incentive to
local authorities to facilitate development;
— to encourage partnerships with local
authorities to promote regeneration;
— to help business to be part of the
regeneration of deprived areas; and to modernise and streamline
the planning system.
It was also announced in the Budget that, in
the light of the recommendations made by Lord Rogers, the Government
is attracted to the idea of offering relief from stamp duty for
new developments on brownfield land. The Government will be consulting
with interested parties on how this measure might be best targeted
to help meet the Government's objectives and how it could work
in practice.
2. What lessons have been learnt from the
examination of American measures to promote urban regeneration
One of the key messages emerging from US experience
is that successful urban regeneration requires a strategy based
on business-led growth, with governments taking a subordinate
role. Governments should concentrate on getting the basics right,
eg education, workforce skills, transport and fighting crime.
Micro-economic measures alone will not reverse the decline of
the most deprived areas. In order to encourage business-led growth,
the Government should focus on the competitive advantage of inner
cities: strategic location, available workforce, untapped retail
market, income density and proximity to regional clusters.
Lessons could be learnt from aspects of President
Clinton's New Markets Initiative, which aims to leverage billions
of dollars of new private investment in America's inner cities.
The US has a well-developed tier of community
finance initiatives, which build bridges between the banks and
inner-city communities. For example, Boston Community Capital
is a five million dollar venture capital funding providing equity
capital for community economic development projects; and the Local
Initiatives Support Corporation invests in social housing and
retail development.
The Government's Phoenix Fund, a £30 million
programme announced in the Pre-Budget Report 1999, is aimed at
promoting better access to finance and business support. This
will help to develop the role of community finance initiatives
in the UK. It includes:
— a new challenge fund to help resource
community finance initiatives; and,
— loan guarantees to help co-finance
commercial lending to community finance initiatives; as well as
— a new development fund to promote
innovative ways of supporting enterprise in deprived areas, such
as incubator units, also more prevalent in the US.
3. What work has the Treasury undertaken on
"area based initiatives" and what conclusions has it
reached
The Government has supplemented existing locally-based
regeneration policy with a range of new area-based initiatives.
It has, for example, established area-based approaches to speed
progress on its priorities in education, health, crime and disorder,
and employment. What all these initiatives have in common is an
attempt to co-ordinate the relevant people on the ground into
a partnership to produce locally owned and tailored responses
to central Government policies.
We understand the importance of effective co-ordination
of management and implementation of area-based initiatives. The
PIU Report, "Reaching Out—the Role of Central Government
at Regional and Local Level" (February 2000) set out proposals
for remedying this, including the establishment of a new Regional
Co-ordination Unit, within the DETR, reporting to Lord Falconer.
The Report noted that its role in approving all new spending proposals
means the Treasury is well-placed to ensure that area-based initiatives
are properly related to departments' PSA targets and that the
new Unit is involved from an early stage in relevant programme
development. We are working closely with the RCU to make sure
that the principles set out in the PIU Report are applied in SR2000
and elsewhere.
4. The role of PFI schemes in assisting urban
regeneration
Innovative public private partnerships are being
used as an important part of the regeneration strategy for deprived
communities. The PFI and other PPPs are being used to fund housing,
education, economic development and transport infrastructure to
create sustainable communities and tackle social exclusion. Such
programmes for change need a wide ranging network of partnerships
to be successful and most be considered in the round.
Some examples of PFI projects with a regeneration
theme:
— PFI pathfinder projects are tackling
a wide range of housing stock—from tower blocks to terraced
houses—in a diverse range of areas—from the inner
city and the suburbs to former coalfield communities. Through
the pathfinder programme we will provide experience and develop
good practice. And we expect PFI to establish itself as an option
that many authorities will want to consider as part of their investment
strategy.
— In the old docks area of Hull the
local authority has been working in partnership to reinvigorate
this run down area. New housing investment has been accompanied
by a new primary school, funded through the PFI.
— PFI transport schemes have bought
substantial benefits to deprived communities. As well as improving
accessibility and decreasing congestion, light rail schemes such
as the Manchester Metrolink or the Sunderland Metro, new commercial
and employment opportunities. The Budget provided £280 million
of transport, of which £110 will be spent on light rail.
5. The Government's view of the desirability
of merging separate departmental budgets to support urban regeneration
Pooled budgets may add value in situations where:
— more than one department has a significant
interest in the relevant issue; and this cross-cutting issue can
sensibly be separated from the main activities of the departments
concerned.
One current example is the budget for Sure Start.
This is a ringfenced budget held by DfEE but managed by an inter-departmental
unit.
Where the cross-cutting issue is hard to separate
from main departmental programmes, pooled budgets can create more
co-ordination problems than they solve.
Where pooled budgets or inter-departmental agencies
are not appropriate, departments might consider the alternative
of establishing "virtual" single budgets. With a "virtual"
single budget, the funds remain within separate departmental baselines,
but the various separate pots are ring-fenced and there is inter-department
co-ordination of ring-frenced funds.
Budgetary rules sometimes get blamed as an obstacle
to joint work when the real problem is disagreements on objectives
and priorities. In these circumstances the answer may lie in better
co-operation rather than new budgetary arrangements; but arrangements
such as pooled or jointly managed budgets can sometimes help participants
to resolve differences over objectives.
6. The Treasury' view of measures (eg tax
allowances) to encourage venture capital (for urban regeneration)
The chain of risk capital provision, from start-up
and early stage through to flotation on the public markets, provides
the financial means by which high-growth SMEs can realise their
potential. In an increasingly rapidly evolving economy, and one
in which growth SMEs make a major contribution to net job creation,
early stage venture capital has an important role to play. The
Government is developing a number of measures to develop the early
stage venture capital market where evidence indicates market weaknesses
in the provision of small scale venture capital to SMEs.
Regional Venture Capital Funds (RVCF)—the
Government is committed to creating at least one RVCF in each
of the nine English regions which will specialise in providing
small-scale equity (sub £250,000 first investment) to growth
businesses—drawing in local expertise from the RDAs and
others. DTI expect £50 million of Government support over
three years to lever up to £250 million of private finance.
In Budget 2000, to build on the Government's
current venture capital interventions, the Chancellor committed
an extra £100 million for a new £1 billion target umbrella
fund, levering in private finance for enterprise growth across
the regions over next three to five years. Regional priorities
will be decided jointly by a new Small Business Investment Taskforce
of the SBS and the Regional Development Agencies (RDAs). The measure
will improve access to small scale risk capital for SMEs with
growth potential, by supporting new funds which help close the
"equity gaps" and help small-firms reach their growth
potential.
The new Social Investment Task Force, due to
report to the Treasure will consider tax incentives for investing
in community development projects, such as incubators, loan funds
and social enterprises; how to target more resources in venture
capital funds at our high employment areas; and for the longer
term, constituting a permanent investment fund with a continuing
remit to help fund a regular wave of new projects.
7. VAT Equalisation
(a) What would be the effect of lowering VAT
on conversions? How many additional homes would be provided? Would
there be particular benefits in inner urban areas in the regions?
Lowering the rate of VAT on conversions would have
little impact on developers who convert non-residential property
to housing (such as office blocks to flats). This is because they
can already reclaim any VAT incurred as the onward sale of the
new housing is zero-rated. But developers who convert existing
residential housing (eg bedsits to flats) are unable to reclaim
any VAT incurred, their onward sale being exempt.
Sometimes conversion work results in fewer,
but better quality, homes (for example, where bedsits are converted
into flats), though research commissioned by the DETR in 1997
shows conversions involving the creation of extra housing units
outstrip those which reduce the number of dwellings by a factor
of three.
(b) What would be the effect on house prices
on greenfield sites? What would be the effect on developments
on brownfield land in urban areas? Would it reduce the amount
of land coming forward for development—if so, by how much;
and to counter this effect, should there be a tax on vacant land
or vacant used as a car park?
The Government's aim is to make better use of
brownfield land. The Government's target is that by 2008 at least
60 per cent of new housing development should be on previously
developed land. A number of measures have already been taken,
for example the publication of new planning guidance. Planning
guidance for housing (PPG3) was published on 7 March 2000 and
sets out clear policies designed to help achieve this target.
As with all taxes the formal and effective incidence
of the tax may differ. The final incidence of a tax would depend
on the supply and demand conditions in local property markets.
In line with the statement of intent, environmental taxation must
meet the general tests of good taxation. It must be well designed,
to meet its objectives without undesirable side-effects; it must
keep deadweight compliance costs to a minimum; the distributional
impact must be acceptable and the implications for international
sectoral competitiveness must be taken into account.
As with all 105 Lord Rogers' recommendations
the Government is giving careful consideration to all the tax
proposals. The Government will be setting out its strategy for
achieving an urban renaissance in the Urban White Paper which
will be published later this year. The Government is attracted
to the idea of offering stamp duty relief for new developments
on brownfield. The Government will consult on how this measure
may work in practice.
It is also worth noting that tax is just one
factor in meeting policy objectives and the effectiveness of different
measures needs to be weighed up.
(c) At what rate should VAT be equalised?
Why?
The Government has no plans to equalise VAT
rates. All tax decisions are for the Budget.
8. Proposed review of stamp duty on brownfield
properties: What is the scope of the review, who will be undertaking
it; when will it report and what initial research has been undertaken?
Will the review group be examining the rate of return on property
investment on brownfield sites compared with comparative investments
in, for example, equities?
The consultation on possible stamp duty relief
for developments on brownfield sites will be taken forward by
the Paymaster General. The Inland Revenue will approach the relevant
representative bodies and would welcome the views of others. The
consultation will focus on how such a measure might be best targeted
to help meet the Government's objective—to encourage better
use of brownfield land. Ad it will explore how a relief could
work in practice. The Housing Green Paper refers to the scope
for action to encourage properly considered long-term investment
in the sector, for example. The consultation on this particular
measure will also be seeking views on targeting and its likely
effectiveness.
9. Are you in a position to comment on the
Royal Institution of Chartered Surveyors claim that the increase
on stamp duty will wipe approximately £13 billion from the
capital value of commercial property?
Such estimates are based on hypothetical assumptions
and are inevitably uncertain as property prices are influenced
by a wide range of factors, making it difficult to isolate the
effects of stamp duty. It seems very unlikely, though that a half
per cent rise in stamp duty would reduce property values by such
an amount.
Stamp duty rates on high value transactions,
which include the majority of commercial property transactions
in value terms, have risen since July 1997. Yet commercial property
prices have risen by 16 per cent over the same period, according
to the Investment Property Databank, and by nearly 7 per cent
since the half per cent rate increase in last year's Budget.
HM Treasury
10 April 2000
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