Curbs that stifle our economy

WHEN economist Kate Barker delivered her report on the housing market for the Treasury a few months back, she highlighted the way planning restrictions curtail the supply of new homes and create shortages that play a part in forcing house prices ever higher.

She pointed out forcibly that it was the planners, not housebuilders hoarding land, who provide the major distortion in the system and prevent supply meeting demand.

Now, in research that is every bit as interesting, an academic from Cass Business School, Tony McGough, has shown how planning restrictions on commercial property can have a similarly negative effect on economic growth.

The study, commissioned by the Office of the Deputy Prime Minister - which has overall responsibility for setting guidelines for Britain's planning - puts numbers on the costs. It says that if a local authority were to tighten its planning regime by just 10% in relation to industrial property, it would reduce local economic activity by 3.8%.

When economists produce such pinpoint figures it always makes me nervous - but the point is well taken. The national growth rate is around 2.5%, so a local planning authority can wipe out all that gain and more by being too restrictive.

Sometimes planning restrictions stop a business locating in a town at all, but more normally their main impact on business is to create a shortage which pushes up rents. This drives up business costs to the point where some cannot afford it and they either pack up or move away.

The impact varies between different types of property. Planning restrictions on retail have the least impact because big chains such as Boots and Next will pay what they have to pay to stay in a good location, if the town is somewhere where they want to be.

Industrial businesses, in contrast, are the least loyal because they are generally less concerned about where they rent than how much they have to pay. In between are offices. Their location can have strategic importance - as in the City - but, despite this, if the rent goes up too much it can force a business to relocate.

These findings, which were done on a local basis, also apply to the economy as a whole. According to McGough, if there was a 10% decrease in planning permissions across the country it would drive enough business abroad to cut the overall growth rate of GDP by 1.45% - to a level that would be too low to stop unemployment from rising.

Conversely, if there were a 10% loosening in restrictions it would boost the economy 1.45%.

The research does not suggest that planning is bad, still less that it should be made much easier. But it does highlight the oft-forgotten fact that there is a cost in refusing to countenance new building, or more traffic or the other side-effects of growth and that cost should be recognised.

It also serves to underline how haphazard the planning process can be. It is very hard to believe there is not a better way.

A cut too far

NEVILLE Isdell, chairman of Coca-Cola, made an interesting admission when discussing the soft drinks company's problems this week. He believes he can develop a strategy that will get Coke out of trouble, but the problem will be in getting that strategy executed effectively because the company has a lack of talent in its executive ranks.

Successive rounds of restructuring under Douglas Daft, the boss Isdell replaced, have denuded the company of much-needed expertise and experience and demoralised many of those left behind. Daft's strategy was to boost earnings by cutting costs and the group is now paying the price.

'I would say we have a lot of good people, but on the bench we have very few reserves,' Isdell said.

It is almost always easier to cut costs than to grow the top line, which is why so many executives go for restructuring when they are under pressure to produce quick results to please the investment community. Perhaps the sign that it can leave a company severely weakened might temper their enthusiasm because this experience is not unique to Coke. The only difference is that Isdell has admitted it.

Companies such as Marks & Spencer, Abbey National and J Sainsbury, which have undergone prolonged periods of management turmoil, have also suffered from the loss of their most talented people.

Perhaps investors should pay more attention to the maxim of Unilever's soon-to-depart Niall FitzGerald. 'The gains from cost-cutting are finite. The gains from sales growth are infinite,' he says. It is obvious which investors should prefer.