22 October 2020

To fix the public finances, the state should sweat its assets

By Alex Morton

Even before the crisis, the Government had little room for fiscal manoeuvre. Spending was already increasing, in order to fund its manifesto commitments. Taxes were already high, and the Government had promised not to raise the main ones further. And borrowing was close to its long-term limits.

In the wake of the crisis, there will inevitably be calls for further tax rises to help fill the hole in the Government’s finances. But before increasing a tax burden which is already at historic highs – and thereby risking choking off any recovery – or thinking that debt can grow ever higher without end or consequence – the Government should re-examine its existing spending.

A Centre of Policy Studies report released earlier this week sets out nine policies to get the public finances back on a secure footing, without having a negative impact on the services that people value. Among our proposals were reducing administrative costs, merging quangos, increased use of e-procurement and a variety of changes to the benefits system, including replacing the pensions triple-lock with a double-lock.

But clearing up the fiscal mess is not just about setting the right tax rates, cutting spending or improving efficiency – vitally important though all of these areas are.

Another way the Government could raise billions of pounds is through smarter use of the £1tn of land and infrastructure owned by the state.

This has, in fact, been on the agenda for some time. Back in 2017, the Cabinet Office Property Unit set a target of freeing up state-owned land with capacity for at least 160,000 homes by 2020, and raising at least £5 billion from land and property disposals. In mid-2019 this strategy was judged to be on track in terms of revenue, but not in terms of land. 

In large part this is due to the way the sale of surplus land is encouraged in a Spending Review, where the Treasury carves out hypothetical receipts worth a certain amount, and then reduces its spending allocation for each department accordingly. The onus is then on individual departments to identify surplus land in order to make up the shortfall. 

This model is better than nothing, but it encourages departments to underestimate the value of their landholdings ahead of the Spending Review period, and then over the period just about manage to deliver the Treasury target – because if they over-deliver, the Treasury would probably assume they had been too lax before, and might cut funding in the next Spending Review. A dance occurs in which departments try not to be too accurate about what they own, and agree targets that are manageable but not excessive, and Treasury turns a blind eye as long as a vaguely plausible target is agreed. 

In 2016-17, the land and buildings owned by the Government were valued at £423 billion, with a further £617 billion in infrastructure, which can often house spare capacity. Most of this land and building space is valuable and necessary – but surely not all of it. There is a strong case for a sensible rationalisation of the Government’s office and land stock, while retaining critical and sensitive assets such as hospitals, schools, prisons, military bases and so on. 

A major review should therefore be conducted to help identify all sites owned by the state. Departments should be forced to create a list of operational or strategically critical properties alongside an assessment of all other land and sites. Local councils should be brought into the process both to help audit all government land and buildings but also to set out their own holdings. 

All non-operational or critical buildings should be considered for sale, or sale and then re-lease over a long-term period. A third party should be brought in to audit each department, with their fee related to the savings made. There are prior examples of this sort of exercise being successful. In February 2019, National Rail completed a £1.46 billion sale of more than 5,250 rental spaces across England and Wales, around 70% of which were converted railway arches. The properties were sold on a 150-year leasehold basis, with National Rail maintaining access rights and the ability to take sites back into ownership in the event that they are needed. Sites such as St George’s Barracks in Rutland, now earmarked for a garden community, show the kind of positive impact such sales can have – both in terms of receipts for government and new housing provision.

If just 2.5% of the state’s property portfolio turned out to be surplus and could be sold, and another 2.5% could be sold and leased back, this would generate £50 billion. Even if we wanted to put aside £10 billion in receipts to pay for the leased-back properties for years to come, this would give a saving of £10 billion each year over the rest of this parliament.

There could also be significant efficiency gains through more intelligent capital spending, particularly in more rural areas. Where schools, hospitals, GP surgeries or other facilities need to be upgraded or expanded substantially, the original sites could be used for housing, and a modern replacement constructed on an adjacent or locally selected site – including potentially greenbelt land.

With the value of a hectare of greenfield land in the South East rising from £20,000 odd if allocated for farming to nearly £3 million for housing, this would raise substantial sums. People are also less likely to object to new homes on an already developed site if they get a new school or surgery – providing new and better facilities for the local community and reducing concerns about infrastructure, a legitimate worry when new housing is proposed.

There’s no doubt that the pressures on the public finances are and remain acute. National debt now exceeds 100% of GDP, and taxes are at their highest level in decades. 

That’s what makes these proposals so attractive. In common with the other 8 reforms outlined in the CPS report, sweating the state’s considerable land and infrastructure assets can raise significant sums of money without hitting frontline services. Crucially reforms would stave off the calls for tax rises on businesses and consumers that would only end up depressing growth and stalling our post-Covid recovery. We urge ministers, especially those in the Treasury, to consider these measures extremely seriously.

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Alex Morton is Head of Policy at the Centre for Policy Studies.