Pensioner Bonds will Cost as Much as Bedroom Tax will Save – Biggest Pre Election Bribe in History

CF Dillow Today

Which interest rate would you rather borrow at – 4% or 0.6%? It sounds like a moronic question. Not if you’re the Chancellor, it’s not. In launching pensionerbonds yesterday which pay 4% pa over three years, he is choosing to borrow at a much higher rate than the 0.6% charged by the gilt market.

This is costing the tax-payer money. If, as is likely, all of the £10bn bonds on offer are bought, the government will be paying almost £300m a year more in interest than it would if it borrowed in the gilt market*.

To put this in context, it is three times as much as the government is saving from the cap on benefits. And it is almost as much as it is saving from the bedroom tax.

The Theory of Smart Growth -How to Test if a Partial Roll Back of the Green Belt is Good for Growth and Sustainability

There has been much discussion in recent weeks on whether a partial roll back of the Green Belt on sites without other designations would help economic growth and meet London and the SE’s housing needs.  For example Centre for Cities, Adam Smith Institute and the London Society.

Whatever you think of the idea it is good that the debate has moved on from a crude abolish the Green Belt or roll it back from the M25 approach which is where it stood three years ago.  Now at last think think tanks have discovered GIS and are looking at actual geographical differences.

Id like to suggest a sensible step forward in working out whether or not this makes economic and sustainability sense or would just contribute to unsustainable sprawl.  In doing so Id like to apply the broken city model used in an earlier post. In this model the urban economies of aggregation rise with city population, but the urban diseconomies of size rise with city size.   The diseconomies rise can be offset with funding of public transport and other infrastructure – but once there the scale of disecenomies exceeds the economies their is no longer an economic case to physically expand the city.

Eventually a city will grow to the point at which physical expansion no longer makes sense, though you can still grow the city’s population through increasing its density and investing in public transport and other infrastructure.  There will be increasing returns to scale with density and city size and the benefits of public transport investment, until transport carrying capacity is reached, at which point you need to start doubling or tripling up the public transport network and there is a large threshold infrastructure cost.  At some point it might make no sense to continue to densify or expand the original city – but rather to expand other cities or towns below their optimum size instead.

It helps explain why some cities such as Jakarta and Mexico City have dramatically slowed growth, they have reached the point where they have become ‘broken’, and why others such as Tokyo and Moscow have slowed down, because public transport investment has not kept up, whilst other that continue to invest, such as Beijing and Singapore continue to grow.

This insight is a combination of :

A) the New Economic Geography of Krugman and Others with its insights on city size.

B) The well known ‘Henry George Theorom’ in Regional Science on the optimal tax level on land value uplifts from public transport investment

C) The Insight from transport economics on the relationship between city density and public transport costs

D) Threshold Analysis theory

The beauty of this approach is it allows you to test various alternative policy options such as  densification, expansion and Garden Cities, it can be extended to cover loss of Ecosystem Services and the hedonic valuation of the ordinary countryside and newly created open spaces.

What the theory seems to predict is the best way to expand a city is through Smart Growth, densifying, expanding around transport nodes with spare capacity and expanding along similar nodes or in new settlements along such nodes.  If such nodes are beyond reasonable commuting distance the theory predicts you will get greater benefits from expanding employment in other housing markets and diverting housing growth and public transport investment to those areas.

If a Green Belt site near a public transport node has limited capacity and this is prohibitive to expand the theory suggest it is better to grow either within or beyond the Green Belt providing you can grow employment in those locations, otherwise the diseconomies of sprawl with outweigh the economies of aggregation.