Today's call for devolved tax-raising powers for London could herald similar moves in cities right across the nation. It's a development that is long overdue
Those who produce reports advocating fiscal devolution within England must always be aware of the fate of earlier reviews of local government finance. It is now 37 years since the Layfield Committee published its definitive report pointing to a choice between a more autonomous model of local government and, alternatively, one which was closer to an agency of central government.
The majority of the Committee opted for the locally-autonomous option, with power to set a local income tax. In the event, no substantive reform occurred: James Callaghan’s minority government had no appetite for radicalism.
Thirty-one years after Layfield, the Lyons Inquiry (which itself built on the work of Nick Raynsford’s Balance of Funding review) published proposals for a modest enhancement of local government income. In the intervening years, local domestic taxation had been capped and non-domestic rates nationalised. Much social housing had been transferred to housing associations and education had largely been shifted from local to national government control. The system of government grants had become baroque in its complexity as computing became cheaper and more sophisticated.
Not much happened after Lyons, either. Another dying Labour government felt unable to tackle the challenges of local taxation reform. Mrs Thatcher’s destruction by the poll tax made national politicians of all parties very wary of any redistribution of the local tax burden.
However, in 1999 and 2000 the Blair government enacted devolution to Scotland and Wales, and to a lesser extent, London. The radical shift of powers to Edinburgh and Cardiff (and later Belfast) signalled a once-and-for-all change in the United Kingdom. Scotland now made its own laws and Wales was on the road to doing so. The Scots were given limited powers to vary income tax.
Subsequently the Calman Commission examined the possibility of devolving greater tax-raising powers to Scotland, while in Wales the Holtham and Silk commissions did something similar. The Scots will soon set a Scottish income tax as well as land transaction and landfill taxes. Devolution was indeed ‘a process not an event’.
The creation of the Greater London Authority was a more modest reform than those in Scotland and Wales, but it did at least have access to council tax and Transport for London’s massive fare revenues. There has been no subsequent effort to increase the financial autonomy of London government. Of course the capital, in common with the rest of English local government, was allowed to retain 50 per cent of the business rate yield from April 2013, but there was no freedom to vary tax rates.
The London Finance Commission has today made the case for a substantive shift of tax-raising powers to London. London’s population and workforce are growing fast. In order to provide a wider tax base which would allow the GLA and the boroughs to pay for more of the capital investments required by such growth, it is suggested that the full suite of property taxation including council tax, 100 per cent of business rates and Stamp Duty land tax be handed over to and be set by London government. There would be a pound-for-pound reduction in government grant, so that neither London nor the rest of the UK were better or worse off.
It would be necessary to relax Treasury rules in relation to borrowing within ‘prudential rules’ for productive capital investment. But if there is to be a virtuous circle of investment and economic growth, the government will need to allow London and other areas to bank and spend the growth in their local tax yield. If they do not do so, there will be no tax-based incentive for growth.
Only in Britain could such a modest proposal sound so radical. Research conducted for the LFC showed that most large cities overseas have access to more taxes and are less dependent on grants from federal or state governments. Moreover, there is no reason why other cities and city regions in England could not enjoy a similar kind of devolution.
Despite the failure of earlier reviews to produce changes to the funding of sub-national government in England, it does not mean that reform cannot occur. The Mayor of London and London councils, supported by other cities, have a chance to lobby for a reform which would add to democratic pluralism and the efficiency of government. The time has come for devolution to England’s cities.
Tony Travers is chair of the London Finance Commission
