The London Finance Commission’s recommendations are a sensible blueprint for local government finance in the capital and beyond. They could help stoke a formidable movement for change
Local government finance reviews come and go. But despite the abundance of high-quality research, expert analysis and compelling argument, history shows that not very much changes.
So why should the London Finance Commission – whose report, Raising the capital, was published today – succeed where the likes of Layfield and Lyons have failed?
A clue to the answer may lie in the title. Like its predecessors the LFC report is about the complexities of local government finance, but, unusually, it is also about a place. The focus on London makes the problems and challenges more vivid, and brings into play a range of different risks and opportunities than apply in a more traditional system-focused review seeking ‘everywhere solutions’.
Most obviously, the risks include possible opposition from the wider local government community beyond London. Why should improved financial arrangements for London be regarded other than sceptically elsewhere in the country? The obvious implication, that better arrangements for the capital will mean reduced funding for every other local authority across the land, is the stuff of nightmares for councils already struggling to manage unprecedented funding cuts.
The commission, skilfully chaired by Tony Travers, has been careful to head off this risk. Indeed it has worked hard to try to engineer significant potential opportunities for other cities and city regions. Its recommendations are unambiguously localist and are quite deliberately designed to be replicable more widely.
In particular, the LFC argues that the full suite of property taxes (council tax, business rates, stamp duty land tax, annual tax on enveloped dwellings and capital gains property development tax) should be devolved to London government. Council leaders elsewhere will immediately see the attractions of city local government taking full responsibility for such a coherent suite of taxes and an important segment of the national tax base, property. Over time it offers the fascinating prospect of councils carefully calibrating different taxes in the portfolio to incentivise efficient use of property.
They will also identify strongly with the arguments for a wider range of funding tools to enable the infrastructure investment that is essential to achieve and sustain growth in the medium term. Again these arguments will have significant resonance in Birmingham, Manchester, Leeds and other core cities.
Councils beyond London will also be reassured by the position taken on ‘day one fiscal neutrality’. The LFC is quite clear that any increased tax proceeds which arise from the devolution of further taxes should be offset at the point of change by a corresponding reduction in grant from government. Thereafter London should bear the risk that tax receipts may grow more or less quickly, or even reduce.
In many ways the commission builds on themes which are already well established in the coalition government's localist policies, especially the recent business rates retention reforms. Hopefully this will help to avert any ‘not invented here’ opposition in Whitehall.
There are also risks within London that the capital's complex system of local governance will be unable to adapt to manage increased devolved responsibilities. Again, the LFC highlights this issue, recommending that London government – the Mayor and the boroughs – should collaborate to create new formal mechanisms for handling any transfer of taxation powers and responsibilities for expenditure. This will not be easy, but the positive disposition of both Boris Johnson, the Mayor, and Jules Pipe, representing London Councils, was an encouraging omen at the report's launch event in City Hall.
And what of other opportunities? At the launch the Mayor spoke with characteristic enthusiasm about helping to rebalance London's democratic deficit; placing London government on a more equal footing with other great international cities like New York and Tokyo in terms of fiscal autonomy; and tackling the huge infrastructure investment challenges which are critical for both London and the wider UK's global competitiveness.
These prospects will have appeal beyond the Mayor and the boroughs. They have the potential to win the support of other critical stakeholders like London's 73 MPs and its business leaders. Combine these ingredients with carefully cultivated support from other conurbations across the country and there is the possibility of a pretty formidable movement for change.
Raising the capital might just be the report to make a real difference. Let's hope so.
Steve Freer is chief executive of CIPFA and a member of the London Finance Commission
