Corporation tax devolution needed to help solve productivity puzzle

6 Jul 16
Devolving around one-third of corporation tax to cities could help provide the local funding and incentives necessary to boost UK productivity, a report by the New Local Government Network has claimed.

In a review that focused on how devolution could make the country more productive, the think-tank said poor UK productivity growth could worsen after the vote to leave the European Union unless action was taken.

Chancellor George Osborne has called for corporation tax to be cut from 20% to 15% to show the country was still “open for business” after the Brexit vote.

However, NLGN’s analysis instead said giving local authorities a share in corporation tax would recognise the regional and local aspect of solving the productivity puzzle.

Despite their critical role in improving local economies, councils have no financial stake in improving productivity.

As a result, plans to localise business rates to authorities could incentivise councils to create large numbers of low productivity jobs in out-of-town industrial and retail parks unless there was corresponding corporation tax localisation.

Devolving a share of the revenue would not change the chancellor’s ability to alter the rate, the report stated, but would mean income would be spent where and how it was most able to stimulate productive growth.

Giving local authorities a stronger stake in revenue generated from corporate profits (as a proxy for productivity) would also put town halls in a stronger position to encourage the clustering and density of economic activity that can boost productivity.

Report author and NLGN deputy director Jessica Studdert said Brexit made it more urgent to take action to turn around those local economies held back by the dominance of low skill, low wage industries.

“For our cities and towns to prosper, local leaders need to be given the financial powers and incentives to support high value growth locally, which their residents can benefit from.

“So the next step for fiscal devolution should be to give city and county regions control over a third share of corporation tax generated in their area. This would create sharper incentives for local government to drive the high value, high skilled productive growth on which local economies should be built on in the future if they are to be resilient and sustainable.”

The report also called for devolved accountability over skills and employment systems, the apprenticeship levy and local Jobcentre Plus employment advice services. Such a place-based approach would encourage innovation that supports local strengths, it stated.

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