Giving cities more tax control should be next step in devolution process

8 Jul 15

A new report has found more evidence to suggest that cities need additional fiscal powers to boost their economies.

Devolution will be high on the news agenda again today, with George Osborne expected to announce plans in his budget speech for more cities and regions to take on new powers.

Those plans are unlikely to include offering more control over taxes, a sticking point for cities like Leeds, who have expressed reluctance to introduce a metro-mayor unless fiscal powers are part of the deal too.

But what impact would devolving tax and spending powers to cities have? And are British cities ready to take on those powers?

One obstacle to answering those questions has been that until now, there’s been little understanding of where tax and spending is spread across different cities and regions, and the implications this might have for the Government’s decentralisation agenda. But some clues can be found in our new report, Mapping Britain’s public finances, which shows for the first time where taxes are raised and public money is spent in local authorities across the country.

The report highlights a number of findings that are particularly relevant for any discussions about which cities would benefit from greater fiscal devolution.

Firstly, it shows that Manchester, Birmingham and Leeds city regions are all performing below the national average in terms of how much tax is generated in relation to their working population. If these three city regions were performing at the national average, they would generate an extra £9.4bn in taxes each year – more than three-quarters of the government’s proposed welfare cuts.

A financial challenge these cities face in boosting growth and productivity is the lack of control they have over the taxes generated in their areas. For every pound they raise in taxes, city regions only keep 9p, with the rest going back to Whitehall. Greater influence over taxes generated and how they are spent would give big cities more tools and investment to help grow their economies.

But as well as focusing on the challenges that big cities are facing, the report also indicates that the government should also be considering fiscal devolution as a way to boost smaller cities which already have strong economies.

While the analysis shows that cities such as Cambridge, Oxford and Milton Keynes are all performing above the national average in how much tax is generated compared to their working population. As a result, these cities have their own problems to contend with, including spiralling housing prices and traffic congestion problems. These are issues that must be addressed if they are to continue punching above their weight.

Although such places are often overlooked in the debate around devolution, giving these smaller, fast-growing cities more control over funds generated locally – for example land and property taxes – would equip them with the tools and incentives they need to deal with these problems more effectively. It would also help the government boost the national finances and tackle the deficit.

Our research highlights the importance of empowering both big cities like Manchester and smaller ones like Cambridge to do better. Allowing greater fiscal autonomy will be a crucial factor in making that a reality – as well as growing the national tax take through more people being in work and paying taxes, which could then be redistributed to help other cities that are currently struggling.

The national economy is an urban economy, and the next stage of the devolution process needs to focus on fiscal issues. The Budget is the perfect opportunity for the chancellor to continue pushing this agenda and to demonstrate his commitment to devolution.

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