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London Finance Commission
Tony Travers
LSE
Context
• The UK is a centralised democracy
Tax raised by State/provincial + local
government in major democracies as % of GDP:
Canada
15.3
France
4.6
Germany
10.4
Sweden
16.1
United States
9.1
Italy
6.5
United Kingdom
1.7
• GLA and local authorities receive majority
of budget from central government grant
and have very little fiscal autonomy
Background
• The LFC was established by the Mayor of
London in summer 2012 in relation to
manifesto commitments to get a fairer
funding deal for London government.
• Purpose: to examine the potential for greater
devolution of both taxation and the control of
resources in London and to develop options to
improve London’s tax and spending
arrangements, in particular to promote jobs
and growth.
Approach
• Met monthly between July 2012 and April
2013
• Commissioned research papers
• Collected written evidence from stakeholders
• Took oral evidence from experts
• Held seminars and focus groups
Academic evidence
• Overall, academic evidence is too
contradictory to state that devolution leads to
growth - difficult to measure and compare
• However, the same body of research also fails
to demonstrate that more centralised models
of government lead to growth either.
International comparisons
• Comparative research commissioned from the
University of Toronto shows London is a clear
outlier compared to competitor international
cities in terms of fiscal autonomy.
• City government in New York, Frankfurt, Tokyo
and others proves competent to manage a
number of taxes.
Taxes available to cities
Written and oral evidence
• Responses to call for written evidence
received from local government (London and
outside), business and others
• Overall support for modest fiscal devolution
• Acknowledgement that taxes with an
immobile base would be the most appropriate
for London.
LFC deliberation: Case for reform
• The Toronto research concludes that access to a
diverse tax base would improve London’s
governance.
• The LFC argues that improved governance is required
specifically to meet the city’s growing infrastructure
needs as the city grows to 9, then 10 million residents
by 2030, and as its economy grows as forecast.
• railways, housing, schools
• Also, a different approach to investment (ie more)
would be likely to generate higher GDP and thus
more tax income.
• a virtuous circle
• NB NDR reform
Infrastructure provision
• High-level infrastructure plan matching
infrastructure need with potential funding
sources – Mayor as ‘infrastructure champion’
• Relaxed borrowing constraints - lift caps on GLA
and local authority borrowing WITHIN
PRUDENTIAL RULES (ie only for capital), including
for housing.
• Distinguish between borrowing for capital and
borrowing for revenue.
Taxes excluded from proposals
• Income Tax
• Longer-term possibility of assignment
• VAT
• Corporation tax
• Customs & Excise duties
• Excluded because of the mobility of the tax
base
Devolved taxes
• Devolved tax revenues could fund borrowing for
infrastructure
• Property taxes appear well-suited to operation by
London government – immobile bases and
substantial revenues
• The full suite of property taxes should be
devolved to London government offset by £-for-£
cut in Whitehall grants (at point of reform)
•
•
•
•
council tax (£3.8bn in London in 2010/11)
business rates (£5.52bn in London in 2010/11)
stamp duty land tax (£2bn in London in 2010/11)
Plus smaller new property taxes introduced in 2013: annual
tax on enveloped dwellings and capital gains tax on property
transaction
• Council tax and business rate would be
linked
• Rates then set locally (with appropriate
protections for businesses)
• London government would have the power
to hold revaluations and to determine
banding
• Scope for reform of imperfect property tax
regime (cf Mirrlees Review) if decided by
London government.
In addition to property taxes
• Permissive power to introduce smaller new
taxes (as in Scotland)
• Much greater discretion for local government
to set fees and charges (many are still set by
the Secretary of State at present)
• Further exploration of single pot budgets,
building on Community Budget Pilots
Principles for good governance
Recommendations underpinned by the following principles
• - Accountability to local voters and businesses
- Transparency to avoid complexity
- Efficiency and effectiveness to ensure local preferences are
met while avoiding waste
- Autonomy to ensure a constitutional balance between different
spheres of government
- Fairness such that reforms are not detrimental to the rest of the UK
LFC success?
• Many reviews of this kind have met an
indifferent response from central government
over recent decades, eg Layfield 1974-76)
Lyons (2004-07) and several others
• However, the Calman Commission for
Scotland and the Holtham and Silk
Commissions for Wales show an increasing
dynamic towards devolution
• Scotland: stamp duty land tax, marginal rates
of income tax, landfill duty and the ability to
create new taxes have were devolved in the
Scotland Act 2012
• Wales: similar fiscal powers recommended
(Government response pending)
• Government support for localism embodied so
far in City Deals, most significantly in the
Manchester Earn Back scheme
- this allows Greater Manchester to retain additional uplift in tax
revenues beyond the business rate against an agreed baseline
Wins for central government?
• Incentives to growth through ability to improve
infrastructure provision means potential uplift in
its own tax base if successful (it would still control
approximately 89 per cent of taxes)
• Ability for London government to tackle ‘problem
issues’ such as council tax banding and
revaluations, for which central government has
little appetite
• Constitutional arguments - could be applied in
other cities
• The English question?
London Finance Commission
Tony Travers
LSE