London Finance Commission Tony Travers LSE

Context Tax raised by State/provincial + local government in major democracies as % of GDP: Canada15.3 France 4.6 Germany10.4 Sweden16.1 United States 9.1 Italy 6.5 United Kingdom 1.7 The UK is a centralised democracy 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 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 Devolved taxes

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

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 Principles for good governance

LFC success? Many reviews of this kind have met an indifferent response from central government over recent decades, eg Layfield ) Lyons ( ) 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