Local Government Resource Review – Incentivising Growth Tony Travers LSE

The London economy  London’s Gross Value Added: £274 billion (2010) [Workplace-based]  Has risen from 56% above UK average to 71% above between 1997 and 2010  GSE has also pulled away from UK  London’s population: 7.83m  London’s share of UK GVA: 21.5% Population 12.6%  London fell back in 2010, but appears to be growing relatively faster than UK in 2011 and 2012

London’s public expenditure  London’s ‘Identifiable’ public expenditure: £79 billion ( )  Plus ‘non-identifiable’: £89 billion  PE as % of GVA = c33%  UK = 50%  Public expenditure in London, GSE represents a significantly smaller share of GVA/GDP than in other regions  NE = 66%  Northern Ireland = 75%

Public expenditure by spending authority London total PE = £89bn made up of: Central departmentsc£61bn Of which - NHS £17bn - Social Security £27bn Greater London Authorityc£10bn Boroughsc£28bn

GLA and Borough expenditure  Revenue (net)£25bn  Of which:  GLA£6.2bn  Boroughs£18.8bn  Capitalc£4bn  Of which:  GLAc£2bn  Boroughs c£2bn NB: ‘Revenue’ includes education; ‘Capital’ excludes housing

GLA and Borough Income  Council tax£4.3bn  Fees & charges* c£2.5bn  (NNDR Yield £5.3bn) Thus, council tax finances c17% of net revenue expenditure Council tax + NDR equivalent to 38% of net revenue income (inc education)

Council tax and Non-domestic rates in relation to all public expenditure in London –  London total PE = £89bn  London total taxation = £97-£100bn Net tax ‘export’ of c£10bn  Council tax (£4.3bn) would fund 4.8% of all public expenditure  CT + NDR (£9.6bn) would fund 10.8% of all public expenditure

The existing local government funding system  Local government revenue expenditure funded by: Council tax Grants [Partly funded by NNDR] (Fees and charges)  Non-domestic rate collected by councils and pooled Allocated as part of central support to LG  Grant paid, in part, to achieve high levels of equalisation Expenditure needs Council tax capacity

Equalisation  Over many years, England has evolved sophisticated equalisation grants  Near ‘full’ equalisation for differences in assessed needs and taxable capacity (‘resources’)  As a consequence, any increase in the local tax base is ‘equalised away’ Thus, no incentive to increase tax base Labour government’s ‘LABGI’ experiment

Local Government Resource Review  ‘Non-domestic rate retention’ is the primary objective  Councils will keep (a large proportion of) their NDR yield  ‘Tariffs’ and ‘Top ups’ to achieve ‘no change’ in Year 1 ( )  Part of overall NDR yield kept by central government to ensure LG expenditure fits Chancellor’s spending plans

Incentives  Councils will keep growth in their NDR yield, as tax base grows Though, any underlying relative growth at the point of revaluation will not be retained  Bad for authorities such as Westminster, the City and Camden with rising RVs within existing properties Good for authorities such as Tower Hamlets, Newham and Hackney with opportunities to develop new sites  Limits on growth for authorities with relatively large NDR bases % growth in NDR yield from year to year will determine maximum growth in income/expenditure Thus, Westminster, City, Camden pay a ‘levy’ on their growth Also protection for any authorities with low growth or falling RVs

The current system Council tax (NNDR)GrantSpending Authority A60(1000)40100 Authority B60(50) Total spending 300

The new ( ) system – (a) with no change from current system Council tax NDRTariff/ Top up Spending Authority A Authority B Total spending 300

The new ( ) system – (b) each council’s NDR yield rises by 1% Council tax NDRTariff/ Top up LevySpending Authority A Authority B Total spending 301.5

Will such incentives work?  Hard to be sure…no evidence from UK in modern history, or when there was such ‘tax competition’ in the past  NNDR in London is £5.3bn within an economy of £274bn – less than two per cent of the economy  Though the marginal impact on constrained council budgets will be sufficient to be felt  Pressures to replace falling (previously central grant) income may be greater than desire to deliver faster economic growth?

Councils will be able to operate the system in ways that maximise the NDR yield  ‘Pooling’ arrangements of two or more councils could work together to increase their yield  ‘Bi-lateral’ agreements could work even better….

The new ( ) system – (b) each council’s NDR yield rises by 1% Council tax NDRTariff/ Top up LevySpending Authority A Authority B Total spending 301.5

The new ( ) system – (c) each council’s NDR yield rises by 1%, but formal pooling arrangement Council tax NDRTariff/ Top up LevySpending Authority A Authority B Total [A+B] Total spending 303

The new ( ) system – (d) overall NDR yield rises by 1%, but bi-lateral agreement with all of rise in Authority B Council tax NDRTariff/ Top up LevySpending Authority A Authority B Total spending 310.5

Complex negotiations and agreements needed to agree pooling or bi-lateral agreements  Game Theory expertise needed to convince councillors (and developers) that pooling and bi-lateral agreements designed to maximise NDR yield growth could increase London (or a part of London) yield  Developers can be offered NDR reductions and, possibly, other incentives to move their development  Easier across a boundary than an ‘area’ agreement?

Other issues  New Homes Bonus Councils now keep the yield of council tax base growth  Planning reforms Neighbourhood Forums and planning Adds complexity to planning decisions, especially where there are major city centre developments Possibility of non-domestic to domestic use changes without planning permission  GLA response Borough:GLA share of NDR growth not yet determined GLA has ambitious plans for NDR retention, and sets London Plan  Tax Increment Financing

Conclusions  LGRR and NDR retention have been put forward by the government as key elements in their growth strategy  Impossible to know (yet) how the new local tax incentives will affect boroughs’ behaviour  Likelihood that boroughs with significant growth potential, but where 100% of growth is retained will be most affected  Newham, Hackney, Southwark, Lambeth?  A modest, but, interesting reform… But not a radical reform of local government finance

Local Government Resource Review – Incentivising Growth Tony Travers LSE