For decades, I have been championing devolution; for communities to take back control over the decisions that affect their lives from the very local allocation of funding to improve an area, to wider service provision and structures. The beauty of our local government is that it looks different in different areas, to suit local communities’ needs.
However, no matter what the structure, funding has always been a problem for local services. Back in 2013, Boris Johnson, as Mayor of London, commissioned Professor Tony Travers to Chair an expert panel called the London Finance Commission, which produced Raising the capital | London City Hall. This report transformed the debate and voiced the need for London and other cities to have more financial control.
The EU referendum, and Britain now having left the EU, has made the case for devolution and fiscal devolution more urgent. Whatever Leave voters felt they were voting for, it was not ‘business as usual’. It was not an endorsement of centralised power, simply removing it from Brussels to Whitehall and job done. People across the country feel isolated from the democratic process.
The referendum result not only affects the country as a whole but also within our nations, regions and cities. The uncertainties from Brexit and the pandemic may well be better managed at a local level, with local and regional government able to respond more effectively.
At present, virtually all taxation in the UK is determined by central government. Only council tax (and in England from April 2013, a proportion of business rates) can be seen as local taxation – and even this is subject to cumbersome controls, including referendum rules set by central Government. When you compare this internationally, you realise the power that Whitehall holds.
In the light of Brexit, the London Finance Commission published a further report – Devolution: a capital idea. This called for a new devolution settlement for London, which could apply equally to other city regions.
It cannot be assumed that the current degree of fiscal centralisation within the UK is the only way to do things. Giving London and other places greater power over their tax base and delivery of public services could be hugely beneficial all round – allowing public services to be reformed and with everyone having an incentive to see their local economy develop and grow.
It makes sense to bring London in line with most other global cities by allowing the capital’s government control over a much wider range of taxes – crucially in exchange for lower levels of government grant. Other cities could benefit too.
This would enable the city to operate more efficiently, effectively and integrate services, bringing forward infrastructure investment vital for growth at no additional cost to central government.
Modest devolution of this nature to London and other cities would enable Whitehall to concentrate on the bigger global challenges, whilst allowing local areas to be reinvigorated.
Simple ideas such as a modest tourism levy which is already operated in international cities such as New York, Paris and Berlin could be used to promote tourism; a percentage of Londoners’ income tax yield – broadly to match its overall expenditure, as and when further devolution occurs; and for London government to be able to consider other health-related taxes, such as a sugar sales tax and a saturated fat tax, to be devised and fully managed by London government.
And significantly, the full suite of property taxes should be devolved to London’s government. This includes the operation and setting of council tax and business rates and the devolution of stamp duty.
The centralised nature of UK government makes it incredibly hard for real innovation at the local level. In London, the Mayor and the boroughs need further powers to bring about the required structural change to address the types of inequalities Londoners face, from housing to household income.
Moving to further fiscal and other service devolution would give local and regional government strong incentives to innovate and develop their areas. It would also help invigorate local democracy. When so few people vote in local elections, is it any surprise when Whitehall pulls most of the strings?
A radical transformation of local and regional government is needed. Taking back control, could be the answer, if that control is genuinely local!
This blog was originally written The Effective Governance Forum, a cross-party campaign working for decentralisation. You can read their report here.
* Caroline Pidgeon is a Liberal Democrat London Assembly Member and Deputy Chair of the London Assembly Transport Committee
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21 Comments
I strongly support Caroline’s call for radical devolution and a revival of local government. But fiscal redistribution will have to be part of the new settlement, given that England has a far wider gap among regions in wealth and prosperity. I know that’s not an easy question for a London representative to address, since there are also clear pockets of poverty in London and evident candidates for additional public spending. From the perspective of West Yorkshire, however, this must be an essential element of economic and social recovery – of a national ‘fair deal’.
I agree with William Wallace. I’d put it that there needs to be fiscal equalisation rather than just a nominal redistribution. Only the central government has the ability to impose this solution.
Otherwise the economy of the SE of England will continue to run too hot with unaffordable house prices at the same time there is a net migration in that direction.
Depressing that among the generally good examples of things a devolved london could do are imposing yet more punitive food taxes on poor people.
Devolution of tax raising powers is critical to the restoration of effective local government services. . In Germany this is embedded in the constitution. 95% of German taxes are collected at the federal level. Most of the revenue is earned by income tax and VAT. The revenues of these taxes are distributed between the federation and the states by quota. The municipalities receive a part of the income of the states.
States collect directly inheritance tax, property taxes and most taxes on alcohol and gambling.
Allowing Council tax billing authorities to levy and retain a land value tax would provide direct control over this source of revenue that is closely related to the planning powers exercised by local councils and the ability to deliver housing.
Fiscal redistribution would remains a function of central government, as it is in Germany, and be based on quotas. An additional feature of the German tax system that came about with the integration of East Germany was the solidarity surcharge. That is a additional income tax levy of up to 5.5% as a surcharge on higher incomes i.e. a form of levelling up.
Tony Travers writes “… despite its apparent affluence, London has the largest concentration of deprived communities and households in the UK. At present, the centralised nature of UK government makes it virtually impossible for the Mayor and the boroughs to bring about the required structural change to address the types of inequalities Londoners face, from housing to household income”.
If you look at any major city where wealth is concentrated, that is where the greatest levels of deprivation exist. Los Angeles and San Francisco have the greatest homelessness problems in the USA. Average rents in New York have skyrocketed to over $3,600 per month. It is the same in Paris, Sydney or Toronto. The cause of rising poverty in these major urban centres is the inflated cost of land. People flock to cities in search of higher wages. Demand outstrips the supply of scarce land with planning consent available for housing and rents rise inexorably leaving in its wake large pools of people without access to basic shelter.
Joe Bourke 21st Aug ’23 – 1:50pm:
Most of the revenue is earned by income tax and VAT.
None of the revenue is “earned”.
An additional feature of the German tax system that came about with the integration of East Germany was the solidarity surcharge.
Introduced over 30 years ago to help cover the cost of reunification. In the immortal words of Milton and Rose Friedman: “…nothing is more permanent as a temporary government program.”
That is a additional income tax levy of up to 5.5% as a surcharge on higher incomes i.e. a form of levelling up.
In the short-term perhaps, but in the long-term high taxes are a form of ‘levelling-down’.
@ Joe
“In Germany this is embedded in the constitution. 95% of German taxes are collected at the federal level.”
Germany is a net exporter which means that its capital account is usually negative. On the other hand the UK is a net importer with a positive capital account. This means that the Government ends up running a budget deficit to recycle the money back into the economy. Therefore, for the UK and unlike Germany, it’s not just a question of redistributing centrally collected taxes.
“The cause of rising poverty in these major urban centres is the inflated cost of land.”
I would say it is the economic inequality, an inevitable consequence of laissez-faire capitalism, which enables the wealthy to be able to afford those inflated prices and to bid them up to that level in the first place. A LVT is fine but unless you back that up with some meaningful wealth taxes it won’t make that much difference to the level of rents you mention.
Completely agree with the need for radical transformation, but that includes questioning the trend for the creation of unitary authorities and regional authorities over smaller bodies – and the shape of London. What is the smallest population size and shape that can reasonably run their own services and be democratically accountable? How would that unit link up to the next tier, until reaching regional, national and international level? Is cost-saving or ‘lack of bureaucracy’ the only consideration, or is democracy worth the cost?
London – City Hall – is a political construct sitting atop a group of political constructs – the boroughs. Below them are multiple neighbourhoods that each had their own civic institutions before being swept away in 1965. They were all too small, too devolved. But the boroughs that replaced them, despite populations of around 200k, find themselves too small to achieve economies of scale in the face of savage budget cuts.
In the outer suburbs (including mine), individual neighbourhoods still feel more real than ‘London’. City Hall comes across as just another distant body pulling the strings alongside Whitehall. This feeling got Johnson elected as Mayor, and has now grown and crystallised around the anti-ULEZ movement.
Governing authorities have to make an emotional as well as a practical case for their existence. Given the uproar over the way ULEZ has been handled, if the outskirts were to vote today on staying in London or returning to the home counties they were carved from, I suspect we’d be looking at Lexit.
Peter Martin,
West Germany and East Germany both had their sponsors after WW2. West Germany the USA and Marshall funding; East Germany the soviet union. We know how that worked out.
Korea is an even more stark contrast. After the Korean war, both North and South Korea had similar very low per capita GDP and North Korea was better placed to succeed economically with heavy industry, natural resources like coal and shared borders with China and the Soviet Union. 70 years on, South Korea has 25 or 30 times the gdp per capita of North Korea.
When the Soviet Union was near collapse in the 1980’s, Gorbachev tried to improve central planning with the use of computers, but it was too little to late to save the system. Maybe one day central planners will be able to figure out a better system with AI. In the meantime we are left with Adam Smith’s observation of human nature “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. When it comes to land however, that is a gift of nature and its distribution by way of market pricing is the principle cause of economic inequality. Correct that market distortion with tax reforms and it will get us a long way to solving the problem of poverty.
@ Joe,
I’m not quite sure how your latest comment relates to my previous one but it looks like you’re making out the case for the superiority of capitalism in the post war period.
I’d largely agree except to point out that the type of capitalism we, in the UK and also other European countries, had then was quite different to what we have now. Some of us would like to have it back!
The post war mixed economy lasted for 40 years or so but after that it was quite clear that the communist threat, if it ever really existed, had passed. Consequently there was no longer any need to, as the political right would see it, pander to workers’ interests and run nationalised industries, maintain full employment, and have free tertiary education etc. The NHS was a more difficult one for them but I’d say they’re still working on that one!
In other words we can argue that the capitalist class had to be on their best behaviour after WW2 to keep the system firmly under their control and the socialists well out of power. They don’t have to do that any longer.
And for 30 years after WW2 we floated on a sea of low cost high density energy. Oil,oil,oil.
I’ve heard it all before, I’m afraid. There is constant flux between centralisation and de-centralisation. Any attempt by London to retain more of its tax receipts would be rightly opposed by the regions. There is always scope for tinkering at the edges but the broad pattern of the national allocation of public finances must continue to be the prerogative of the UK government.
Cheap oil was a big factor, Jenny. There are two causes commonly cited for the Opec oil crisis. A persistent decline in the value of the U.S. dollar, which had eroded the export earnings of OPEC states and Western support of Israel against Egypt and Syria during the Yom Kippur War (1973).
The UK did mitigate energy costs with the North Sea fields coming on line in the late seventies, but the example of Norway shows how it should be done and that of Venezuela what not to do.
Venezuela was a rich country 50 years ago with vast oil reserves. Today it is in chaos while Norway boasts one of the largest Sovereign wealth funds in the world. That has not stopped them bringing in a controversial wealth tax though Super-rich abandoning Norway at record rate as wealth tax rises slightly
50 years ago one in ten UK school leavers might have gone to University, today it is over 50%. Student loans are not the problem (that is effectively a graduate tax), the problem is living costs especially rents. Maintenance loans or grants are insufficient to cover students living expenses with room rents alone costing more that the loans/grants available University accommodation costs
“There are two causes commonly cited for the Opec oil crisis.”
Peak conventional oil in the USA is more likely. Up till then, the USA could control the oil price, but once they hit peak, they were no longer able to. I agree that the UK should have used the N.Sea oil bonanza for a sovereign wealth fund, but Thatcher’s government had a more important project: destroy the unions & cut tax.
This has been clear and instructive, and I am unable to comment. But may I take the opportunity of suggesting — change being in the air — that as the Johnsonian epoch is now fading we must all attempt to restore our ravaged language? Not all that has for half a decade been described as “incredible” and “incredibly” can be respectably so described, since nine times out ten that is a deplorable falsehood. “Incredible” does not mean ‘astonishing’ nor incredibly “very”. Can we revive the language and say what we mean again? (Apols, if I’ve interrupted.)
There is a constant sucking of resources towards London that must be constrained and reversed if levelling up is to be achieved. Any changes in revenue collection must be monitored to see its effect on that. Devolution does allow for natural experiments to be performed and for other areas to copy successful ones. A successful economy might have to be balanced against more regional equality.
” Norway boasts one of the largest Sovereign wealth funds in the world.”
The population of Norway is just over 5 million. If oil money had been allowed to flow into the country on a free market basis the rise in the country’s currency would have wiped out just about every other industry there. The Norwegian government decided to prevent this from happening by setting up a SWF which is a way of exporting their unwanted oil money and reducing the value of their Krone.
So, sure we, ie a country with some 12 times the population level, could have done the same thing. However, those advocating for a SWF do need to open about this. They do need to explain why they want, or wanted, the pound to be valued at a lower level on the Forex markets.
Larry Elliott writing in 2012 Britain has squandered golden opportunity North Sea oil promised explains why he wanted, the pound to be valued at a lower level on the Forex markets.
“Norway has used its North Sea revenues to amass a sovereign wealth fund that will help the country adjust to an ageing population. Britain used its oil and gas receipts to pay for mass unemployment, tax cuts and current government spending.
Boasts that the black gold would retool British industry proved utterly hollow. If anything, oil added to the woes of manufacturing, since sterling’s status as a petro-currency drove up the exchange rate and made exports uncompetitive. A fraction of the billions creamed off by the Treasury might have been used as the capital for a national investment bank, but neither Conservative nor Labour governments saw fit to use the receipts for this purpose.
Lower North Sea oil production is one reason for Britain’s weak economic recovery and makes it harder for Osborne to balance the books. Even more worryingly, acute energy dependency looms. The coal mines have closed; the older nuclear power stations are on their last legs; the gush from the North Sea will soon be a mere dribble. An entire era can be summed up in three words: discovered, extracted, squandered.”
@ Joe,
Do we agree that having a SWF means having a lower pound? Larry Elliot usually gets it right but I doubt Lib Dems would ever suggest this.
The popular desire is full of contradictions. It’s for having a SWF but also a high pound. The higher the better. This makes for cheap imports but most want at least balanced trade or even an export surplus. At the same time the government should have low debt levels but at the same time everyone else is saving more.
It just isn’t arithmetically possible!
Peter,
Singapore’s GIC is one of the world’s largest institutional investors. The sovereign wealth fund has estimated assets of more than $700bn.
The Singapore dollar is allowed to float against a basket of currencies of Singapore’s major trading partners and competitors. This, in theory, allows the Singaporean government to have more control over imported inflation and to ensure that Singapore’s exports remain competitive.
Soon after this impoverished former British colony gained independence in 1965, the government had a pressing need for an adequate supply of land to carry out its developmental projects, especially those concerning resettlement and industrialisation. The Land Acquisition Act in 1966 gave the government the power of compulsory land acquisition for public development.
The compulsory acquisition of land by the government was effective in keeping the costs of building houses and industrial premises affordable. Cheaper and more effective land acquisition also resulted in better urban planning that facilitated urban renewal efforts which led to the growth of the commercial and business district in downtown Singapore.
The results are there for everyone to see today.
@Joe – re Singapore
Your thumbnail reminds me of the Milton Keynes development corporation. It was doing a good job until the politicians decided it should be wound up in the mid 1990s, subsequent development is of a significantly lower standard and more driven by developer profits…
So if the UK were to follow Singapore, you can be sure future politicians will mess things up. In some respects Brexit is just another example of this mindset in action.