Travers, Tony Raising the capital: the report of the London Finance Commission Report Original citation: Travers, Tony, Raising the capital: the report of the London Finance Commission. London Finance Commission, London, UK, 2013. Originally available from london.gov.uk This version available at: http://eprints.lse.ac.uk/63397/ Available in LSE Research Online: October 2015 © 2013 London Finance Commission LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. Raising the capital The report of the London Finance Commission MAY 2013 RAISING THE CAPITAL | THE REPORT OF THE LONDON FINANCE COMMISSION Raising the capital The report of the London Finance Commission MAY 2013 1 RAISING THE CAPITAL | THE REPORT OF THE LONDON FINANCE COMMISSION C opyright P ublished by London Finance Commission City Hall, The Queen’s Walk London SE1 2AA May 2013 www.london.gov.uk 020 7983 4564 ISBN 978 1 84781 479 1 Design: www.jwcreativedesign.co.uk © London Finance Commission, 2013 2 RAISING THE CAPITAL | THE REPORT OF THE LONDON FINANCE COMMISSION C ontents CHAIR’S FOREWORD 4 EXECUTIVE SUMMARY 7 RECOMMENDATIONS 10 PART 1: INTRODUCTION AND BACKGROUND 13 1. Introduction and background to the Commission 14 2. UK devolution in context 17 3. Summary of previous reviews 21 4. Principles adopted in making recommendations 25 PART 2: EVIDENCE 27 1. Summary of evidence received 28 2. Academic and international evidence 34 PART 3: SUPPORTING LONDON AND UK GROWTH 37 1. London and UK cities 38 2. Funding and incentivising growth 47 PART 4: FISCAL POWERS 56 1. Introduction to fiscal devolution 57 2. Emerging concepts of devolution to cities 59 3. Property taxes 62 4. Radical tax reforms? 70 5. Fees and charges 73 PART 5: RELATIONSHIPS WITHIN AND OUTSIDE LONDON 75 1. Distributional and equalisation mechanisms 76 2. Implications for wider London government reform 78 3. London within England 80 4. Conclusion 81 ANNEXES 82 1. Biographies 83 2. Terms of Reference 86 3. London’s tax and spending 89 3 RAISING THE CAPITAL | THE REPORT OF THE LONDON FINANCE COMMISSION C hair’s foreword T he London Finance Commission provides an opportunity to improve the government of London. Initiated by the Mayor and supported by the boroughs, the Commission has been able to consider the weaknesses of the existing system and to propose improvements. This report makes proposals to build upon reform which has already taken place under successive governments. The Commission believes that there would be more jobs and growth in London if the government of London had greater financial autonomy. Devolution and localism face little opposition apart from national politicians’ cautious approach to constitutional change in Britain. Although Scotland and Wales now enjoy substantial devolved power, England has not seen anything like the same degree of devolution. London has a relatively new system of city-wide government which, in the Commission’s view, could readily wield more power and fiscal autonomy. London is a leading international city which has, somehow, become a model for free-wheeling, tolerant, metropolitan living. It has a fast-growing population and, along with its surrounding counties, one of the largest regional economies in the world. It cannot stand still. Other major cities are rapidly building metros, enhancing education facilities and developing new homes. Infrastructure is the key to continued economic success and a decent quality of life. The Commission has sought evidence from a wide range of organisations and individuals. The message we received was clear and unanimous: London’s government needs to be given greater freedom to determine and use the resources raised from taxpayers. At present, London (and, indeed, England as a whole) is an extreme outlier compared with other cities and countries. Only a tiny proportion of the taxes raised in London are determined by the city’s government. Even after the reforms of April 2013, barely seven per cent of all the tax paid by London residents and businesses is retained by the Mayor and the boroughs. The equivalent figure in New York is over 50 per cent. Commissioned research provided us with evidence about previous finance reviews, the potential economic impact of greater local autonomy, longer-term trends in taxation and public expenditure, the position of other global cities, and the situation in Scotland and Wales. While the impact of earlier national reviews was very limited, recent inquiries in Scotland and Wales are paving the way towards substantive fiscal devolution. Evidence about the impact of devolution on economic growth is ambiguous, though there is no suggestion that London would be likely to see slower growth if there were more local freedom over taxation and expenditure. Research commissioned by the City of London projects continuing relative growth in London’s tax yield and thus in its contribution to the rest of the UK. It is easy to assume that England’s centralised democracy is the only possible arrangement. Compared with other major countries, sub-national government in London has been infantilised by a long-term move over many decades to centralise public finance and tax- 4 RAISING THE CAPITAL | THE REPORT OF THE LONDON FINANCE COMMISSION raising. The Mayor and the boroughs must rely on the Exchequer to redistribute almost all of the taxation paid in the city and to determine spending priorities. As a result, co-ordination which can deliver real results at a local level is lost. This is not a good situation for a developed democracy. London’s population is equivalent to those of Scotland and Wales combined. Its economy is almost double the size of these nations together. Yet while the dynamic of devolution continues to offer new powers and financial freedoms to the governments in Edinburgh and Cardiff (and, indeed Belfast) there have been no proposals to increase the autonomy of London government. The Commission has received no evidence as to why London and other English city regions cannot be afforded the kind of decentralised power offered to Scotland, Wales and Northern Ireland. Hitherto, there have been a number of barriers to significant further devolution to London. First, public expenditure reviews currently work in such a way as to inhibit any deviation from individual departmental priorities or, indeed, overall Treasury control. Second, any substantive removal of London from Whitehall control would weaken departments and ministers; London is a large and interesting part of any spending department’s empire. Third, London and its region are so important to the UK economy that any threat to growth there would be seriously problematic for the British government. Yet it is economic growth that the Commission sees as the potential prize of a further shift of financial and fiscal control to London. As the city population grows to nine and then ten million people by 2030, there will need to be massive investment in enabling infrastructure simply to accommodate these new residents and, indeed, commuters. Beyond this investment to keep pace with the population, the Commission is convinced that London would be better able to prioritise decisions about investment. Londoners know they need new railways, schools, homes, waste facilities and streets. Because of their day-to-day dependence on physical infrastructure, we believe London voters would be more likely than voters elsewhere in Britain to prioritise spending on longer-term investments. If London had enhanced fiscal capacity to back such investment, there could be an enhanced level of capital spending which would, in turn, produce additional growth and tax yield. London government could then re-invest higher tax revenues in more infrastructure; a virtuous circle would be created. Of course, it is important to acknowledge that with greater autonomy there would be greater risk. London is not a city state. But it could have a greater degree of self-government and thus, in our view, be better governed. The same is true for other city regions. No one can seriously any longer believe that Whitehall always knows best. This report makes the case for a further, logical step towards a stronger and more productive system of London government. If reform is successful, the results would be good for London but also good for the rest of the country. The time has come for a more autonomous and accountable model of funding for the city. Any devolution to London of powers over taxation, financial management or expenditure would have implications for both the Mayor and the boroughs. It is difficult to imagine a change that did not affect both parts of the city’s government, or which might not have implications for longer-term relationships between City Hall and the boroughs, collectively and individually. With this in mind, we envisage the Mayor and London Councils creating a more formal mechanism for handling any transfer of taxation powers and/or responsibilities for expenditure. In any such mechanism, both parts of London’s government would have to be represented and have the ability to ensure that there was agreement about how new 5 RAISING THE CAPITAL | THE REPORT OF THE LONDON FINANCE COMMISSION responsibilities were handled in the longer term. This is not to say that a particular tax could not be given wholly to the Mayor or wholly to the boroughs.