May 15, 2013 7:25 pm

It is time to set London free to tax and spend its own money

Other capital cities have a wider tax base and more freedom to set rates, says Tony Travers
The Shard and London Bridge Quarter buildings shown towards city / canary wharf ( baby shard )

London is one of the world’s leading cities. It and its hinterland are comparable with the New York-New Jersey region and the Paris agglomeration. It has a powerful and developed political class and system of government. Yet its access to the taxes paid by its residents and businesses is on a par with a small rural municipality. This needs to change.

London is out of line with other cities in having access to only a single, capped, tax. New York, Paris, Berlin and Tokyo, among others, have a far wider tax base and more freedom to set tax rates. In 2012-13, just 5 per cent of all taxes paid in London were collected by the city’s government. The remaining 95 per cent went to the UK Treasury. A modest reform to business taxation in April this year adjusts these figures to 7 per cent and 93 per cent, respectively. London’s politicians have severely restricted access to the tax paid by their citizens.

Devolution to Scotland and Wales has provided a political dynamic that has led to pressures for a transfer of taxation powers to Edinburgh and Cardiff. The Scots will introduce land transaction and landfill taxes in 2015, and a locally determined income tax the following year. The Welsh are bidding for similar tax autonomy. Thursday’s report from the London Finance Commission (LFC), which was asked by Boris Johnson, London’s mayor, to analyse the city’s fiscal position, found no evidence that devolution had damaged the economic progress of Scotland or Wales. Indeed, the practicalities of establishing the Scottish tax regime suggest there are no insuperable obstacles to the devolution of tax powers to any other part of the UK.

It is easy to assume that England’s centralised democracy is the only possible arrangement. Existing Whitehall departments would certainly find their powers reduced if London assumed greater autonomy over fiscal policy and public services. Sub-national governments in London and other British cities have been infantilised by a long-term move over many decades to centralise public finance and tax-raising. The mayor and the borough councils currently rely on the exchequer to collect and redistribute almost all of the taxation paid in the city. As a result, there is a perpetual requirement for the city’s rulers to negotiate to get their own area’s money back.

Looking ahead, London’s population is projected to rise from 8.4m today to 9m in 2020 and 10m in 2030. Such rapid growth will require major investment in housing, transport and schools. Moreover, the UK government is hoping that local areas will encourage economic growth through the business rate retention reform introduced in April. The LFC concluded that the need to accommodate population growth, allied to the need for incentives for a more productive economy, pointed in the direction of a wider tax base for London government.

Such an expanded tax base would allow increased borrowing, which would then make it possible to build the infrastructure required to secure the city’s growth. Investment in rail, housing and other capital would, in turn, produce higher tax revenues and thus additional investment.

The commission examined the full range of UK taxation and concluded that income tax, VAT, corporation tax and many other revenue sources would not be appropriate for devolution to London in the short term. There is little chance of such radical options being adopted in a single step by any UK chancellor. But property taxes were judged to be a more promising option. The LFC has proposed that the full suite of such taxes – council tax, non-domestic rates and stamp duty land tax – be devolved to London. In order to ensure the rest of the country was not made worse off, there would be a pound-for-pound reduction in central government grants to London. Tourism and environmental taxes could also be introduced.

London is not and will not become a city state. But it could have a far greater degree of self-determination and thus be better governed. If things went well, provision would be more efficient and more locally sensitive. There would be more investment. Other English cities could be allowed to follow the same path. The LFC’s proposals are modest but could produce radical results. This is surely a reform worth making.

The writer is a professor at the London School of Economics and was the chair of the London Finance Commission

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