Is it London’s turn for devolution?

Politicians and business leaders in London could be forgiven for feeling frustrated. The capital is overwhelmingly the most powerful part of the UK economy, yet, far from turning into the independent “city state” that some advocate, it is struggling to win its case for even a modest devolution of financial powers.

Barely 7 per cent of all tax paid by London’s residents and businesses is retained by its mayor and boroughs, compared with 50 per cent in New York. Almost three-quarters of its local government income is derived from a central block grant, compared with 31 per cent in New York, 25 per cent in Berlin and 17 per cent in Paris.

The London Finance Commission set up by the mayor, Boris Johnson, last year recommended that property taxes, including council tax, stamp duty land tax, business rates and capital gains tax on property disposals, be devolved to the capital, matched by a cut in government grants. It called also for freedom to create smaller levies, such as a tourism tax, and borrow more easily on capital markets to fund infrastructure and housing – an important issue in a city projected to grow from 8.4m people today to 10m in 2030.

The UK government has shown little appetite for such a move, yet it is planning to give extra powers to Scotland and Wales. Under existing plans, Scotland would gain control over stamp duty land tax from 2015 and set a Scottish rate of income tax from 2016. Wales is getting legislation to devolve stamp duty land tax and landfill tax and provide for a referendum on devolving an element of income tax.

More concessions were promised to Scotland as polls showed the rival campaigns neck-and-neck in the run-up to the recent independence referendum. The main UK party leaders pledged more extensive powers for the Scottish parliament over income tax rates, spending and welfare, to a tight timetable.

Pressure for new arrangements in England, Wales and Northern Ireland has intensified since the No vote in the Scottish referendum. But with sharp differences between Labour and the Conservatives about what that might involve, early agreement seems unlikely.

“London’s economy is double the size of Scotland’s and Wales’s combined; our population is equivalent to that of the two nations together. Yet the powers devolved to them dwarf the powers of London local government,” says Colin Stanbridge, chief executive of London Chamber of Commerce and Industry.

If citizens of New York, Frankfurt and Tokyo can be trusted with tax-raising powers, why not the people of London, Manchester or the northeast?

The Scottish parliament and Welsh assembly have had greater power than London’s mayor and assembly, including expenditure such as health and education. The Greater London Authority, headed by Johnson, controls transport, policing, economic development and planning, and has a role in housing strategy.

London’s political problem is that since the financial crisis, Britain has fretted about its dependence on the capital, whose output measured by gross value added per head grew from 157 per cent of the UK average in 1997 to nearly 175 per cent in 2012.

Official policy is to “rebalance” the economy by fostering growth outside the capital. While no serious politician wants to hold back London as in the 1960s, when new office development in the city was banned briefly, granting extra powers to the capital alone would risk being seen to fuel its economic dominance.

David Cameron, the prime minister, told the CBI employers’ group last year that Britain needed a “fundamentally different economic model … a more balanced economy. We want to be not so reliant on the southeast of England, not to be so reliant on finance.”

The capital’s best chance may be to make common cause with other cities. Last autumn Johnson joined forces with the Core Cities group of England’s largest cities outside the capital – Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield – to call for cities to gain control of property taxes. Johnson said it would “end stop-start finance settlements and instead provide a reliable stream of funding to enable investment, jobs and growth”.

The Commons communities and local government committee has called for a “framework for devolution”, under which groups of local authorities would gradually gain power over business rates, stamp duty, council tax and smaller taxes and charges.

“If the citizens of New York, Frankfurt and Tokyo can be trusted with tax-raising powers, why not the people of London, Greater Manchester or the northeast?” says Clive Betts, committee chairman. Among the obstacles is the Treasury’s wariness of seeing its revenue base fragment. David Gauke, Treasury minister, said in March 2013 that devolving powers over stamp duty to the mayor would have “legal, economic and constitutional implications”.

It was an important source of government revenue to provide essential services on a national basis, Gauke said. He added: “Different tax rates in different parts of the country are likely to create a distortive effect around borders, with negative effects on the property markets either side of the borders.”

Most of the government’s regional growth initiatives are aimed at the provinces, but London benefits from some, such as the Royal Docks enterprise zone. London has also been promised £236m over six years for items such as skills and housing from the government’s £2bn-a-year local growth fund in England – less, however, than has been pledged to Leeds, Manchester and Birmingham. Labour leader Ed Miliband called for the fund to be trebled to £6bn and for councils to have full control of business rate revenue if they combined authorities, but he made no commitment to devolving stamp duty.

Winning more fiscal powers for London looks like being an uphill battle, not only for Johnson but for whoever succeeds him in 2016.

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Powerhouse politics: the view from the north

When 16-year-old Mancunian Mike Emmerich met his careers teacher in 1983, he received advice unchanged for decades, writes Andrew Bounds. “He told me to go to one of the dozens of big factories near the school. Within a couple of years most of them had closed,” he says.

When the Catholic schoolboy had finished his A-levels two years later, he had discovered John Maynard Keynes and opted to study economics instead.

Emmerich, chief executive of New Economy, a think-tank in Manchester, says the scarring experience of mass unemployment as industrial jobs moved to the developing world infused a generation of Mancunians with almost a “religious desire” to raise the city back to its feet. Greater Manchester, with a population of 2.6m, is now talked about as a possible northern “mini-London”, able to attract and retain talent to mitigate the economic overreliance on the capital and its financial services industry.

Vince Cable, the business secretary, said last year: “London is becoming a kind of giant suction machine draining the life out of the rest of the country, and I think more balance in that respect would be helpful.”

The question of how to create that balance without draining London is exercising politicians and economists.

Emmerich, who has advised Boris Johnson, the London mayor, as well as Manchester, says: “The idea of doing London down to improve Manchester or anywhere else is crazy. Would Britain be a richer country if London didn’t exist? No.”

He believes, however, that moves to steer science and transport spending from the southeast northwards could go faster. He cites the public sector research institutes in places such as Weybridge in Surrey. They could be moved to the north and Midlands, freeing valuable land for housing and allowing scientists a better standard of living. “That’s good for both London and the north,” says Emmerich. It would echo a move by the BBC, which moved almost 2,000 jobs from London to Salford in 2011.

Most developed countries, such as Spain and Germany, have a number of cities – Barcelona and Frankfurt, for example – outside the capital that are magnets for talent. Politicians from all parties have now backed the idea of a “northern powerhouse” to replicate that effect.

George Osborne, the chancellor, coined the term and in August launched a report drawn up by northern councils calling for £15bn of transport investment between Liverpool and Newcastle, including new rail links between Manchester, Leeds and Sheffield. Together the conurbations have a population of 9m, a £154bn economy and almost 3m jobs.

“I’m ready to commit new money, new infrastructure, new transport and new science. And real new civic power too,” Osborne said. However, no specific sums have as yet been allocated.

The aim is to create a larger labour market that would allow companies to recruit from across the region. It could also help the region retain more graduates from its universities – more than half those graduating in Yorkshire and the Humber leave, many for the southeast.

Transport has become the main focus: rail and many road journey times between provincial cities are twice as long as those around London. The proposed high-speed rail line from London to Manchester and Leeds via Birmingham could highlight the disparity for cities not included, so in October Sir David Higgins, chairman of HS2, will recommend how to plug others into the line, including initial options for a cross-Pennine fast rail link.

IPPR North, a left-leaning think-tank, has calculated that public spending on skills, transport, research and development, and economic development per head is more than £1,000 a year in London but just £542 in the West Midlands and £642 in Yorkshire and the Humber.

London’s contribution to UK gross domestic product has grown from 20.7 per cent before the 2008 recession to more than 22 per cent, while the gap in gross value added per head between north and south has grown from 34 percentage points to 35. “You cannot fly on one engine,” says Professor Michael Parkinson, of the University of Liverpool, who led the research.

Henry Overman, professor of economic geography at the London School of Economics, is doubtful that London can be replicated, because of its sheer size. To copy London’s impact would require focusing on one city – say Manchester – diverting spending from others. He also questions Osborne’s observation that the distance from Leeds to Manchester, about 50 miles, is the length of London’s Central underground line. “Nobody commutes from one end of the Central Line to the other. They go to the middle,” says Prof Overman. He argues it is better to invest scarce public money where it will generate the greatest economic return.

Others, including some council leaders, believe the proposal is empty rhetoric to shore up Conservative support in the north ahead of the general election next year. Alan Harding, director of the Heseltine Institute for Public Policy & Practice at the University of Liverpool, says: “We have heard all this before.” Nevertheless, he believes the financial crisis may convince politicians they have no choice but to give cities more powers to fend for themselves.

One thing has changed: rivals such as Leeds and Manchester are collaborating on spending plans. And most back further powers for London, realising they are unlikely to receive more devolution than the capital.

A northern powerhouse would change Prof Harding’s own 21st-century careers advice to students. With only “a little irony”, he says: “I ask them, ‘Do you have friends or relatives in London with a floor you can sleep on?’”