London calls for greater say over its taxes to boost growth

15 May 2013

The Mayor Boris Johnson today endorsed the findings of a new report calling for greater financial freedoms for the capital, giving London government the autonomy to invest in its own vital infrastructure as its population and economy grow, and bring London in line with competitor global cities.

The London Finance Commission’s report outlines a comprehensive package of devolution measures to give Londoners a more direct say over a greater proportion of taxes raised in their city. It concludes that London government could better promote its own economic development by devolving financial and fiscal control rather than relying on the current formula of majority Government grant. The Commission, chaired by London School of Economics academic Professor Tony Travers, has established there is a broad consensus amongst the capital’s key organisations in support of reform.

‘Raising the capital’ found that only seven per cent of tax paid by London residents and businesses is redistributed directly by locally elected bodies (the Mayor and borough councils). This contrasts with other world cities; for example, 74 per cent of London’s funding comes from centralised grants, compared to 31 per cent in New York, 25 per cent in Berlin, 17 per cent in Paris and eight per cent in Tokyo. London is also a ‘tax exporter’, home to 13 per cent of the population but generating 18.5 per cent of the national tax take.

The report concludes that current funding mechanisms are inadequate to cope with London’s predicted population growth of one million over the next decade. It sets out recommendations to better provide investment in the infrastructure needed to prepare the city for this growth.

The key findings and recommendations are:

• Existing funding models for basic infrastructure are inadequate to cope with predicted growth – London needs fewer constraints and greater devolved powers making it more accountable to its residents and businesses;

• A failure to invest in London will hamper forecast demographic and economic growth – sustained investment is needed into transport, schools, housing, energy supply and technology;

• The report proposes devolving the full suite of property tax revenues streams - this includes council tax, stamp duty land tax and business rates – with the ability to reform those taxes while retaining prudential rules for borrowing for strategic capital investment. This will provide stable and continuous funding for prudent investment, moving away from ad hoc financing for specific projects;

• A recommendation that London could introduce smaller new taxes, a power now being introduced in Scotland;

• The Mayor, London Councils and London Enterprise Panel develop and maintain a long term, high level capital investment plan for the city;

• With enhanced fiscal autonomy, London could re-invest additional tax yield directly back into the city. The report’s proposals are revenue neutral at the point of devolution, no additional money is being sought beyond that which London already receives;

• The report finds this is a formula applicable not only to support the growth of London but other large cities across the UK.

The Mayor of London Boris Johnson and Mayor Jules Pipe, Chair of London Councils, the group representing the capital’s 32 borough councils and the City of London, have welcomed Professor Tony Travers’ findings in full. Implementing the measures would bring London in line with the funding structure of comparable global cities, against which London is in direct competition, and is in line with the Coalition Government’s agreement to promote ‘radical devolution’.

The Mayor will next month publish his 20:20 Vision providing a detailed analysis of London’s infrastructure needs.

Professor Tony Travers, chair of the London Finance Commission, said: ‘London needs greater financial autonomy to drive growth and deliver better infrastructure. Wales and, in particular, Scotland are moving towards far greater discretion over taxes. London should be treated similarly. Indeed, other cities in England could follow London down the route to greater financial accountability and self-determination. England is far too centralised and the London Finance Commission’s pragmatic proposals would be a first step towards a more sensitive and popular democracy.’

The Mayor of London, Boris Johnson, said: ‘I want to thank Professor Tony Travers and the London Finance Commission for examining this vital issue of how the motor of the UK’s economy is best serviced in the face of massive predicted population growth and increasing global competition. This excellent report sets out the case for a fairer deal for Londoners, one that gives residents and businesses a closer say over where their hard-earned taxes are spent.

'It recognises the acute need for London to be able to better plan and finance the infrastructure needed to prosper and maintain a great quality of life, in the face of a decade of expansion. Crucially, we can see that providing London with fiscal freedoms does not come at the detriment of other regions but can in fact help London to generate more jobs and growth across the country.

‘The current system is simply not fit for purpose and is out of step with the funding settlements enjoyed by cities of comparable size and stature. Furthermore, Londoners will increasingly question why London government cannot enjoy similar fiscal freedoms as those afforded to the devolved governments in Scotland and Wales. London’s key bodies are agreed that the capital’s financial future lies in greater devolution. We will now be taking this case to Government.’

Mayor Jules Pipe, Chair of London Councils, said: ‘Just seven per cent of all the tax paid by London residents and businesses is retained in London by the Mayor and the boroughs. The equivalent figure in New York is over 50 per cent. The UK has one of the most centralised taxation systems in the world and that is reflected in the decisions being taken by Whitehall civil servants and ministers.

‘These proposals offer new hope for jobs, improved local services and economic growth. They would give boroughs and the Mayor of London the power to support London’s economy to create sustained economic growth and jobs, and we would be accountable to Londoners for delivering that. They also offer a powerful model for how English devolution can be moved forward across the country not just in cities but in other local authority areas too.’

Baroness Jo Valentine, Chief Executive of London First, said: ‘Londoners and London businesses pay significantly more in tax than is spent in London and London government is largely dependent on an unpredictable and uncertain grant from central government. This makes it difficult for London government to plan investment spending properly. We agree that London government should retain a greater proportion of the taxes raised in London at levels broadly consistent with current spending. Where further functions are devolved, so too should be tax revenues. It’s time to free the Mayor from having to spend his time lobbying central government, and going cap in hand to the Treasury, when he should be focused on positive actions to bring in investment and growth.’

Councillor Julie Dore, Leader of Sheffield City Council and Core Cities Cabinet Finance and Investment lead, said: ‘We welcome the publication of the London Finance Commission findings as a significant contribution to the debate on devolution and financial reform. The Core Cities have long argued for more reform of the tax system to create greater independence for local government in big cities, in order to drive growth and jobs. We believe that similar freedoms should also be available to all Core Cities.

‘London continues to out-perform the rest of the UK economy. We all need London to succeed but recent evidence shows that, in the long run, it is bad for the economy to be too intensely focused in one geographical area. The Government agree, and said so in their response to Lord Heseltine’s review into economic growth. The Core Cities have unused economic potential, and these kinds of financial freedoms would enable us deliver more growth and jobs for the country. If the Government wants a rebalanced UK economy, it has to be willing to devolve more power and set cities free. What’s good for London is – in different ways – good for all the country’s major cities.’

The London Finance Commission report can be found here from 10am, 15 May: www.london.gov.uk/london-finance-commission

Ends

Notes to editors

• The Mayor of London established the London Finance Commission in July 2012 to investigate funding arrangements in the capital. He appointed Tony Travers, London School of Economic academic as chair. Professor Tony Travers appointed the following members to support the work:

John Biggs (London Assembly member for City & East) Roger Bright (former Chief Executive, the Crown Estate) Chris Duffield (former Town Clerk and Chief Executive, City of London) Mike Emmerich (Chief Executive, New Economy Manchester) Steve Freer (Chief Executive, CIPFA) Nick Holgate (Town Clerk and Executive Director of Finance, Royal Borough of Kensington and Chelsea) Stephen Hughes (Chief Executive, Birmingham City Council) Alexandra Jones (Chief Executive, Centre for Cities) Gerald Jones (former Chief Executive, Wandsworth Council) Sir Stuart Lipton (partner, Lipton Rogers) Teresa O’Neill (Vice Chair, London Councils) Jules Pipe (chair, London Councils) Nick Raynsford (MP for Greenwich and Woolwich) Ben Rogers (Director, Centre for London) Bridget Rosewell (Senior Partner, Volterra Partners) Martin Smith (Chief Executive, London Borough of Ealing)

• The London Finance Commission has taken a series of oral and written submissions from a wide range of experts, organisations and stakeholders to gather further insights into matters relating to fiscal devolution.