Devolution in England: the case for local government - Communities and Local Government Committee Contents

2  The case for fiscal devolution

Fiscal devolution internationally

16. The starting point for several witnesses favouring greater fiscal devolution was a comparison of the level of tax set locally in the UK with other countries.[31] Professor Tony Travers of the London School of Economics, who chaired the London Finance Commission (LFC), drawing on OECD figures, noted that the UK's total of 1.7% of taxes set locally consisted entirely of council tax, adding that even if the 50% of business rates that local authorities have retained since April 2013 were included, "the figure would only rise to perhaps 2.5 per cent". He concluded that the UK was a "substantial outlier by international standards".[32] The Government itself appears to have recognised a disparity and that change is required. In October 2012 the Department for Communities and Local Government announced details of a policy, entitled "Giving local authorities more control over how they spend public money in their area". The policy's webpage, updated in October 2013, states:

    England's local government finance system is one of the most centralised in the world. This means that local authorities don't have the autonomy and flexibility they need to make sure public money is spent on the things that matter in their area.[33]

17. The London Chamber of Commerce and Industry (LCCI) described London compared with other capital cities as an "extreme outlier". It noted that Madrid looked to the state for 37% of its funding, New York 30.9%, Berlin 25.5% and Tokyo 7.7%. London, in contrast, required central government funding totalling 73.9%.[34] The Mayor of London provided further context to these figures pointing out that London, including its boroughs and the Greater London Authority "currently spend about 7% of all the taxes that are raised in London, compared to 50% in New York, [and] 77% in Tokyo".[35] (It should be noted, however, that while such cities may collect more in taxes than London, they may not retain it all, as some yield will be redistributed to other areas of the country with higher needs and lower tax bases.)[36] Crossrail is being funded in part through bonds and a business rate supplement,[37] but this is an exception. Darren Johnson AM, chair of the London Assembly, told us:

    When I greet international delegations from other cities at City Hall, they are absolutely amazed and astounded that the Mayor of London has to lobby central Government to get money to build a new bridge, a Tube line extension or something like that. They just find that concept absolutely amazing: that at that micro-level of decision making, the Mayor of London has to lobby and has so little power to raise revenue.[38]

The Mayor summed up the position: "We are comparatively fiscally infantilised in this country, and [the LFC's proposals are] a chance to do something about it".[39] Under the LFC's fiscal devolution proposals, the proportion of locally controlled tax would rise to 12%,[40] still low by international comparisons.

18. English local authorities, when compared with their counterparts in other developed nations, have limited control over local taxation and, as a consequence, rely, by comparison, disproportionately on central Government funding. Given the level of UK central Government control over local spending and over local taxation in England compared to other developed countries, it is entirely reasonable for local areas in England to aspire to greater local control over the money raised from their areas and spent locally. The key question is what to do about this aspiration: specifically, whether England should put in place a programme of fiscal devolution to local authorities and, if so, how it should go about the task.

Devolution to Scotland and Wales

19. Closer to home, the fiscally centralised UK state is evolving dramatically and, in the process, England's position is becoming increasingly anomalous. The Scotland Act 2012 has given the Scottish Parliament the power to set a Scottish rate of income tax. Subject to the outcome of the forthcoming referendum on independence, this power is expected to apply from April 2016. Indeed, in a joint statement, the three pro-Union parties in Scotland have backed a further extension of powers, including money-raising powers, in the event of a no vote.[41] The Scottish Conservative Party has itself proposed the full devolution of income tax to Scotland.[42] And the other main political parties have made similar if less far-reaching proposals.[43] The 2012 Act also fully devolves the power to raise taxes on land transactions—stamp duty land tax—and on waste disposal to landfill. It is expected that this will take effect in April 2015. In addition, the Act has provided powers for new taxes to be created in Scotland and for additional taxes to be devolved.[44] In relation to Wales, the Government announced in the Queen's Speech a new Bill, which:

·  devolves stamp duty land tax and landfill tax to Wales, enabling the Assembly to replace them with new taxes specific to Wales;

·  allows further taxes to be devolved, if agreed by Parliament and the Assembly;

·  provides for a referendum on devolving an element of income tax; and

·  grants powers for Welsh ministers to borrow to fund capital expenditure.[45]

20. The Local Government Association (LGA) pointed out that there was now a "stark contrast" between the powers being devolved to the Scottish Parliament and to the Welsh Assembly and the position of England:

    The devolved nations are increasingly being given powers to raise revenue locally, with the Prime Minister and Deputy Prime Minister making the case that for "too long, decisions about Wales's future have been directed by bureaucrats hundreds of miles away in Westminster—and it has suffered as a result. Wales could benefit hugely if the government at Cardiff Bay was responsible for raising more of the money it spends".[46]

In oral evidence, Sir Merrick Cockell, Chairman of the LGA, told us:

    The real ability to do things is controlled by your ability to tax or borrow […] if it is good enough for Scotland and good enough for Wales, why is it not good enough for London, Manchester, Sheffield or any other part that you may represent?[47]

Witnesses also noted the difference between different areas' contributions to the UK economy and the extent of their devolved powers. Professor Tony Travers noted:

    Greater Manchester has total 'gross value added' of £50 billion, more than that of Wales (£47 billion). The West Midlands (former metropolitan county area) also has a larger GVA[48] than Wales […] London's GVA (£310 billion) is 60 per cent bigger than that of Scotland, Wales and Northern Ireland added together.[49]

21. The UK Government is in the process of granting substantial fiscal devolution to Scotland and Wales. Ministers have therefore accepted the principle of fiscal devolution from Whitehall. This prompts the question, if such powers are considered justified and workable in Scotland and Wales, why not in England? Greater Manchester and Greater Birmingham each have a larger GVA [Gross Value Added] than Wales. London has a larger GVA than Scotland, Wales and Northern Ireland combined. When the changes for Scotland and Wales take place, England's local authorities will be left in an increasingly anomalous position, with a little more responsibility for spending than they have now but much less control over taxation than the Scottish Parliament and the Welsh Assembly.

Spending decentralisation and fiscal devolution

22. As we noted in chapter 1, some limited examples of fiscal devolution already exist in England.[50] The Minister of State for Cities and Constitution, Greg Clark MP, referred to the Manchester City Deal, which includes Earn Back, as "ground-breaking".[51] The Parliamentary Under-Secretary of State for Communities and Local Government, Brandon Lewis MP, said the new homes bonus and business rates retention scheme showed that on fiscal devolution "it is fair to say we have done a lot".[52] As we have noted, we detected in the Government a focus on the decentralisation of spending powers and public services. While Mr Lewis acknowledged that taxation powers had a role, he also said: "We get very caught up in fiscal devolution, and I understand why, but it is also about having the power to do things locally." He drew attention to the Localism Act 2011, which had transferred powers to local government and other local bodies,[53] and as a consequence increased what could be done locally through agency collaboration, local government collaboration and central-local government collaboration. This he said was happening through Community Budgets, the Transformation Network, the Local Growth Fund and Local Enterprise Partnerships.[54] Mr Clark agreed on the need to increase local authority responsibility for expenditure: "There is a lot of spending that takes place within cities in this context that is controlled from central Government and should be controlled locally."[55]

23. Mr Clark's perception was shared by some local authorities. When we asked how the case might be made to the Government for more fiscal devolution, some witnesses emphasised the need for greater local control over Government funding. We heard, for example, how Newcastle had shown it could save 15% from the health and social care budget through community budgets and how Essex had put forward a case for community budgets to create 25,500 houses and 60,000 jobs.[56] Key Cities wanted to see localisation of the Work Programme and skills funding, both as powers and with revenue streams handed over from central Government to local control.[57]

24. We received evidence that there was a direct link between the decentralisation of powers over spending and public services and the devolution of taxation powers. Tom Riordan, on behalf of Core Cities, said the two would have to go hand in hand.[58] The Greater Manchester Combined Authority said that fiscal devolution had to

    play a significant role in any realignment of the relationship between local authorities and central government […] incentivising and rewarding growth must be accompanied by more control over the other public sector resources which are spent in local areas.[59]

Wolverhampton City Council said that the devolution of business rates had the "potential to be beneficial, if such devolution is complemented by Single Pot funding".[60]

25. The process of devolution, if it is to be meaningful and effective, must include more than decentralised funding streams spent in local authority areas. Fiscal devolution provides enhanced local autonomy. Without it, local authorities will be agencies of central Government, focused in large measure on the requirements set by the funder, central Government, and acting within spending constraints set by Whitehall. That said, fiscal devolution and decentralisation, through place-based funding, are mutually reinforcing policies. Taken together they would give local areas greater control over spending and allow policies on growth and public service reform to complement each other.

Fiscal devolution and economic growth

26. We considered whether fiscal devolution would encourage economic growth across England. We were told that England was unusual among developed nations in having few cities whose GVA was above the national average.[61] London outperformed the national average throughout the recession and now accounts for 19% of the UK's jobs, 21% of its businesses and 25% of its economic output. The UK's recent recovery has been led by the capital.[62] Besides London and the South East, Scotland, which has had a form of fiscal devolution since 1999, was the only region that grew relative to the UK national average between 2001 and 2011.[63] Witnesses suggested that decisions taken at a distance from the people and places they affect have the effect of limiting the activities that can lead to growth. Centre for Cities summarised the position:

    Devolution will not inevitably lead to increased economic growth but we do know that the current centralised system restricts growth opportunities […] By providing freedoms, tools and incentives to local authorities, devolution would enable cities to unlock their full potential.[64]

27. Fiscal devolution was also considered to be an opportunity to increase the number of economic growth areas in England. Several witnesses, including Greg Clark, said local growth was not a zero sum game: growth in one area would not preclude growth elsewhere.[65] IPPR North pointed out:

    Unlike other European nations with their devolved governance and more distributed expenditure on infrastructure and economic affairs, central government in the UK has invested in London and not afforded its other cities the same opportunities […] In short, UK cities outside London have huge potential to grow, to transform public service provision and to drive a fairer Britain, but over-centralised economic policy-making is holding them back.[66]

Stephen Hughes, former chief executive of Birmingham City Council, said that the devolution of fiscal powers to areas outside London would enable them to develop projects that otherwise would not happen, going some way to closing the differential in growth rates between London and the rest of the country.[67] Newcastle University noted that if policymakers were serious about a balanced recovery, "fiscal decentralisation should itself incorporate a significant element of geographical redistribution, directing greater resources towards areas of greatest need".[68] Professor Travers told us DCLG's own research had suggested business rates retention would increase GVA by "a substantial number of billions of pounds […] the logic being […] that if councils kept at least part of the growth in the tax base, they would make decisions that would generate economic activity more quickly". While he acknowledged that wider academic research on devolution and growth "shows results both ways", he said there was no evidence that devolving public finance to lower levels of government produced lower economic output.[69]

28. We conclude that there is evidence of at least an indirect connection between fiscal devolution and growth. There is also evidence that fiscal devolution—as part of a package of wider decentralisation—would encourage greater economic growth across England. The Government has, through its own business rates retention scheme, accepted the logic behind this. Putting a wider range of tax and borrowing powers into the hands of local politicians simply extends this logic. London, already in the vanguard of UK growth, would not be pressing for devolution if it was not to its advantage. Placing power in the hands of other areas, too, would provide an opportunity to contribute to a more balanced economy. Cities and their wider regions have the most potential to drive growth.


29. We heard that a corollary of more economic and fiscal decisions being taken outside Whitehall, including on local taxation, would generate more interest in the political process locally.[70] Centre for Cities said that "creating a more direct link between funding raised and spent would […] strengthen local accountability and governance".[71] Professor Travers, referring to Manchester's tram system, said:

    The more decisions are made by people who feel how that system operates, the better they will use the money, simply because however frail we humans are, the ones nearer to you are the ones you can eyeball and get to make the decisions that you want.[72]

By contrast, one criticism of the City Deals process was that it was bureaucratic and a challenge to understand and deconstruct.[73] Sir Merrick Cockell also cited surveys that the LGA, the BBC and Ipsos MORI had conducted, showing that "people trust 79% of decisions taken closest to them; 11% (of) decisions taken in Whitehall".[74] Sir Merrick's approach chimes with our report, Councillors on the Frontline, in which we said that for the health of democracy at all levels councillors needed to be empowered to effect change within their local areas.[75] It also fits with the Government's policy of building localism. As Cllr Philip Atkins, Leader of Staffordshire County Council, pointed out, the principle of fiscal devolution was "the heart of localism".[76]

30. Fiscal devolution presents an opportunity to improve accountability, to hold local politicians to account for their successes and failures and, therefore, to improve democracy. By giving politicians outside Westminster the responsibility for raising, as well as spending, money locally, fiscal devolution would bring decisions on how that money is generated and spent much closer to local people—and make those who make such decisions much more visible. This would enhance the standing of local democracy and, by extension, democracy throughout the country. Enhanced local democracy offers the best possibility of a step towards addressing the challenges of the wider democratic deficit caused by the over centralisation of England.

Commitment to the principle of greater fiscal devolution

31. The evidence shows in England that to date more progress has been made on spending decentralisation than on fiscal devolution. The Department for Communities and Local Government said:

    any further decentralisation should not be rushed and should always be the subject of careful consideration. The key tests, in addition to legality, against which any proposals for future fiscal decentralisation should be measured are: does it support deficit reduction; does it have cross-party support; is it supported by evidence; and; will it have a detrimental effect on the rest of the UK.[77]

Professor Tony Travers said devolution had occurred without mishap in Scotland and Wales, and "contemporary city leaderships are self-evidently moderate, pragmatic and effective". He added:

    The single biggest obstacle to reform is the fear within the Treasury and service departments that they will lose control of spending levels and provision which can only be run effectively by them […] Devolved and decentralised models in virtually all other countries work effectively. Chicago, Frankfurt and Lyon are no more 'out of control' than British cities, but they have greater freedom to innovate.[78]

Jules Pipe, Chair of London Councils and Mayor of Hackney, told us that Government agreement on the principle of fiscal devolution needed to be established before spending time and money on working out the detail,[79] and Colin Stanbridge, Chair of the London Chamber of Commerce and Industry, added:

    What we want from the (2015 election) manifestos is a statement to the effect that, in principle, if elected as a government, they (the political parties) would look at the devolution to the major cities of more fiscal powers. Then you would have huge pressure for us to come up with all those details.[80]

32. The point has been reached for the Government (and policy makers in other political parties) to make it clear whether they are committed in principle to larger-scale and more comprehensive fiscal devolution in England. We are, and we believe they should be too.

33. With a clear national commitment to the principle of fiscal devolution local authorities working with central government would be able to produce more detail on how such devolution might work in their areas. The Government is rightly concerned about deficit reduction and whether fiscal devolution will have a detrimental effect on the rest of the UK. However, the Government must plan beyond the next few years and the present financial constraints. A common agreement to the principle, combined with a measured approach arranged between local and central Government, including initial devolution to a small number of areas, should allay those concerns. We set out this approach in the following chapters.

31   To recap, as of 2011 the proportion of tax set in the UK at a sub-national-local or regional-level was 1.7% of GDP. This compared with 15.9% in Sweden; 15.3% in Canada; 10.9% in Germany; and 5.8% in France. See Newcastle University Centre for Urban and Regional Development Studies (FDC0009) para 2.1. See Q67 [Professor Pike] and Q247 for views on France's centralisation.  Back

32   Professor Tony Travers (FDC0033) pp 1, 2; see also Sheffield City Council (FDC0034) appendix 1, for OECD figures on European countries' local government tax revenue as a percentage of total tax revenue. See also Q243 [The Mayor of London, Boris Johnson, also described Britain as an outlier]. Back

33   Gov.UK, "Giving local authorities more control over how they spend public money in their area", accessed 2 May 2014  Back

34   London Chamber of Commerce and Industry (FDC0019) paras 18, 17 Back

35   Q242 Back

36   The need for redistributive and equalisation arrangements is considered in chapter 3. Back

37   Newcastle University Centre for Urban and Regional Development Studies (CURDS) (FDC0009) para 10.2 Back

38   Q316 Back

39   Q242 Back

40   Q240; Q283 [Darren Johnson]; Q354 [Cllr Nick Forbes]; Q415 [Professor Travers]  Back

41   "Powers pledged by pro-UK parties after poll", The Herald, 16 June 2014  Back

42   Scottish Conservatives, Commission on the Future Governance of Scotland, p 2 Back

43   "Scottish independence: What are the 'No' parties offering instead of independence?" BBC News, accessed 16 June 2014 Back

44   HM Revenue and Customs, "Devolved taxation in Scotland", accessed 2 May 2014. The income tax rate paid by Scottish taxpayers will be calculated by reducing the basic, higher and additional rates of Income tax by 10 pence in the pound and adding a new Scottish rate set by the Scottish Parliament. Back

45   Cabinet Office, "Queen's Speech 2014: what it means for you", accessed 10 June 2014  Back

46   Local Government Association (FDC0005) para 19 Back

47   Q380 Back

48   Gross value added is the value of output less the value of intermediate consumption; it is a measure of the contribution to GDP (Gross Domestic Product) made by an individual producer, industry or sector (OECD Glossary of Statistical Terms, accessed on 1 July 2014). Back

49   Professor Tony Travers (FDC0033) p 3 Back

50   See para 10. Back

51   Q446 Back

52   Q444 Back

53   Q443 Back

54   Q452 Back

55   Q447 Back

56   Q76 [Tom Riordan]; Q81 [Cllr David Hodge]; see also Q227 [Sir Richard Leese]. Back

57   Key Cities Group (FDC0015) paras 15, 16 and 19; see also London Councils (FDC0007) paras 13 to 19. Back

58   Q96 Back

59   GMCA (FDC0006) paras 4.1, 5.1 Back

60   Wolverhampton City Council (FDC0024) para 8 Back

61   See IPPR North (FDC0020) p 2. In 2012 only Bristol and London outperformed it; see also Core Cities, Keys to the City, 2012, p 12. Back

62   See Office for National Statistics, Statistical Release, March 2013; Centre for Cities, Cities Outlook, 2014, p14. Back

63   "Scottish independence", The Economist, 31 May 2014 Back

64   Centre for Cities (FDC0028) para 1.3. See also Newcastle University (FDC0009) executive summary; Q114 [Professor Andy Pike]; and Q436 [Professor Travers] Back

65   Q450 [Greg Clark]; Q12 [Alexandra Jones]; Q67 [Cllr David Hodge]; Q218 [Sir Richard Leese] Back

66   IPPR North (FDC0020) p 3 Back

67   Q357; see also Cllr Nick Forbes, Q359. Back

68   Newcastle University (FDC0009) executive summary; equalisation and redistribution is dealt with in chapter 4. Back

69   Q2 Back

70   Chapter 3 deals in more detail with governance and accountability locally. Back

71   Centre for Cities (FDC0028) paras 1.3, 4.1; see also Newcastle University (FDC0009) executive summary; Q114 [Professor Andy Pike]; and Q436 [Professor Travers]. Back

72   Q425 Back

73   See Q91 [Tom Riordan]; Q137 [Ed Cox] and Newcastle University (FDC0009) para 3.5. Back

74   Q398 Back

75   Communities and Local Government Committee, Sixth Report of Session 2012-13, Councillors on the Frontline, HC 432, para 105 Back

76   Q202 Back

77   DCLG (FDC0014) para 4 Back

78   Professor Tony Travers (FDC0033) p 4 Back

79   Q304 Back

80   Q305 Back

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Prepared 9 July 2014