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.
FISCAL DEVOLUTION AND LOCAL DEMOCRACY
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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