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


3  Conditions for fiscal devolution

Introduction

34. We support the principle of fiscal devolution. We recognise, however, that winning support for it in practice will require a number of matters to be settled:

·  the place of equalisation and redistribution within fiscal devolution;

·  the definition of the area to which fiscal powers are devolved;

·  the extent to which a devolved authority will have to demonstrate a capacity for planning and delivery; and

·  the governance and accountability arrangements that should apply.

Equalisation and redistribution

The assessment of needs and resources

35. Prior to April 2013 the general grant funding received by each local authority was determined, in part, by both its relative need and its relative ability to raise income locally from council tax. It was allocated annually as Formula Grant, a combination of business rates and Revenue Support Grant (RSG), through the Local Government Finance Settlement. The formula used was built on a complex four block model.[81]

INTRODUCTION OF THE BUSINESS RATES RETENTION SCHEME

36. The 2013-14 Local Government Finance Settlement used the same formula, albeit with some technical changes, to calculate the total funding required by all local authorities in England. The national total in 2013-14 was £26.1 billion and, as before, was paid over via business rates and RSG.[82] The calculation of the amount due to each authority in 2013-14 was called its start-up funding assessment (SFA)[83] and reflected both its needs and resources in 2013-14.

37. In April 2013, however, the distribution of funding changed. The Business Rates Retention Scheme began, enabling local authorities to keep half their business rates yield (the local share). The other half (the central share) was returned to Government for redistribution as part of RSG. After adjustments the Government determined the local share of business rates for 2013-14 to be £10.1 billion and the RSG—including the £10.1 billion of central share—needed to cover the rest of local authorities' required funding to be £15.2 billion. The Government used the ratio of 10.1 to 15.2 to determine how much notional SFAs for each local authority would be funded by the local share of business rates and how much by RSG.[84] The Government then estimated every local authority's actual local share of business rates yield. According to whether its local share was higher or lower than its local SFA, the authority then paid a tariff or received a top-up payment.[85]

38. Other key features of the Business Rates Retention Scheme (BRRS) are:

·  authorities that experience disproportionate growth in business rates income pay a levy, which is used primarily to fund safety net payments to authorities whose business rates income fall significantly—determined by a proportion set by the Government;

·  the system will be reset—with a new assessment of relative needs and relative resources—in future, with Government currently proposing a reset in 2020;

·  the top-up and tariff payments remain part of the system over the life of the scheme but are uprated for inflation each year; and

·  no changes are made to the way that businesses rates bills are calculated or collected.[86]

A key difference from the earlier system is that, since April 2013 and the introduction of the BRRS, a local authority's funding has been linked to need only through its funding assessment calculated for 2013-14. No re-assessment has been made for the 2014-15 finance settlement.[87]

39. Professor Tony Travers from the London School of Economics explained the consequence of the changes:

    If you have full equalisation—and we did for many years—you cannot build up your tax base at all, because any extra tax base you generate will be equalised away. That was the logic of the previous system, which is why the previous Government, and now this one, have taken steps, or at least made an effort, to get away from that arrangement. At the other end of the spectrum, there is a "winner takes all" system, where those who grow build up their tax base, and those who do not lose everything; as their tax base declines, everything within that declines.[88]

The LGA has voiced its concerns about the operation of the BRRS but does not wish to go back to the old system of central Government redistribution of all yield. Indeed, in its evidence it called for 100% local retention of business rates.[89]

40. The new system of local government finance introduced in 2013-14 appears to have broad, but not universal, acceptance among local authorities. It was an improvement on previous arrangements but its operation still causes some concern. Significantly, it recognises the equalisation of needs and resources at the outset but thereafter incentivises local growth and provides some autonomy, albeit with limits on "excessive" gain and untoward loss in any one area. We refer later in this Report to these limits, the precise nature of which should be agreed between central and local government.

LONDON FINANCE COMMISSION PROPOSALS

41. In its report the London Finance Commission (LFC) set out its proposals for addressing equalisation and distribution in the event of London assuming responsibility for its local property taxes and greater borrowing powers:

    In order to ensure that the Exchequer, and thus other parts of the UK, did not lose out as the result of any transfer of taxes to London there would need to be an equivalent off setting reduction in the grants received by London […] This off-set could be achieved either by reductions in the residual Revenue support grant or by changes to transport funding.[90]

We note that the LFC did not recommend at the outset of fiscal devolution in the capital an assessment of London's relative need and resources—its ability to raise income locally. Nor, in contrast to the BRRS, did it have any proposals for:

·  consequent opening tariffs or top-ups London might pay or receive;

·  a levy on disproportionate growth London might experience;

·  what would happen in the event of a serious reduction in tax revenue; or

·  a reset point, when a fresh assessment would be made of London's need and income.

42. The absence of these arrangements and the omission of a proposal for a reset would take the system of local government finance further along Professor Travers's spectrum from equalisation. During our inquiry, we heard that some areas might struggle to develop or maintain their tax base. They might not therefore be able to take advantage of the potential benefits of fiscal devolution and would require some form of redistributive support.[91] At the other end of the spectrum, if, for example, London took over responsibility and receipts for stamp duty, without a levy on excessive growth in a strong housing market, it would receive a windfall tax unrelated to incentives to promote economic growth.

SETTING A STARTING POINT FOR FISCAL DEVOLUTION

43. The equalisation model involving the BRRS could provide a starting point for negotiations between central Government and local authorities seeking fiscal devolution. The LFC said it "would be easy enough" for the DCLG to adopt a similar approach to the retention of business rates.[92] The Core Cities pointed out that the top-up and tariff scheme could "evolve" to deal with changes in needs and resources, "and although focused currently on business rates, has essentially created a framework through which any fiscal reform might operate".[93] There was in fact broad support for an equalisation mechanism operating within fiscal devolution. Jules Pipe, Chair of London Councils and Mayor of Hackney, said that "we do not have a specific model at the moment". But when we asked him whether such a model would be a good idea, he replied, "Yes is the short answer."[94] Cllr Nick Forbes, from Core Cities, said fiscal devolution would not give London substantially more revenue if there was "a proper rebalancing and a proper rebasing, according to a new formula or funding settlement".[95]
2012-13 Formula grant 2012-13 combined stamp duty and business rate yield[96]
Greater London £6.27 billion £9.31 billion
Greater Manchester £1.30 billion £1.12 billion
West Midlands £1.49 billion £1.03 billion
West Yorkshire £961 million £846 million
Lancashire £429 million £384 million
South Yorkshire £652 million £454 million
Tyne and Wear £609 million £439 million
Oxfordshire £149 million £393 million

    44. The table shows that needs, funded by formula grant, and resources, as provided by stamp duty and business rates, are not evenly matched. Some adjustment would need to take place. It would not be possible, however, to replicate the full arrangements of the BRRS scheme for full business rates retention and devolution of stamp duty because—as we explain in more detail in the next chapter—we envisage fiscal devolution being a piecemeal process as groups of local authorities seek packages of devolution. But certain features of the BRRS should be retained. Given that a local authority area's funding assessment is resourced only by business rates, RSG and certain smaller grants, this would allow every devolved area to offset roughly these same grants against their devolved tax yields.[97] If an area's devolved tax yield were higher than its funding assessment, however, it might offset the difference against other grants.[98]

    45. Through the Business Rates Retention Scheme, England has a system which balances equalisation and incentives for local growth. It provides a useful signpost for further fiscal devolution. First, it was set up on the basis of an assessment of need and resources. Second, there is a period of stability without further equalisation and redistribution, to provide an incentive to local authorities to increase and retain revenue, and, third, it is predicated on periodic re-assessments of needs and resources—the first will be in 2020. For further fiscal devolution local and central Government will need to take the model and develop it to establish an agreed approach. We therefore consider that similar arrangements, incorporating equalisation, should feature in any process of significant fiscal devolution, which we expect a limited number of local authorities to pursue initially. This will ensure a degree of fairness to begin with, balancing needs and resources with incentives to improve the local economy. If fiscal devolution does not include these principles, it could become a system in which the winner takes all.

    TREATMENT OF DISPROPORTIONATE GROWTH

    46. We envisage that for fiscal devolution to work authorities should be able to keep a portion of the growth in the yield of a devolved tax. Without that the incentive to grow the local economy could be blunted. We considered whether in cases the growth of tax yield could be so great as to justify a limit on the amount the devolved authorities could retain. The Mayor of London told us that he was not keen on a "complicated claw-back mechanism".[99] He said that London should retain any uplift in devolved property tax revenues and instead central Government "would collect and redistribute" an amount related to the uplift through "other tax revenues (such as income tax and corporation tax), which make up by far the majority of overall tax revenues (around 88 per cent, according to our estimates).[100]

    47. We do not consider that a putative general uplift in taxes such as income tax and corporation tax would provide a satisfactory redistributive arrangement under fiscal devolution to areas outside London. First, it is likely to be difficult to identify and quantify. Second, the use of the yield from these taxes will be subject to the Government's competing priorities, including deficit reduction. Third, under current Treasury rules, it would count against the Total Managed Expenditure limit, the control on gross UK spending, and so either the Government would have to raise the limit or offset it with a reduction elsewhere. We conclude that such an approach, on which we received no detailed costings or calculations, is unlikely to command support. (We examine Total Managed Expenditure further in chapter 5.)

    48. Stamp duty, which we examine further in chapter 5 as a candidate for inclusion in fiscal devolution, provides a case study of a tax that is not only volatile but unevenly spread across England as the table below illustrates.
    Stamp duty yield[101] 2009-10 2012-13 % increase 2012-13 yield per head[102]
    Greater London £1.55 billion £2.86 billion 85%£348
    Greater Manchester £90 million £120 million 33%£44
    Oxfordshire £94 million £116 million 23%£177
    West Midlands £80 million £109 million 36%£107
    West Yorkshire £70 million £87 million 24%£39
    Lancashire £41 million £49 million 20%£41
    South Yorkshire £40 million £46 million 15%£34
    Tyne and Wear £42 million £42 million 0%£38

    The table shows that London's stamp duty yield was £1.55 billion in 2009-10 and £2.86 billion in 2012-13, an increase of 85%.[103] Greater Manchester's yield was £90 million in 2009-10 and £120 million in 2012-13, an increase of 33%. South Yorkshire's take rose by 15%. Tyne and Wear saw no change.[104] Professor Travers pointed out that outside London stamp duty operated in "a reasonably ordinary way". But in London he said that there was a "curious" property market, so for London's local authorities "it is a bit of a gamble" as "it works both ways. Is this the top of the boom, or is four years or four months out (from) the top of the boom?"[105] Cllr Forbes envisaged that there would be a swapping of property taxes for revenue-formula grants but he said:

      We cannot get away from this point about resource equalisation. If we simply ring-fence existing property taxes within an area, that does not take account of historic circumstances, of what has gone before or of how we got to where we are now. What we need is an independent review of the allocation process, which would kick-start this whole thing off and re-establish that principle of resource equalisation.[106]

    The BRRS includes a levy which might be adapted for fiscal devolution, where the devolved authorities' tax yield exceeded their needs assessment or grants offset. Under the BRRS a large difference between yield and need means a large levy. The levy is capped at 50p in the pound and calculated annually to take account of any increase in yield.[107]

    49. London's stamp duty yield increased by 85% between 2009-10 and 2012-13—dramatically more than any other area, including the Core Cities. By any objective measure, London's relative spending requirements could not have increased by 85% over the same period. Its yield per head of population was also considerably more than elsewhere. If a similar increase in stamp duty yield, or indeed in business rate yield, occurred in future, the question whether a local area was solely responsible for it, or the beneficiary of a windfall due to national economic circumstances, would need to be addressed. In our view there has to be a levy on disproportionate tax yield growth.

    REASSESSMENT AND REBASING

    50. The BRRS will be reset in 2020 to take account of changes of relative need and resources.[108] At the reset point, new equalisation adjustments will be employed to take account of the intervening period and its impact on relative need and ability to raise income locally. Reflecting the LFC position Mayor Johnson said he "could look" at a reset, but "would prefer just a clean devolution".[109] In other words once, tax yield was swapped for grant there would be no further changes.

    51. Even with the relatively more stable and predictable business rates we heard that over time changes could be significant. The variation in yields across city and county regions is set out below.
    Business rates yield[110] 2009-10 2012-13 % increase 2012-13 yield per head
    Greater London £5.10 billion £6.45 billion 26%£786
    Greater Manchester £942 million £1.01 billion 6%£373
    West Midlands £897 million £934 million 4%£345
    West Yorkshire £696 million £759 million 9%£343
    South Yorkshire £379 million £408 million 8%£304
    Tyne and Wear £360 million £397 million 10%£360
    Lancashire £295 million £335 million 14%£286
    Oxfordshire £267 million £277 million 4%£424

    52. The table shows that between 2009-10 and 2012-13 London's business rate revenue increased from £5.1 billion to £6.45 billion, a rise of 26%; Greater Manchester's by 6%.[111] Sir Merrick Cockell said he envisaged a new equalisation settlement having to be able to cope with local conditions and needs changing, such as a major employer leaving an area or new investment creating a disproportionate benefit.[112] He told us:

      as happens now, money would go from parts of the country that have vast surpluses on business rates. That is something that when I was the leader of Kensington and Chelsea I was committed to, and leaders of Westminster and others, particularly in central London, are absolutely committed to. [Business rates] have to be shared appropriately with the rest of the country but that would be part of that new formula.[113]

    Jules Pipe, Mayor of Hackney, agreed there ought to be "some sort of tax, take for the rest of the country, on disproportionate benefit" in London.[114] Sir Merrick, speaking for the LGA, added that if London was removed from equalisation, "and you let London do things for itself, there could be risks to the rest of the economy".[115] The LGA's view was that "overall there is a balance, and if you look four years hence, overall in local government we could be self-sufficient, but that would require equalisation".[116] Lord Smith of Leigh, chair of the Greater Manchester Combined Authority, shared this approach:

      we do not want to be people who are always on the receiving end. We want to create a successful economic and social background so we can get away from that, but there may then be economic change that means other parts of the country need support. We will willingly give that.[117]

    53. Cllr Nick Forbes also argued the case for a periodic reset:

      The position of the Core Cities is that it would be sensible to build in a review process over a longer period of time. The rationale for that would be that if we were having this debate 40 years ago, I would be snapping at your heels to have the settlement for my area, because we had a huge manufacturing industry […] Yet that has changed, because the economy has changed over the last 40 years. We need something that takes account of the bigger forces at play above and beyond local determination.[118]

    54. It was also recognised that outside any system of equalisation central Government would continue to step in to help poor-performing areas. Professor Travers told us even if the system were much more about "winner takes all" government would inevitably intervene.[119] We also raised with Professor Travers the issue of devolved tax yield being used for revenue purposes, such as to fund social care, while other non-devolved areas were subject to central Government cuts affecting their ability to fund such services. Such discrepancies could be addressed through a periodic reassessment of needs and resources.

    55. Ed Cox, from IPPR North suggested that rebasing of devolved fiscal measures and funding formulas should be carried out independently as:

      There needs to be a reset process every 10 years to allow the system to run for a decent length of time and build up certain incentives; and I would suggest that we consider some kind of independent body, rather than expect it is in any political party's interest to actually revalue or reset equalisation measures at any given point in time.[120]

    CONCLUSIONS ON A SYSTEM OF EQUALISATION AND REDISTRIBUTION

    56. We conclude that for a system of fiscal devolution to balance equalisation and incentives it has to: start with an assessment of need and resources; have a mechanism for reallocating disproportionate tax yield growth; and include periodic reassessments. The operation of the arrangements will be for agreement between local and central government but we recommend that before fiscal devolution take place in an area:

    a)  the negotiations for the package are carried out on the basis of a current assessment of need—either the 2013-14 assessment or a subsequent reassessment;

    b)  negotiations take place on the basis of an up-to-date assessment of projected income from the taxes to be devolved up to the next reassessment;

    c)  the arrangement would operate by offsetting grants and support paid by central Government for local authority control of taxes;

    d)  the parties agree an excessive rate of increase in the yield of the devolved taxes above which a levy will apply; and

    e)  the parties acknowledge and agree that a reassessment of need and resources will take place after specified periods.

    THE LEVY

    57. We make no detailed recommendation on the levy beyond that, although it should be part of the arrangements for fiscal devolution, it should only come into operation in exceptional circumstances. It should not be set so low as to stifle dynamic local authorities' attempts to stimulate economic development but should aim to capture windfall taxes.

    THE SAFETY NET AND USE OF SPECIFIC GRANTS

    58. The system needs to be able to cope with the point Sir Merrick Cockell made about local conditions changing radically for the worse—such as when a major employer closes down. The levy will be derived from taxes devolved to local government. We recommend the levy from disproportionate growth in yield be held in an account by the Government. This should be ring-fenced and, by law, protected for use as a fund to provide a safety net for an area facing a significant and uncontrolled revenue shortfall, but explicitly exclude under-performing authorities. It should also be available to be redistributed to all local authorities. As is the case now, we would expect provision from other funds met from general taxation and disbursed to local authorities also to be available. In addition, specific grants should be targeted at low-growth areas, and local authorities should control how that money is spent.

    59. If more powers were devolved, associated funds would have to be transferred from central Government. In the case, for example of the Work programme, which will inevitably operate in areas of high need, such transfers will enable further redistribution and achieve a strong match of resources to need.

    THE REASSESSMENT

    60. On the reassessment, we recommend that the Government legislate for such an assessment to take place every 10 years. This would ensure the process actually takes place, and local authorities should be clear from the outset that it is an integral part of the process of fiscal devolution. On the reassessment process, we recommend that it be informed by the advice of an independent body, with responsibility for the assessment of needs and resources and the determination of apportionment between local authorities, but with the Government determining the national totals of resources for England, and with precepts for major capital projects in devolved areas excluded. This would ensure the process was not only fair but seen to be fair. We recommend that the Chair of the independent body be subject to a confirmation hearing with this Committee. We discuss Total Managed Expenditure at paragraph 143.

    61. The reassessment should allow local authorities to keep a substantial proportion of the improvement since the previous assessment. It should not reward those areas that have made no effort to grow. We consider that a system incorporating the arrangements we have outlined would be fair and make it sustainable in the medium and long-term. It would prevent any area being automatically advantaged—or disadvantaged—at the outset and instil confidence in those areas that might not be in the first wave of fiscal devolution.

    Definition of areas for fiscal devolution

    62. There are several layers of local government in England and a variety of "areas" to which fiscal powers could be devolved. Supporters of fiscal devolution cited economic reasons to justify the devolution to their areas of greater powers to raise money locally.[121] It would follow that an area seeking devolved powers should be able to demonstrate a potential economic benefit. There was general agreement on the type of area with the greatest potential to assume fiscal devolution: the functional economic area. London Councils said the capital could be described as "an economic whole", although its economy functioned through complex overlapping markets, which required strategic oversight and local knowledge.[122] The County Councils Network (CCN) said that "in many cases the functional regional economic area is coterminous with County boundaries and […] fiscal devolution should reflect this reality". But CCN also said counties recognised they were not "complete" functional economic areas and any new arrangements would need to acknowledge strategic links often in different regions.[123]

    63. We considered whether the characteristics of the "functional economic area" provided a definition of an area for fiscal devolution. The Centre for Cities noted that successful city economies needed "efficient transport, skilled workers, quality housing, good public space and amenities" but that city economies did not "stop at local authority boundaries […] So budgets and strategies to organise and deliver planning, transport, housing and skills should cross local authority boundaries".[124] Alexandra Jones, chief executive of Centre for Cities, told us:

      if you did, say, devolve to the travel-to-work area, which is what people experience as a city, rather than the administrative boundaries, and you looked at public services as well […] you could get a more efficient and effective system where you make better use of the limited money that you have got.[125]

    The Key Cities added that cities which were large second-tier authorities within counties, such as Preston, Norwich and Worcester, should have a distinct menu of new devolved powers. It said this would not only promote localism and stimulate economic growth and innovation, but by working with smaller neighbouring districts, mitigate risks of increased inequality between areas and encourage cooperation between different tiers and types of local authority area.[126]

    64. "Functional economic area" can be defined in a range of ways. The Core Cities of Manchester, Sheffield, Leeds and Liverpool have sought to reflect the economic reality of their areas by establishing combined authorities with neighbouring local councils. Newcastle is doing the same with its neighbours. These groups have powers over transport, regeneration and economic development.[127] Beyond the Core Cities, counties such as Staffordshire, Warwickshire and Lancashire have collaborated with cities within their geographical boundaries on City Deals.[128] Another approach is the Joint Committee system, through which local authorities such as Wolverhampton City Council collaborate with other councils.[129]

    65. While collaboration between local authorities within demonstrable economic areas was important, a certain scale was considered significant too. Newcastle University told us that if money-raising powers were devolved to too small an area:

      there are risks of inequalities in resource and policy outcomes—post code lottery issues—and displacement to neighbouring cities or local areas […] Cities and city regions need to consider carefully the geography of areas seeking greater fiscal autonomy—and if necessary improve and build effective collaboration.[130]

    Sir Richard Leese, vice-chair of Greater Manchester Combined Authority said most of the work his authority wanted to undertake with significant fiscal powers was not possible for an individual local authority. He also said he could envisage Lancashire County Council working with the unitary and district authorities in the county in the equivalent of a combined authority.[131] Professor Tony Travers commented that "we are in the middle of the evolution of what looks to me like in the medium to long term a city and county regional model of devolution."[132] This is the model we saw in Lyon. Its communauté urbaine, or combined authority, incorporating 58—soon to be 59—individual authorities (though in France some of these are very small), has various strategic responsibilities and control over France's version of business rates. Individual authorities retain control over domestic property taxes.

    66. There were, nevertheless, other ideas on how and where an initial introduction of meaningful fiscal devolution might take place. Stephen Hughes, former chief executive of Birmingham City Council, said, there was some benefit in introducing it to a variety of areas "to see whether or not it makes a difference in different places". Cllr Roger Lawrence, leader of Wolverhampton City Council, agreed and cited Cambridge—a new member of the Key Cities Group—as "one of the great success stories outside London".[133]

    67. The first test for areas seeking to assume more control over local property taxes and enhanced borrowing powers is that they are able to demonstrate how their particular unit functions as an economic entity. They may cut across administrative boundaries and are likely to be geographically large in scale. We see merit in starting with an existing model. Combined authorities provide one potential example. But such areas could include and, in some cases already do include, large cities, smaller cities and counties. In that sense fiscal devolution would not be restricted to any one type of area, capital city, Core City, Key City or county or combination. It is potentially appropriate for a range of areas that contributed evidence to this inquiry.

    IMPACT OF URBAN ECONOMIC GROWTH ON NEARBY AREAS

    68. The size and economic predominance of London raises questions about smaller cities within its orbit. Core Cities cited research suggesting that "a synergistic relationship", such as that between London and Reading, "allows the smaller city direct access to the markets, skills and specialisations of its larger neighbour, in turn giving it the opportunity to develop its own specialised growth momentum".[134] Recent research has found that unlike most countries the performance of UK cities depended on location more than size. Smaller places such as Milton Keynes and Reading, close to the capital, were found to have done better than Manchester, Leeds and Birmingham.[135]

    69. In any consideration of functional economic area, and of those that might "go first" in any process of fiscal devolution, local and central Government should bear in mind the influence of London on the economic performance of those closest to it. Balanced economic growth may not require devolution to multiple areas. Smaller areas with good links to larger devolved areas, for example, might benefit from fiscal devolution without needing similar powers themselves but this should not stop smaller areas acquiring fiscal devolution if it is appropriate and they can satisfy the necessary conditions.

    Capacity for planning and delivery

    70. IPPR North said that every area wanting additional fiscal powers would need a clear account of "its approach to strategic planning and decision making" and of "delivery arrangements on a range of different matters".[136] Core Cities said an area would need to demonstrate how it would operate fiscal reforms across a "functioning labour market geography".[137] Cllr James Lewis, from Leeds City Council, gave one example: "We have a very clear prospectus and purpose for devolution around improving infrastructure, investment, jobs and skills […] That might not be the right approach in another area."[138] Cllr Forbes, from Core Cities, said the answer to the question who should receive fiscal devolution "depends very much on what it is you want to achieve". He said the Government should ask areas:

      'What would make the biggest difference to your area? Who are you prepared to work with in order to make it happen? How do you want to show you are proving successful?' If you offered areas that, people would come up with all sorts of different things, but that is the beauty of local government: we do come up with tailored solutions for our local communities.[139]

    Stephen Hughes, former chief executive of Birmingham City Council, considered that fiscal devolution, if it were to happen, would be to a small number of areas and probably the larger cities and added that it was "about those who have the appetite to do it and can put forward a good plan to demonstrate that it will add value".[140] Indeed the Department stressed any further decentralisation would be measured against the test of whether it supported deficit reduction.[141]

    71. We conclude that an authority or group of local authorities seeking fiscal devolution must be able to demonstrate: fiscal competence, which would include the prudent management of borrowing; a capacity for strategic planning and decision-making leading to economic growth; clear plans as to what they would do with their enhanced powers, including how they would cope with an unplanned and significant change in forecast revenue; and, importantly, an appetite to make them work. Given the Government would test whether any further transfer of powers supported deficit reduction, local authorities will need firm, costed proposals.

    72. We consider deficit reduction again in chapters 4 and 5.

    Governance and accountability

    73. Newcastle University underscored the importance of good governance:

      Places are more likely to be successful if they possess effective, sound and high quality institutions and leadership driving forward effective visions and evidence-based strategies […] Different governance models may exist in different cities and city regions. However, the principles of openness, public accountability and scrutiny should underpin all decentralised governance arrangements.[142]

    As joint working has developed in England different governance arrangements have evolved. For example, the Greater Manchester combined authority's chair, vice-chair and cabinet are the leaders of its 10 constituent authorities. They are elected to their local authority and, by virtue of being leader, become a member of the combined authority. Lord Smith of Leigh, Leader of Wigan Council, was appointed leader of the combined authority and the other leaders have formed the cabinet of the authority. A group of 30 local councillors is appointed, according to political proportionality, to scrutinise the cabinet's decisions. By contrast, in London the Mayor is directly elected by Londoners and there is an elected Assembly to scrutinise him. The Mayor's cabinet consists of his appointees. Under the London Finance Commission proposals some of the governance of London would be carried out separately by, or in different combinations of, the Mayor and the GLA, groups of boroughs and individual boroughs according to agreed principles.[143]

    74. In the context of fiscal devolution the Centre for Cities said creating a directly elected mayor would be an effective way of holding one person to account for decisions made, but Alexandra Jones from Centre for Cities acknowledged:

      If it is a system that is bottom-up—so if the decision is that places come forward with the arrangement that works best for them—then, based on the sentiment in cities around the country, many of them would not want to opt for [a directly elected mayor].[144]

    Ms Jones added that "even with a combined authority you can hold individual local authority leaders to account".[145] Tom Riordan, chief executive of Leeds City Council, noted that Lille, Barcelona and Berlin all had indirectly elected mayors, and that in his city region there had been three votes in which the idea of directly elected mayors had been "emphatically rejected".[146] From the perspective of business, Liz Peace, chief executive of the British Property Federation, said:

      The whole discussion around elected mayors is a distraction […] The Greater Manchester group comprises representatives of councils that have indeed been elected. For the purposes of delivering the best services to their members, they have come together with others and, between them, they have acknowledged a leader.[147]

    75. The Minister, Greg Clark, took a relaxed approach:

      My own view is that it helps to have a directly-elected mayor because you have got someone who is both visible and has the clear mandate of the entire population, but would I say that you should only be able to have powers devolved to you if you have an elected mayor? That would have prevented us doing a deal with Manchester. That would have been bad for Greater Manchester and bad for the nation, so I do not want to have a red line about it.

    But he did not "think we should establish an ideal, because one of the features of the country is that every place is different, and you would not want to prescribe something that has to take place in every area". Referring back to Greater Manchester he said: "It works. We know that they have got a track record of very close working together; they can organise in such a way that they can take collective decisions".[148] Lord Heseltine, in No Stone Unturned, recommended the introduction of legislation enabling the election of conurbation mayors. He added "where broad local support exists, (Government should) act to facilitate such developments without a referendum".[149]

    76. Professor Travers summed up the position saying that the Government would want to be convinced that any arrangements put in place locally "were powerful enough and fair enough and democratic enough".[150] He pointed out, however, that "we are working with the institutions we have got. We are trying to do something that does not require the full-scale reorganisation of local government."[151] He added that in Greater Manchester

      there are 10 powerful districts, each one with its own history as a town or several towns, and trying to overwhelm all of that by something else [a directly elected mayor] would cause such a fight-back […] that that would take years, and then you would have to come back to the financing issue after that.[152]

    77. We wish to ensure fiscal devolution does not stall due to ongoing discussions about governance. But we are clear that there must be a requirement on local authorities seeking fiscal devolution to demonstrate a commitment and an ability to deliver on the principles of openness, public accountability and scrutiny, which should underpin all decentralised governance arrangements. No single model of governance had a monopoly on these attributes, however. In the combined authority model, members are drawn from the same tier of governance and have an equal stake in it. Any decision on governance should ideally be made locally. If the Government legislates to enable combined authorities to introduce directly elected mayors, local authorities must consult local people on such a change in a referendum.

    REDISTRIBUTION WITHIN DEVOLVED AREAS

    78. One practical example of where effective and transparent governance will be required is in the disbursement of revenue to different local authorities that make up a devolved area. Witnesses referred to the need for detailed proposals in the event of fiscal devolution in order to redistribute tax yields and the proceeds of growth within their areas.[153]

    79. We consider that local authorities putting forward proposals for fiscal devolution should be able to show equitable and fair arrangements for the disbursement of tax yields within the devolved area and, similarly, for the sharing of the proceeds of growth generated by fiscal devolution. In addition, any area seeking devolution will have to have in place transparent governance procedures for redistributing revenues within its boundaries.

    THE NEED FOR A REFERENDUM

    80. Voters in Scotland, Wales and London had the opportunity in referendums to decide whether they wanted devolution. We asked witnesses whether such a referendum might be necessary for fiscal devolution in England. IPPR North said,

      the public are very wary of any sub-national institutional change and the social identification around England's core cities—however strong—is quite unlike that of the devolved nations […] there could be provision made for a post-hoc referendum after say—3 or 5 years—once a city region has had the chance to consider the advantages and disadvantages of the new system.[154]

    Sir Merrick Cockell noted that central Government had willingly agreed to introduce further, fiscal devolution to Scotland and Wales without a referendum.[155]

    81. We see no compelling reason for a referendum on fiscal devolution.


    81   See Local Government Finance Settlement 2014/15, Standard Note SN/SG/6816, House of Commons Library, February 2014, p 12; The Local Government Finance Settlement 2011-13 Research Paper RP11/16, House of Commons Library, February 2011, pp 2, 6. Back

    82   The Local Government Finance Settlement 2013-14 and 2014-15, Research Paper RP13/10, House of Commons Library, February 2013, p 24 Back

    83   From 2014-15 onwards this is known as its settlement funding assessment. Back

    84   For example Birmingham's 2013-14 SFA was £783 million, with £313 million funded by the local share of business rates and £430 million by RSG; Birmingham was assessed as needing to fund £313 million of that amount locally. See The Local Government Finance Settlement 2013-14 and 2014-15, Research Paper RP13/10, House of Commons Library, February 2013, p 25. Back

    85   Birmingham's estimated local share would bring in £191 million, so it received a top-up payment of £122 million to reach its assessed need for £313 million of funding to be paid for locally. See Department for Communities and Local Government, Business rates baseline calculations model, accessed 10 June 2014. Back

    86   The Local Government Finance Settlement 2013-14 and 2014-15, Research Paper RP13/10, House of Commons Library, February 2013, p 27. The Local Government Finance Act 1988 provided for national non-domestic rates to be held in a separate account, audited by the National Audit Office; the Local Government Finance Act 2012 amended this provision. Back

    87   The Local Government Finance Settlement 2013-14 and 2014-15, Research Paper RP13/10, House of Commons Library, February 2013, pp 23, 36 Back

    88   Q415 Back

    89   See Local Government Association, Rewiring Public Services (December 2013); and LGA (FDC0005) para 29.2. Back

    90   Raising the Capital: the report of the London Finance Commission, p 76, paras 2 and 3 Back

    91   Q111 [Tom Riordan], [Cllr Hodge]; Q157 [Cllr Box] Back

    92   Raising the Capital: the report of the London Finance Commission, p 76, para 3 Back

    93   Core Cities (FDC0008) para 3.9 Back

    94   Qq288-89 Back

    95   Q363 Back

    96   See Department for Communities and Local Government, Changes in Grant Allocations: 2012-13 compared to Adjusted 2011-12 (amounts, except for Greater London, exclude police funding); Stamp duty figures, see HM Revenue and Customs, UK Stamp Tax Statistics 2012-13 (September 2013), table 4.2. For business rate figures, see Department for Communities and Local Government, "Collection rates for Council Tax and non-domestic rates in England, 2012 to 2013", table 4, accessed 17 May 2014. Figures for West Midlands, Greater Manchester, South Yorkshire, West Yorkshire and Tyne and Wear are for met county areas. Back

    97   The specific grants used to cover the funding assessment are: 2011-12 Council Tax Freeze Grant, excluding the amount that will be paid to Local Policing bodies; Council Tax Support Grant, excluding the amount that will be paid to Local Policing bodies; Early Intervention Grant, excluding funding for free education for two-year olds; Greater London Authority General Grant; a proportion of Greater London Authority Transport Grant; Bus Services Operators Grant in London; Homelessness Prevention Grant; a proportion of Lead Local Flood Authorities Grant; and Learning Disability and Health Reform Grant. Department for Communities and Local Government, A guide to the local government finance settlement in England, para 38.  Back

    98   Local authorities receive a number of ring-fenced and non-ring-fenced grants-outside their settlement funding assessment-from different Government Departments. London, for example, receives a Transport for London grant from the Department for Transport. A list of such grants can be found at Department for Communities and Local Government, Business rates retention and the local government finance settlement: a practitioners guide, February 2013, annex C. Back

    99   Qq 253, 255 Back

    100   Mayor of London (FDC0029) para 40 Back

    101   See HM Revenue and Customs, UK Stamp Tax Statistics 2012-13 (September 2013), table 4.2. Figures for West Midlands, Greater Manchester, South Yorkshire, West Yorkshire and Tyne and Wear are for met county areas. Back

    102   Population statistics used to calculate 2012-13 per head yield based on 2011 census; see "2011 census results: how many people live in your local authority?", The Guardian, accessed 9 June 2014. Back

    103   2009-10 to 2011-12, see HM Revenue and Customs, "Stamp Duty Land Tax, by Local Authority, County and Government office region", accessed 18 May 2014; 2012-13, see HM Revenue and Customs, UK Stamp Tax Statistics 2012-13, (September 2013), table 4.2. Back

    104   2009-10; see HM Revenue and Customs, "Stamp Duty Land Tax, by Local Authority, County and Government office region", accessed 18 May 2014; 2012-13, see HM Revenue and Customs, UK Stamp Tax Statistics 2012-13 (September 2013), table 4.2.  Back

    105   Q420 Back

    106   Q333 Back

    107   Under the BRRS any growth in such an authority's yield is considered disproportionate, because a 1% increase in its business rates yield is worth more than a 1% increase in its needs assessment. But the levy is capped and tapers according to the difference in yield and need. For example, Westminster's estimated 2013-14 local share of business rates yield was £523 million, while its needs assessment was £78 million. Its levy was calculated at 85p in the pound but capped at 50p. In contrast Hammersmith and Fulham's yield was £56 million, while its needs assessment was £54 million, so its levy was only 0.05p in the pound. See 'The Local Government Finance Settlement 2013-14 and 2014-15', House of Commons Library Research Paper 13/10, p 33. Back

    108   The Local Government Finance Settlement 2013-14 and 2014-15, Research Paper RP13/10, House of Commons Library, p 35 Back

    109   Q258 Back

    110   See Department for Communities and Local Government, "Collection rates for Council Tax and non-domestic rates in England, 2012 to 2013", table 4, accessed 17 May 2014. Figures for West Midlands, Greater Manchester, South Yorkshire, West Yorkshire and Tyne and Wear are for met county areas. Population statistics used to calculate 2012-13 per head yield based on 2011 census. See "2011 census results: how many people live in your local authority?", The Guardian, accessed 9 June 2014. Back

    111   Department for Communities and Local Government, "Collection rates for Council Tax and national non-domestic rates in England 2009 to 2010", table 5, and "Collection rates for Council Tax and non-domestic rates in England, 2012 to 2013", table 4, accessed 17 May 2014. Westminster City Council's business rates revenue rose from £1.1bn to £1.65 billion in the same period, while Kensington and Chelsea's went from £213 million to £268 million. Back

    112   Q378 Back

    113   Q395 Back

    114   Q290 Back

    115   Qq395,397 Back

    116   Q405 Back

    117   Q239 Back

    118   Q335; see also Q215 [Sir Richard Leese]. Back

    119   Q438 Back

    120   Qq 155, 157 Back

    121   See Mayor of London (FDC0029) paras 4, 12; Core Cities (FDC0008) paras 1.2, 1.3, which said that its member cities, together with their surrounding urban areas, were home to 16 million people and were set to grow by at least 1 million by 2030, generated 27% of England's wealth (more than London), were home to half of the country's leading research universities and contained 28% of highly skilled workers. The County Councils Network (FDC0013) para 2.9, said its member council areas generate over half of all GVA (Gross Value Added) generated outside of London (ONS, 2012), County areas contribute more GVA per head of population than many of the Core Cities (ONS, 2012) […] and that Counties account for more than half the jobs in key sectors such as manufacturing, construction and motor trades (ONS, 2012). Oxfordshire County Council said devolution measures should be considered across England, rather than an assumption of "core city first" devolution. It added that its functional economic geography was coterminous with its county boundary. See (FDC0017) paras 12, 15 and Key Cities (FDC0015) para 3. Back

    122   London Councils (FDC0007) paras 26, 27 Back

    123   County Councils Network (FDC0013) paras 4.2, 4.10; Oxfordshire County Council, however, suggested its functional economic geography was coterminous with its county boundary; see (FDC0017) paras 12, 15.  Back

    124   Centre for Cities, Breaking boundaries: empowering city growth through cross-border collaboration, March 2014, p 1 Back

    125   Q26 Back

    126   Key Cities Group (FDC0015) para 25 Back

    127   Some cities in the Key Cities group are members of combined authorities. Wakefield and Kirklees councils are part of the West Yorkshire Combined Authority; Doncaster is part of the South Yorkshire combined authority; Sunderland is part of a proposed North-East Combined Authority. Back

    128   See CCN (FDC0013) appendix 1.  Back

    129   See RTPI (FDC0011) p 2; Wolverhampton City Council (FDC0024) para 3. Back

    130   Newcastle University (FDC0009) executive summary. See also Royal Town Planning Institute (FDC0011) para 1 Back

    131   Q233 Back

    132   Q30 Back

    133   Q331 Back

    134   Core Cities (FDC0008) para 3.5 Back

    135   "UK cities need devolution of powers and links to London to succeed", Financial Times, 6 May 2014  Back

    136   IPPR North (FDC0020) p 4 Back

    137   Core Cities (FDC0008) para 3.1 Back

    138   Q160 Back

    139   Q330 Back

    140   Q331 Back

    141   DCLG (FDC0014) para 4 Back

    142   Newcastle University (FDC0009) p 1 Back

    143   Raising the Capital: the report of the London Finance Commission (May 2013) p 15; see Q285 [Jules Pipe] for the principles behind London's proposed system of governance under fiscal devolution. Back

    144   Q44 Back

    145   Q54 Back

    146   Q114 Back

    147   Qq 141, 143; when the Committee visited the Greater Manchester Combined Authority it heard differing views on the need for an elected mayor; they were sceptical about introducing a directly elected assembly; see Qq 228-230. Back

    148   Q490 Back

    149   Rt Hon The Lord Heseltine of Thenford CH, No Stone Unturned in Pursuit of Growth, (October 2012) paras 2.1-2.94; in response the Government said it intended "to seek legislation for such mayors where the authorities want this". See HM Treasury, Department for Business, Innovation and Skills, Government response to the Heseltine review, Cm 8587, March 2013, pp 5, 47. Back

    150   Q53 Back

    151   Q54 Back

    152   Q62 Back

    153   Q250 [Boris Johnson]; Q287 [Jules Pipe]; Q345 [Cllr Nick Forbes] Back

    154   IPPR North (FDC0020) para 3 Back

    155   Q372 Back


     
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    Prepared 9 July 2014