House of Commons - Devolution in England: the case for local government - Communities and Local Government Committee

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

5 Devolved taxes and powers

Introduction

112. Fiscal devolution means greater control over taxation as well as spending locally. We have already made recommendations on broad principles of fiscal devolution. Here we look at more detailed implications. The London Finance Commission (LFC)[211] and the Core Cities[212] proposed that a suite of property taxes could be devolved and we examine three: full business rates retention, council tax and stamp duty. We also examine the LFC suggestion that London—and by implication "devolved" local authorities—should have responsibility for setting the rates of those taxes and authority over revaluation, banding and discounts[213] and that they should also be able to introduce new smaller yield taxes, such as betting, landfill and hotel duties, and to set fees and charges for all discretionary services.[214] We expect fiscal devolution to provide local authorities with enhanced borrowing powers which we also examine in this chapter.

Control over business rates

113. The LFC proposed the full devolution of business rates to London, which would mean:

· 100 per cent retention of business rates; (We considered the issue of 100 per cent retention at paragraphs 44, 51 and 52.)

· freedom to set and vary the business rate multiplier; and

· responsibility for the timing of revaluations.[215]

In this chapter we examine rate setting and revaluation.

RATE SETTING

114. The open market rental value—the rateable value—of a business property is calculated by the Valuation Office Agency. The multiplier—the percentage of rateable value that will be payable in business rates—is set by the Government. The business rate payable to the local authority is calculated by multiplying the rateable value by the multiplier. The Government is responsible for the timing of any revaluation, which historically has always been carried out nationally.[216]

115. Some witnesses suggested that local authorities should be responsible for setting the business rate multiplier. Leeds City Council said that cities should

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Cllr James Lewis from Leeds City Council pointed out: "Cities are responsible organisations. We set a council tax every year […] I do not think the power to set a rate is uncommon to us."[218] Cllr Peter Box, from the Key Cities Group, told us:

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116. Cllr Roger Lawrence, leader of Wolverhampton City Council, had concerns, however. He drew our attention to tax competition with Wales when Regional Development Agencies still existed: "It was a dreadful waste of everyone's time and effort, chasing that around. Clearly, we need to have measures in place to prevent that."[220] Stephen Hughes, formerly of Birmingham City Council, said "the buoyancy should come […] from building the tax base, not necessarily by changing the tax rate". He added that "we are too small a country, really, to have lots of different variable tax rates. It does not do any good".[221] Cllr Paul Watson, leader of Sunderland City Council, agreed there was a lack of detail on the impact of rate setting locally on rebasing business rates or revaluing rents nationally, and said the mechanics of any scheme would have to be sorted out.[222]

117. Among business, the London Chamber of Commerce and Industry said "with the right safeguards and consultation with the business community, there is no reason for LCCI to oppose the GLA or London [local authorities] being given the power to determine the rate".[223] The Greater Birmingham Chambers of Commerce disagreed, saying new freedoms would bring "new opportunities for additional taxes and levies aimed at business which could stymie the growth of the private sector". It therefore could not support local rate-setting.[224] Liz Peace, chief executive of the British Property Federation, said greater relocation of business rate collection rather than setting was needed. Its members were

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VARYING THE RATE

118. Whether or not the multiplier was set locally, witnesses saw merit in being able to vary it within their area. Cllr Nick Forbes, from Core Cities, said that the "issue about business rates [...] is not so much about the difference between local authorities; actually, it is within a local-authority area where you might want to have some marginal variation of business rates."[226] Cllr Lawrence cited the Business Improvement District model, "where a small supplement on the business rate in small areas is used very explicitly for particular activities to help those businesses and those businesses have a share in driving that forward".[227] Sir Merrick Cockell added that small variations and increases in business rates might be decided locally: "Areas might be able to save 5% either way, and that would be down to those areas to work with local businesses to agree what was right and how that money was being invested."[228]

119. We consider that restoring the ability of local authorities to set the business rate multiplier to meet local circumstances, combined with the power to vary the rate for specific projects and categories of business, will provide authorities with a key lever in stimulating and fostering local economic growth as well as guaranteeing that they work closely with local business. It will ensure that local authorities have to consult with, and focus on the needs of, local business. We see a logic in the same multiplier being set across the devolved area. We also recognise, however, that there may be a concern about the potential for excessive increases in the multiplier. One option to constrain that would be for local authorities in a devolved area to be limited to increasing business rates by no more than the increase in the average council tax in the devolved area. The operation of the business rates levy would need to avoid penalising authorities that, after full consultation with local business, increase their multiplier.

REVALUATION

120. Although the national reassessment of rateable values must take place every five years, the Growth and Infrastructure Act 2013 changed the date of the next revaluation from 2015 to 2017.[229] While there has been some criticism of this change,[230] the transfer of responsibility for revaluation to local areas was not seen as the solution or as a prerequisite for fiscal devolution. Sir Merrick Cockell said:

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But several witnesses wanted more frequent valuations. Among business, LCCI noted that "revaluations are frequently delayed",[232] while Liz Peace suggested that, with modern technology, revaluation could take place every two years and there would be fewer arguments.[233] Three to four years was suggested by Lord Smith, Chair of the Greater Manchester Combined Authority.[234] On the other hand, Ed Cox, from IPPR North, suggested combining the revaluation of business rateable values with a more general rebasing of devolved fiscal measures and funding formulas—a comprehensive resetting. He said this might be carried out by an independent body every 10 years.[235]

121. We detected little clamour for transferring the revaluation of business rateable values to local areas as part of the process of fiscal devolution. The main concern has been the delay in holding national valuations. The time has come to set a timescale for an independently commissioned national business rate revaluation and, to ensure it happens, for it to be set in primary legislation without the facility to change the date through secondary legislation. We recommend it takes place every five years, beginning in 2020, and within six months of a general election. Revaluation could then coincide with the resetting of the Business Rates Retention scheme, to which we see a strong link. Subsequently, it could coincide once every 10 years with the resetting of any assessment of relative need among local authorities, administered by the independent body to which we have referred. In our view such a process would ensure not only regular and fair equalisation and redistribution of resources, but predictability, allowing local authorities to plan ahead.

THE INDEPENDENT OFFICE FOR LOCAL GOVERNMENT FISCAL MANAGEMENT

122. In sum, the independent body we recommend would introduce a substantial degree of objectivity into local government fiscal management. Specifically, it would be responsible for: assessing relative needs and resources every 10 years, starting in 2020 when the BRRS is rebased; evaluating proposals when a fiscal agreement cannot be reached; and commissioning the independent revaluation of business rates and council tax every five years, starting in 2020.

Council tax

123. The LFC recommended that:

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COUNCIL TAX REFERENDUMS

124. The Localism Act 2011 makes planned increases in council tax, above a certain threshold set by central Government, subject to a local binding council tax referendum. In 2014-15 the threshold is 2%. Explaining the Government's thinking behind the policy, the Minister, Brandon Lewis, told us that:

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Mr Lewis added:

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Sir Merrick Cockell said that:

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The Greater Manchester Combined Authority said:

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When we asked Mr Lewis why the principle of a referendum should not apply to other taxes, he said that was "a very good question" but offered no further explanation.[241]

125. We found across local government in England, if not a demand for full fiscal devolution in all areas, a strong appetite for greater fiscal responsibility. The Government is going to have to learn to have confidence in local authorities in the same way it has confidence in the devolved legislatures. For a start all local authorities should be trusted with responsibility for setting the council tax rate in their areas. We consider that all local authorities should have the freedom to set their local domestic property tax rates. There is no hard and fast rule that they will automatically use this flexibility to increase their council tax rates, but if they do they should be free to do so and then test local people's appetite for it, as they do for a range of decisions, on local election polling day.

REVALUATION AND REBANDING

126. Domestic properties in England have not been revalued since 1991. The Government announced in 2010 that there would be no revaluation in this Parliament, as according to the Secretary of State it "could have pushed up taxes on people's homes".[242] Similar excuses were used by the last Government when in 2005 it also postponed a revaluation, which had been planned for 2007, after revaluation in Wales led to anger over council tax rises.[243] The absence of any revaluation was of concern to witnesses. Lord Smith, Chair of the GMCA, told us that "we have a council tax system based in 1991 that has never been revalued. You buy a new house where there are all these broadband facilities and so on. How do you measure that?"[244] The LFC called for London to be required to hold periodic revaluations of domestic properties, carried out by the Valuation Office Agency. Other witnesses recognised the importance of a general revaluation but focused on smaller, incremental devolutionary measures that might be taken. Wolverhampton City Council said that:

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127. The LFC noted that council tax did not operate on the basis of a full range of values:

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IPPR said local authorities should be allowed to introduce new additional council tax bands as they saw fit, while the structure and number of council tax bands should be reviewed.[247] Leeds City Council agreed and said "the setting and adjustment of bandings should be done by Combined Authorities". It added local setting of bands would "more accurately reflect local economic conditions".[248] And in London the Mayor agreed that the introduction of extra council tax bands, particularly for valuable properties, should be examined.[249] The Chair of the Assembly, Darren Johnson AM, said, while each borough should be able to set its own council tax, decisions on banding should take place across the whole of London.[250]

128. Council tax rates are based on valuations made a generation ago, and those in the highest-banded properties are limited to paying no more than three times the tax of those in the lowest. The pretext for deferring revaluation-that it would increase most people's council tax—is erroneous if the revaluation is carried out properly and is fiscally neutral overall locally. Therefore a revaluation of itself must not affect a council's income. If nothing is done, there is a risk that the whole system will eventually collapse or, like domestic rates, have to be replaced. If there is a case for a revaluation of business rateable values—last carried out in 2010—the case for revaluation of domestic rates must be greater. We recommend that Government introduce legislation to ensure, for the purposes of Council Tax, domestic properties are revalued every five years.

129. There is also scope for further flexibility. We conclude that devolved areas—which we envisage, in the first instance, would be London or combined authority areas—should be given the power to introduce new council tax bands at the top end of the scale and to split existing ones. The national revaluation will therefore need to be precise, citing a property's price not just its band, so that any devolved local authorities wishing to introduce a new band are able to include the appropriate properties in it. Doing so might go some way to increasing fairness in the distribution of the tax burden locally.

Stamp duty

130. Stamp duty is levied only on a limited number of properties, concentrated in areas such as London and the South East.[251] London's stamp duty yield in 2012-13 accounted for 33% of all stamp duty collected, about £2.8 billion out of a UK total of £7.7 billion. Professor Travers noted that outside London and South East, however, the tax

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The Greater Manchester Combined Authority said there was a strong case for devolving stamp duty to its area:

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Responsibility for stamp duty in Scotland is due to be transferred in 2015.[254]

131. The yield from stamp duty in London and the South East is a fiscal anomaly in England. Full fiscal devolution of the tax in London could deprive the Exchequer of a significant amount of revenue that could be used elsewhere and for different purposes. As we have set out, to meet the principle of equalisation, it could be devolved in London subject to a levy requiring transfer of duty above an agreed threshold to the Exchequer. On the basis of this requirement, which could apply also to other devolved authorities, we recommend that stamp duty be included in the fiscal devolution framework. In addition, we would expect the Department for Communities and Local Government to monitor and review lessons that can be drawn from devolution of stamp duty in Scotland to inform its introduction in England.

Other taxes and charges

132. We noted in the first chapter how under new devolution arrangements Scotland and Wales will be given the power to introduce some taxes.[255] The LFC suggested the creation of tourism, environmental, alcohol or betting taxes might be permitted under devolution to the capital.[256] The LGA said such powers could reduce the dependence on council tax and business rates and allow areas to reduce the tax burden on local taxpayers.[257] When in France we heard that Lyon had a tourism tax of around €1 per night, dependant on the type of accommodation used. Tom Riordan noted how Leeds, the venue for the start of this year's Tour de France, might have benefited from levying such a tax.[258] Professor Andy Pike, of Newcastle University, however, warned that other taxes, such as environmental or betting levies, were volatile and often unpopular and were a route to increase taxes outside the control of a centralised system.

LOCAL INCOME TAX AND VAT

133. The Scotland Act 2012 introduced the Scottish rate of income tax (SRIT), which is expected to be implemented in April 2016. The 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. A SRIT of 10% would mean no change from the UK rates. However, a SRIT of 9% would mean the rates paid by Scottish taxpayers were lower and a Scottish rate of 11% would mean they were higher.[259] IPPR North recommended this arrangement in England:

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Another suggested local tax was VAT. Stephen Hughes said it was a better incentive, because "VAT is much more directly related to value added. It is not dependent on a particular type of growth".[261]

134. Arrangements have been developed to allow the devolved nations to introduce new taxes, as well to take control of business rates, stamp duty and, in the case of Scotland, part of income tax. As we expect fiscal devolution in England would in the short term be restricted to a handful of areas the opportunity is available to replicate some of the Scottish and Welsh arrangements in areas in England with the capacity to take advantage of these resources and to implement projects with the potential to generate good returns on investment. At the minimum fiscal devolution should empower these authorities to introduce relatively low-yield taxes. A range of suggestions includes betting taxes and landfill and hotel duties.

135. Recognising what is happening in Scotland and Wales we see a case in the long term for examining the apportioning in a similar manner to Scotland a percentage of income tax or VAT to groups of authorities covering significant geographical areas in England. We recognise, however, this is an extension of the fiscal devolution on which we have not taken detailed evidence. We would not want consideration of devolving income tax and VAT to hold up fiscal devolution of property taxes, but Government and local authorities should evaluate the proposals. Evaluation of devolution of these taxes could and should form part of the comprehensive assessment of the operation of any fiscal devolution and decentralisation we have recommended to be carried out after the first wave of fiscal devolution has been implemented and which we describe in the previous chapter.

FEES AND CHARGES

136. If the principle of fiscal devolution to local authorities is accepted, the justification for detailed financial constraints on local authorities falls down. One example is the constraint on the level of fees and charges local authorities can levy. We recognise that there are risks—for example, where a local authority is the sole supplier of a service for which it can charge. Local authorities are currently limited to charging only what they need to recover in costs. Central Government is, however, going to have to learn to trust local government and their local electors, and as a first step it could use a devolution framework and fiscal agreements to set limits to allow local authorities to charge, for example, more than the cost of providing a service and to allow authorities greater freedom to apply these resources.

137. We recommend that as part of a devolution framework and in fiscal agreements the Government provide for the relaxation of the current controls on the levels of fees and charges local authorities can charge for services and the purposes to which the income generated can be disbursed.

Borrowing

138. Those authorities to which fiscal responsibilities are devolved should be able to demonstrate fiscal competence and management, and a key objective of the process would be economic growth. The process would allow them a greater range of revenue streams. On enhanced borrowing powers, the LFC said:

· the Government should distinguish between borrowing that will be used to promote growth or reduce public expenditure and thus be repaid, and other kinds of debt;

· in light of the robust and effective prudential borrowing regime, GLA Group borrowing ceilings should be removed;

· the Mayor and London's local authorities should determine which Tax Increment Financing (TIF) projects to proceed with in London, within the prudential borrowing code.[262]

Under current prudential borrowing arrangements local authorities can borrow for capital expenditure without obtaining prior Government approval. Local government officers assess the sustainability of borrowing and set limits in line with the prudential code, which requires councils to have the financial capacity to repay debt, as borrowing is unsecured by assets.[263] Newcastle University noted the precedent being set once again in Wales:

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TAX INCREMENT FINANCING

139. Earn Back and Gain Share are tax increment financing (TIF) schemes now in place in Manchester and Cambridge respectively. The GMCA said its model:

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The Department for Communities and Local Government said that the business rates retention scheme now gave all councils unfettered access to tax increment financing by enabling them to retain and borrow against future business rates.[266] Core Cities told us its members needed access to a wider range of devolved taxes in order to fund further TIF schemes and allocate finance over longer periods.[267] It added:

Government should not […] be concerned about large increases in borrowing. The use of the Prudential Code is a robust process, and the numbers of viable schemes on which cities would feel able to use mechanisms like TIF is relatively small in the context of national borrowing and spending.

It also said local areas should determine which TIF projects to proceed with, again within the prudential borrowing code.[268] The GMCA also referred to "the strong financial stewardship of local government" and said that the Treasury could be reassured about the affordability of borrowing within the PBF.[269] As we have noted in previous chapters, the Department made plain that further decentralisation should support deficit reduction.[270] Professor Andy Pike from Newcastle University took issue with the deficit reduction test, however, noting that

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140. One key aspect of fiscal devolution is its focus on stimulating economic growth. Local authorities in England wanting to grow their economies may therefore need to borrow to invest. Given the Government's focus on deficit reduction, however, we recognise that a general relaxation of the rules on borrowing is not appropriate at this stage. But those local authorities that negotiate a fiscal agreement with the Government will have had to demonstrate strategic financial management and competence. Such authorities should therefore have access to greater and more flexible borrowing powers—for the purposes of capital investment in projects clearly and quantifiably designed to stimulate growth. Enhanced powers should remain within the stringent prudential borrowing code, however, ensuring authorities have the means and capacity to meet their annual borrowing costs. This would allow them to pursue the innovative approach to borrowing that the Government has, commendably, negotiated with Greater Manchester, allowing it to benefit from increased tax take. Greater local revenue streams would enable local authorities to borrow to invest and so increase their tax yield and reinvest in further schemes. Devolved areas should have the power to determine what TIF projects to introduce without the need for Treasury approval but within the prudential borrowing code. Given the limited number of projects to which this would apply, this should be achievable in practice.

HOUSING REVENUE ACCOUNT

141. Core Cities, among others, also wanted the Government to raise the Housing Revenue Account borrowing cap, which it described as "an unnecessary threshold which restricts growth and construction, and sets limits on local self-determination".[272] The LGA told us that reforming the classification of council borrowing for housing would bring the UK into line with Europe in the way it classifies this kind of borrowing and end the current preoccupation with where the borrowing sits for accounting purposes, rather than the value attained for investment. Sir Merrick Cockell from the LGA added that:

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In our report, Financing of New Housing Supply, we recommended that:

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The Government responded saying:

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142. We reiterate our recommendation in a previous report that the Government lift the cap on local authorities' borrowing for housing. We believe this should be universally applied.

National fiscal implications and management

143. Throughout our inquiry witnesses emphasised that any increased tax yields or borrowing would be spent on—invested in—infrastructure projects or, indeed, public services. This has implications for the UK's gross national spending limits, particularly, Total Managed Expenditure (TME). TME covers all current and capital spending carried out by the central Government, local authorities and public enterprises. It comprises Departmental-Expenditure Limits, spending that Government departments control, and Annually Managed Expenditure (AME). AME includes locally financed public expenditure, funded by council tax and other local sources.[276]

144. When we put the impact of fiscal devolution on national spending to Professor Travers, Chair of the LFC, he said:

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He explained:

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Professor Travers added that "the way the Office for National Statistics measures public expenditure is entirely ordained by classifications issues, which I am sure they would say were fitting with international accounting standards".[279] Both Professor Travers and Rob Whiteman from CIPFA told us other countries had a more restricted definition of public debt in their control totals. Professor Travers cited Germany and the United States as examples. While acknowledging these were federal counties, he noted that in the US total public spending funded by taxation was "definitely not something that the President starts with and says, 'This will be a total we will work down from'".[280]

145. We put these points to the Minister, Greg Clark, and he too linked them to those accounting rules, which he said assumed a certain growth trajectory whereby, if Manchester or Liverpool grew faster than the average, it was at the expense of somewhere else. He urged us to reflect on how those conventions did not allow for the association of growth and revenue with particular places.[281] With the further Scottish devolution in mind, we asked him whether TME could be raised to take account of what Scotland decided to spend (rather than trigger an offsetting reduction in England). He said:

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146. Growth in one area of England does not mean reduced growth elsewhere. Fiscal devolution focused on local growth may involve increased local spending financed from local or national taxes, borrowing or voluntary contributions through business levies. Under the current rules limiting gross expenditure, this would have to be offset by a reduction in expenditure. Applying that requirement to infrastructure projects would be unjustified. While we accept that all governments have to manage the resources taken by the public sector, we think it would be regrettable if the control system were used to hobble fiscal devolution in England. It has not obstructed fiscal devolution to Scotland and Wales. We recommend that the Government clarify how the controls on UK public expenditure will apply to fiscal devolution to Scotland and Wales and whether similar arrangements could be put in place for local authorities in England.

147. There are perhaps three ways in which the problem could be addressed. First, local authority expenditure on capital projects designed to stimulate economic growth could be taken out of the control total. It would be distinguishable by the ratings agencies, and would be used to invest in growth projects, a potentially virtuous circle. Second, the Government could agree to raise Total Managed Expenditure to accommodate expenditure devolved to local authorities in England. A third way would be to decrease central Government spending.

No Government having accepted fiscal devolution to Scotland and Wales should allow the Treasury's fiscal control system focused on gross expenditure to require every additional pound of additional public expenditure in Scotland and Wales to be offset pound-for-pound by a reduction in spending in England. Nor should such a perverse arrangement apply to additional public expenditure determined under fiscal devolution in England. Where such expenditure is fully funded by increased local taxes and charges a gross control of public expenditure cannot be justified. Fully funded expenditure does not increase the deficit.

211 Raising the Capital: the report of the London Finance Commission (May 2013); the Mayor of London established the London Finance Commission in July 2012; it was chaired by Professor Tony Travers of the London School of Economics, who in a personal capacity gave evidence to this inquiry twice. Back

212 'London and England's largest cities join to call for greater devolution to drive economic growth' Greater London Authority press release, 30 September 2013; and Core Cities (FDC0008) para 3.10; the Core Cities are Birmingham, Manchester, Nottingham, Bristol, Sheffield, Newcastle, Leeds and Liverpool. Back

213 Raising the Capital: the report of the London Finance Commission, p 9 Back

214 Raising the Capital: the report of the London Finance Commission, pp 9, 71 Back

215 Raising the Capital: the report of the London Finance Commission, pp 11, 64, 65 Back

216 Valuation Office Agency, "How are my rates calculated?", accessed 19 May 2014 Back

217 Leeds City Council (FDC0025) p 4 Back

218 Q193 Back

219 Q153 Back

220 Q352 Back

221 Qq 351, 354; see also Q192 [Cllr Watson]. Back

222 Q195 Back