Conclusions and recommendations
Our inquiry
1. The
power to raise, retain and spend money locally—fiscal devolution—is
back on the political agenda. Local government wants more of it.
The UK Government, in promoting devolution, localism and spending
decentralisation, has shown that we may have passed the high water
mark of Whitehall control. But increased and increasing fiscal
devolution to Scotland, Wales and Northern Ireland—and foreign
comparisons—highlight how much England is still firmly in
the fiscal grip of central Government. There is unlikely to be
an English Parliament or regional assemblies, so devolution based
on existing structures or groups of authorities is the only way
forward. With a UK general election less than 10 months away,
policy makers must listen to calls for fiscal devolution to local
authorities in England and consider their response. (Paragraph
15)
The case for fiscal devolution
2. 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. (Paragraph
18)
Devolution to Scotland and Wales
3. 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. (Paragraph 21)
Spending decentralisation and fiscal devolution
4. 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. (Paragraph 25)
Fiscal devolution and economic growth
5. 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. (Paragraph 28)
Enhancing democracy
6. 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. (Paragraph 30)
Committing to the principle of fiscal devolution
7. 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. (Paragraph
32)
8. 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. (Paragraph 33)
Equalisation and redistribution
9. 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.
(Paragraph 40)
10. 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. (Paragraph
45)
11. 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 (Paragraph 47)
12. 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. (Paragraph
49)
13. 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.
(Paragraph 56)
14. 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. (Paragraph 57)
15. 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.
(Paragraph 58)
16. 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. (Paragraph 59)
17. 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.
(Paragraph 60)
18. 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.
(Paragraph 61)
Definition of areas for fiscal devolution
19. 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. (Paragraph 67)
20. 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.
(Paragraph 69)
Criteria for securing fiscal devolution
21. 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. (Paragraph 71)
Governance and accountability
22. 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. (Paragraph 77)
Redistribution within devolved areas
23. 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. (Paragraph 79)
Local referendums
24. We
see no compelling reason for a referendum on fiscal devolution.
(Paragraph 81)
The speed and spread of fiscal devolution
25. We
conclude that in the short-term at least fiscal devolution encompassing
a range of taxes and enhanced borrowing powers is likely to be
implemented successfully by a small group of local authorities,
particularly those that have already secured decentralisation
packages or shown a strong interest in fiscal devolution, such
as London and some Core Cities. This would be nothing new: local
government in England has for a long time been structured asymmetrically
and developed at different speeds. An incremental approach has
more chance of gaining acceptance from the Treasury, which has
a tendency to be cautious on fiscal matters. It would also allow
those who want to make progress to move forward faster. (Paragraph
84)
A framework for devolution
26. While
we are clear that the decision whether or not to seek fiscal devolution
must rest with local authorities, the Government has a crucial
role in facilitating the development of the arrangements, not
least in respect of the redistribution considerations discussed
earlier. Ministers should, through negotiation with local authorities,
expand the range of powers available to all levels of local government
as part of a framework that ultimately includes fiscal devolution.
As part of a commitment to create balanced opportunities for growth,
the Government should in this framework spell out the range of
powers that would be available to different levels of local government.
For large and small cities and counties a framework would provide
an incentive to make plans for enhanced collaboration and, if
they wished, to pursue more meaningful, fiscal devolution in the
future. The framework should set out what powers could be available
to local authorities over the next 10 years. (Paragraph 88)
27. We envisage that
the framework as well as setting out a range of devolutionary
powers would contain terms and conditions that the local authorities
seeking substantial fiscal powers would have to meet. These include
an agreed approach to equalisation and redistribution, and being
able to demonstrate that the devolved area functions as an economic
entity, has a strategic approach to planning and delivery and
includes good governance. (Paragraph 89)
Enhanced powers for individual authorities
28. For
all local authorities, the framework should make provision for
local control over spending on a wider range of services and for
them to expand or change the range of services decentralised over
time. This arrangement would reassure those areas not wishing
to proceed with substantial fiscal devolution that tailored powers—in
particular, over how money was spent locally—would be available.
Decentralised powers, such as the Work programme, should be accompanied
by an appropriate amount of decentralised spending to fund such
initiatives. (Paragraph
91)
29. Any process
of decentralisation that links to budgets allocated to places
rather than policies will require further changes in the attitude
and organisation of central Government. Its structures need to
mirror more readily those being developed in local government,
so that budgets can be developed based on the spending priorities
of local people, not national Departments. The framework needs
to be able to assist individual local authorities which are primarily
seeking decentralisation of spending programmes such as the Work
programme with, if necessary, an option for limited fiscal devolution
allowing the authority to raise low-yield local taxes, such as
on landfill or tourism. (Paragraph 93)
Enhancing the role of collaborating authorities
30. We
recommend that, as part of any framework for devolution of further
powers to all local authorities, including fiscal devolution initially
to a limited number, the Government enhance the powers available
to combined authorities. This would align their powers more closely
with those available to the Greater London Authority, give them
a greater strategic role and enable them to prepare, if they wish,
for more significant fiscal devolution in the future. These enhancements
would include: control over place-based budgets; powers to borrow
for non-transport purposes, to become precepting authorities and
to finance investment based upon the proceeds of GVA growth; and
strategic housing and planning responsibilities, including the
power to oversee local authorities' duty to co-operate.
(Paragraph 97)
31. We recommend
that the Government bring forward as soon as possible its planned
legislative reform order, to allow authorities that do not have
contiguous boundaries to join combined authorities. Similarly,
Government should bring forward legislation, to allow a district
or groups of districts that form part of a locally agreed functional
economic area to have full voting rights. The full powers of the
combined authority should then extend to cover such districts.
(Paragraph 99)
Fiscal agreements
32. Local
and central Government should devise a means of enabling those
authorities covering functional economic areas that wish to assume
significant fiscal devolution to enter into negotiations with
the Government. The London Enterprise Panel has made such a proposal
within the existing mechanism of the Government's Growth Deals.
If the Growth Deal route is feasible, those local authorities
that wish to should take the initiative and, subject to an agreed
equalisation and redistribution mechanism, make their own proposals
within the framework arrangement we urge the Government to develop
and adopt. (Paragraph 102)
33. In responding
to our report we ask the Government to confirm whether the Growth
Deal route with, if necessary, the exercise of provisions in the
Localism Act 2011 to transfer powers is a vehicle for comprehensive
fiscal devolution. If this is the case, we would expect that by
this route similar powers should be made available to further
authorities in due course. If it is not, we recommend that the
Government bring forward primary legislation to enable fiscal
agreements to be negotiated. In addition, we recommend that within
six months after the next general election the Government and
local authorities agree and set out the arrangements by which
certain areas might secure a long-term fiscal agreement.
(Paragraph 104)
34. Central Government
rightly has to ensure any introduction of fiscal devolution is
done effectively and efficiently. Where an authority or group
of authorities demonstrate that they meet the principles we outlined
in the previous chapter and come within the framework we set out
above, there should be a presumption in favour of fiscal devolution.
In our view it is essential that the process develops on from
City Deals which, despite their considerable benefits, have been
characterised as bureaucratic, placing local government in the
unequal position of supplicant. (Paragraph 107)
35. To assist the
development of the process we make two recommendations. First,
where agreement between central Government and local authorities
cannot be reached, there should be a process of impartial evaluation.
We see a role for the independent body, described earlier in our
report, to advise. Second, we recommend that local government
examine whether a small group of strategic authorities, selected
by their peers and with an agreed approach based on the principles
we have outlined, present to the Government joined-up proposals
for fiscal devolution to several areas in one go. In our view
this would provide a collaborative approach, develop the framework
and act as a way forward for authorities in future. (Paragraph
108)
Constitutional issues
36. Wider
questions about the role and place of local government in our
constitutional settlement should not delay fiscal devolution.
But implementation of this significant change will require appraisal.
We therefore recommend that towards the end of the next Parliament
a comprehensive assessment of the operation of any fiscal devolution
and decentralisation take place. This assessment might be a starting
point for a revised constitutional settlement. On this issue
we welcome the Political and Constitutional Reform Committee's
existing work, which we expect will inform any such revision.
(Paragraph 111)
Control over business rates
37. 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. (Paragraph 119)
Business rates revaluation
38. 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. (Paragraph 121)
39. 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. (Paragraph 122)
Council tax
40. 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. (Paragraph 125)
41. 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. (Paragraph 128)
42. 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. (Paragraph 129)
Stamp duty
43. 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. (Paragraph 131)
Other taxes and fees and charges
44. 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.
(Paragraph 134)
45. 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.
(Paragraph 135)
46. 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. (Paragraph 137)
Borrowing
47. 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. (Paragraph 140)
48. 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. (Paragraph
142)
National fiscal implications and management
49. 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. (Paragraph 146)
50. 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.
(Paragraph 147)
51. 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. (Paragraph 148)
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