[First published on CityMetric, 7 October 2010]
The pathway to local government devolution is rocky, with surprises
waiting round every corner. Just when we had got used to the asymmetric
"city deal" model, and to a deafening silence on fiscal devolution, the
chancellor unveils another surprise – full devolution of business rates
to local authorities.
This measure, recommended by the London Finance Commission in their 2013 report,
is good news for London and other local authorities, a tentative first
step away from the centralised funding model that came in with Council
Tax. There are still details to follow, and there will doubtless be all
sorts of devils lurking in them, but the starting point will be each
local authority retaining all the business rates it collects, with a
corresponding reduction in central government grants.
Grants will then be frozen, so any increase in business rates from
local growth will be retained by the local authority; any reduction will
hit budgets. This creates an incentive to promote business growth
(though it would be hard to find a councillor who didn’t already want
more businesses on his or her patch).
Councils will not have unfettered power to vary the level of business
rates charged locally. They will be able to give discounts as an
incentive to attract or retain businesses, but will only be allowed to
increase the rate charged locally in limited circumstances (essentially,
for infrastructure investment, in consultation with local businesses,
and in places where there is an elected mayor – the approach that
Commentators have observed
that, if London continues to grow faster than other UK cities, further
measures will be needed to rebalance taxes between the regions (which
risks undermining the incentives). But London also presents a microcosm
of this challenge in itself, as a result of its pronounced split between
central business districts and residential suburbs, many of which have
significant proportions of poor people.
London has some of the biggest tax generators in the country but also
some of the areas with biggest concentrations of need. If there was no
equalisation in place, some London boroughs would be able to fund their
services with huge surpluses to spare, while others would be among the
most underfunded in the country. Research by Local Government Chronicle
suggests that City of London, Westminster, Hillingdon, Camden, and
Kensington and Chelsea would be the five best-funded councils in the
country; Lewisham, Waltham Forest and Haringey would be among the
While the equalised starting point would level the playing field on day one, the mayor’s infrastructure plan
suggests that growth will continue to be spread unevenly between
boroughs, with central London gaining most ground. All other things
being equal, therefore, outer London councils would gradually lose
funding while inner London councils would gain.
Outer London councils might try to remedy this by aggressively cutting
local business rates to attract more businesses. But even assuming it
was successful, this "race to the bottom" would quickly create conflicts
with the assumptions of the London Plan and Transport for London’s
strategy, which assume a hierarchy of business districts.
The end point of this approach, making London into 33 self-sufficient
local economies would not just go against decades of policy, but would
fly in the face of London’s status as a world city. To paraphrase
Engels, you cannot have capitalism in one borough.
Alternatively, and as suggested by the Finance Commission, London
boroughs and the GLA will need to find a new way to allocate funding, so
that the boroughs with most businesses share the proceeds of growth
with the boroughs that house their workforce. The GLA and London
boroughs have strengthened their ties in a number of ways already;
perhaps fiscal devolution will push them to take their relationship a
step further, and open a joint account.