In giving the green light to the next stage
of planning for Crossrail 2 in the 2016 Spring budget, the Chancellor has taken the right decision for
London and the UK. Transport for a WorldCity, the National Infrastructure Commission (NIC) report published a few days before the budget, powerfully made the case that Crossrail 2 is vital for sustaining
economic vitality. The NIC estimates that the capital could pay for more than
half of the £33 billion cost. But the detail of how London pays its share goes to the heart of our antiquated and hopelessly
dysfunctional local government finance regime.
Ever since the Jubilee Line extension was
built in the late 1990s, boosting land values so much that these could have
paid for the project three times over, governments have wrestled with dilemma
of big infrastructure: the costs fall on the public purse, but many of the
benefits (and in particular property value uplifts) accrue to the people and
businesses who are most directly affected.
Property owners who pick the right numbers in the infrastructure lottery
get a windfall at others’ expense.
As public spending has tightened in recent
years, the search for clever ways of funding big projects has become more and
more intense. Money borrowed for the
Northern Line extension to Battersea will be repaid through developer
contributions and ringfenced business rates, and commentators have suggested that
Crossrail 1 was only spared the axe in 2010 because 60 per cent of its costs
were met by Londoners and London businesses.
The Crossrail 2 package proposed by
Transport for London follows the Crossrail 1 pattern by loading most costs onto
London’s businesses and property developers. 18 per cent of the costs would be
met from future fares and property deals; 20 per cent would come from a supplement
on business rates (about a five per cent increase in the tax bill for most
larger businesses); and 17 per cent would come from a Mayoral community
infrastructure levy on new development.
But householders get off very lightly. Only 1.4 per cent of the cost of the project
would come from council tax, specifically from rolling forward the Olympic
precept that Ken Livingstone introduced in 2006 (memorably comparing it to the
cost of a Walnut Whip for the average household every week). The precept currently adds £20 per year to the
average ‘Band D’ household, around 1.5 per cent of the annual bill.
So where’s the problem? London’s booming businesses and rapacious
developers get hit with the tax bills, lightening the load on ordinary citizens. This may look like good news, but given the
state of London’s property market, this funding package would do almost all the
wrong things. Charging an additional
community infrastructure levy will threaten developers’ bottom line, which
could just as easily result in delayed development, raised sale prices, or reductions
in other social benefits like affordable housing, rather than in reduced
profits. And higher business rates may
be reflected in higher prices or slower wage growth, or may even push
businesses away from London.
Modest London-wide council tax increases,
on the other hand, will do nothing to capture the increased desirability and
value accruing to homeowners, particularly those nearest the new rail lines,
who will get the mother of all free rides (one possible exception being
Chelsea, where affluent residents are protesting against a new station). In fact, Crossrail 2 may make matters worse
for Londoners struggling to get on the housing ladder, pushing prices even
higher in the districts that it opens up.
So the Crossrail funding package proposed for
London could increase the costs of doing business in London, and hike the value
of property, creating an unearned and largely untaxed bonanza for those living
nearest stations, and pushing prices further our of reach for everyone else.
As the NIC report points out, the package
proposed is constrained by the scope and structure of taxes raised locally. TfL are working with what they’ve got. As the
London Finance Commission pointed out in 2013, London’s council tax bands have
not been revalued since 1993, when £320,000 defined the top tier of property
values, rather than representing a bargain, £200,000 below the average house
price.
Regular (perhaps annual) revaluation would be
fairer, allowing tax rates to be better tailored to the real values of homes
and to capture some of the benefits that new infrastructure brings to
home-owners in the shape of rising house prices. If new infrastructure dramatically increased values,
council tax would reflect this, and a proportion of the new tax revenues could
be top-sliced to repay money borrowed to pay for the investment in the first
place.
The obstacles to council tax revaluation
have been seen as practical as well as political. Practically, the exercise would be complex
and call for careful callibration, but we shouldn’t make too much of this. The technology we use to track property
values has changed out of all recognition since 1993. When anyone can check the value of their
property against the local market with a few clicks of a mouse, a revaluation
would not require a new Domesday Book.
There would be winners and losers, and
political controversy, but these problems aren’t insuperable. Transitional reliefs would be needed, as
might measures to allow tax to be deferred so that cash-poor owner-occupiers
were not forced to move by sudden tax hikes.
And Labour’s proposed ‘mansion tax’, a far blunter instrument than
recalibrated council tax, did not do the party too much damage last year in
London, the city that would have been hardest hit.
Other taxes could help to fund
infrastructure too. Stamp duty and
capital gains tax do actually reflect rising property values, though they only
kick in when property changes hands, and in the case of capital gains tax they
do not apply to people’s main residence.
Nor are these currently available to the Mayor or the London boroughs,
though the Government could at the very least extend the principle it applied
to the Northern Line extension by allowing the Mayor to repay borrowing using
tax revenues that would normally go directly to Whitehall.
In times of continuing austerity, booming London
will have the devil of a job convincing the rest of the UK, let alone the
Treasury, that it deserves massive public subsidy for infrastructure, however
much other regions actually benefit from its growth. London is booming, and should pay its fair
share. But without more comprehensive devolution
and more control over its taxes, the capital will struggle to secure its future
prosperity.
