Fiscal devolution: going further than business rates

Backing devolution will help the new government meet political and economic challenges ahead. But there are more fiscal options that should be considered, argues Alexandra Jones.

Devolution emerged as one of the surprise flagship policies for former prime minister David Cameron and former chancellor George Osborne during their six years in power.

So, despite being in the very early days of Theresa May’s premiership — one which starts with a long to-do list headed by “exit the EU” — it’s unsurprising that there is much interest in the next steps for city region devolution.

In recent weeks, the new prime minister has committed to some of the key devolution deals already on the table in places such as the West Midlands and Sheffield City Region. She has also stressed that the metro mayor elections scheduled for next May will go ahead as planned.

Doubts

Yet, summer recess speculation continues, from debate that the focus on the Northern Powerhouse and Midlands Engine brands will be reduced in favour of a UK-wide approach, to suggestions that May is considering dropping the requirement for metro mayors for future devolution deals.

Areas such as the West of England, which only recently agreed a mayoral devolution deal, or the Solent, which has not, as yet, been able to do so, will be watching developments closely as we move into the autumn and ministers return from holiday.

The issue of fiscal devolution will also come under scrutiny once more. Over the last six years there have been persistent calls for greater devolution of taxes and tax-raising powers – including from the 2013 London Finance Commission, convened by former London mayor, now foreign secretary, Boris Johnson.

To date, the most significant reform has been to business rates. Then chancellor Osborne announced in October 2015 that local government would be allowed to keep all the proceeds from business rates raised in their area, up from 50%, and that areas with mayors would be able to increase business rates by up to 2% to invest in local infrastructure, subject to the agreement of the Local Enterprise Partnership.

The details of how retention of business rates will operate in practice are still being worked out. Balancing the desire to incentivise local areas to grow their economies with redistribution will be critical, especially as the Revenue Support Grant — formerly used to fund areas with high demands for services — is being phased out.

Incentives mean, by definition, winners and losers, but it is unclear how much areas will be permitted to win or lose and how the top-up and tariff system will be used to compensate different areas, either within city regions or across the UK.

Other issues including the frequency of business rate valuation and managing the financial uncertainty created by appeals against business rates — especially for areas highly dependent on one or two large businesses also need to be dealt with.

‘Going further’

But the May government will also need to respond to more fundamental questions about fiscal devolution in the wake of the referendum vote.

However significant a shift in local government finance the reforms to business rates are, they still leave UK local authorities well behind those of international peers. On average UK authorities control 19% of their revenue, compared to 48% in France and 64% in New York.

Business rates provide some more control for local areas but the March 2016 Budget illustrated the limits of this, when George Osborne announced small business rates reliefs worth £6.7bn over the next five years.

And business rates themselves remain a clunky incentive as they incentivise creating large new spaces rather than refurbishing existing space — vital in prosperous areas like Westminster or Manchester — or encouraging a focus on some of the higher value businesses that require less space but support some of the most productive, high wage jobs; for example in sectors such as digital and IT.

So, while business rates devolution is a welcome step towards giving places more control over their finances, research by the Centre for Cities suggests that to create a truly sustainable system of local government, the government would need to go even further.

For example, devolving land and property taxes, together with the responsibility for funding local housing benefit, would offer local leaders more powers and sharper incentives to invest in key areas of economic growth such as housing and infrastructure.

Other fiscal devolution options that the May government should consider include: additional bands for council tax; being able to vary council tax without a referendum over a certain threshold; and being able to levy small taxes such as tourist taxes provided there is local and business agreement in a particular city.

It’s been encouraging that, despite the challenges May faces, economic growth and industrial strategy with a strong focus on the role of places have already been highlighted as flagship issues.

As ministers return from the summer break, now is the time to ensure that the devolution deals and business rate reforms agreed under Cameron and Osborne are confirmed and built upon.

Backing devolution — including giving places more fiscal powers — will not only enable May to start to bridge some of the political divides that exist across the country.

It will also be crucial in ensuring the new Government, and places across the country, can make the most of the economic opportunities and manage the challenges ahead as the UK prepares to leave the European Union.

Alexandra Jones is chief executive of the think tank Centre for Cities.

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