The London Finance Commission one decade on – are we raising the capital? | Paul Honeyben, Strategy Director, London Councils
By Paul Honeyben, Strategy Director: Local Government Finance & Improvement, London Councils
A lot has changed since 2013. No-one had heard of Brexit or Covid-19, few people knew what net zero meant, and the term “levelling-up” had yet to be coined. Inflation was 2.6 percent, interest rates were at 0.5 percent, the average UK energy bill was £1,345, and the decade of austerity was just starting to bite.
Few of these era-defining issues could have been foreseen in 2013 when the then Mayor of London, Boris Johnson, commissioned Professor Tony Travers to lead the London Finance Commission (LFC) to investigate funding arrangements in the capital. While the world has changed considerably since then, sadly local government funding has not.
The LFC 2013
The context for the LFC was seemingly inexorable growth in London, driven by the agglomeration of financial and professional services concentrated in central London, with Crossrail promising to deliver even better transport connectivity (by 2017!) and the population forecast, at the time, to grow to 9 million by 2020 and 10 million by 2030.
The Commission’s headline finding that only 7 percent of the tax generated was retained in the capital compared with over 50 percent in New York, starkly demonstrated that London was a significant outlier compared with other world cities when it came to financial autonomy.
The Commission concluded that London’s government (the 32 boroughs, City of London Corporation and the GLA) should be given greater freedom to determine and use the resources raised from taxpayers. Such reforms would increase accountability to residents and businesses. It was clear to stress that this was equally applicable to other UK cities.
Recommendations sought to stimulate investment in infrastructure, generate economic growth, encourage house building, and reduce ringfencing through a devolved single pot along “community budget” lines. Most notable was the recommendation to devolve the full suite of property taxes including council tax, business rates, stamp duty land tax, and others. This would increase the retained tax figures from 7 to (a still modest) 12 percent.
Importantly, proposals were designed such that, when introduced, the rest of the UK would not be put at a disadvantage, with any tax devolution met by a pound-for-pound reduction in grant funding.
This would require the Mayor and London borough leaders to create a more formal mechanism for handling any transfer of tax or spending powers, where both tiers of London’s government would be represented. This would not preclude a particular tax being devolved wholly to the Mayor or to the boroughs but would require both tiers of government to agree the broad structure and its mode of operation.
The current Mayor, Sadiq Khan, reconvened the LFC in 2016. The final report in early 2017 went further by recommending assignment of a proportion of income tax and VAT, but only to fund other nationally run services were they to be devolved.
What progress has been made?
Ten years on from the first LFC, while there has been some progress towards the ambitious vision it set out, achievements have been disappointingly few and far between. Two, however, stand out.
The pan-London business rates pilots in 2018-19 and 2019-20, trialled 100 percent and 75 percent retention of business rates growth respectively, and demonstrated how all 34 London authorities could work collaboratively to take decisions over a joint pot of funding. It generated over £600m of additional funding and used the governance principles envisaged by the LFC, with voting arrangements that saw parity between the Mayor and the collective of borough Leaders.
It was hoped this would provide a steppingstone towards fuller devolution of business rates. However, the economic impact of the pandemic meant the pool, which continued in 2020-21 under non-pilot conditions, became financially unviable and was discontinued.
More recently, the kind of collaboration and multi-layered decision making envisaged by the LFC was again evident last year when London Councils and the GLA worked very closely to achieve a multi-layered plan for the UK Shared Prosperity Fund. This chose a distribution model reflecting London’s needs, rather than the default formula prescribed by government, recognising some elements would be best spent at a pan-London level, some at a sub-regional level and some at the borough level.
What hasn’t changed?
Sadly, much of the local government finance system remains unchanged and has become, if anything, more centralised, with the government (and Treasury) showing little appetite for reform. Central government largely determines each council’s spending power, as well as the timetable for allocating resources.
Council tax now represents roughly three fifths of Core Spending Power – up from two fifths in 2013. Placing so much of the funding burden on a tax that hasn’t been revalued for 30 years makes less and less sense. The tax effectively remains capped via the referendum principle, and since 2016-17 has become increasingly hypothecated to fund social care.
Councils have even less control over business rates. Central government still sets the national multiplier and 97 percent of reliefs awarded each year leaving councils with few levers to respond to local economic needs. Tinkering by successive Chancellors – and the recent trend of freezing rates since the pandemic – has added further complexity and blunted councils’ incentive to grow the tax base, evidenced by £2bn of grant funding awarded nationally next year to compensate for historical decisions.
Despite these added complexities, the same rules apply within the business rates retention scheme as in 2013. With previous government ambitions to move to 100 percent retention now cancelled, councils are stuck with a 50 percent scheme that is a million miles from the genuine devolution proposed by the LFC which, because of failures to reform wider funding, many feel is unfair.
More broadly, there remain many ringfenced funding streams – increasingly within adult social care – with a range of centrally governed strings attached that cannot easily be combined to be spent on local priorities. This prevents truly joined-up and place-based approaches to service delivery. The unpopularity of central government’s favoured “bidding pot” approach was evident in the reaction to its recent allocation of the Levelling Up Fund.
One other thing that hasn’t changed is public opinion, which continues to support fiscal devolution in London. Over half (54 percent) of Londoners support transferring more powers over public spending to London, compared with just 16 percent who oppose. London businesses support greater powers to raise resources to fund additional community safety and policing (80 percent), and more freedoms to fund and build infrastructure (80 percent) and houses (78 percent)1.
London’s changing context
Many of the challenges that faced the capital in 2013 – housing affordability, air and noise pollution, congestion, youth violence – remain. But London’s context is changing.
The 2021 census shows that London’s population growth is now slowing, only reaching 8.8 million by 2021, and not projected to hit 10 million before 2040. It is too early to conclude whether the pandemic had a real or temporary impact but taking census data at face value suggests outer London saw higher population growth (9 percent vs 5 percent); more densification (9 percent vs 4 percent); and may have become more deprived than inner London since 2011. Homeownership levels reduced and the prevalence of renting increased in outer relative to inner London, and diversity – whether measured by country of birth, ethnicity, or prevalence of English speaking – showed rates increasing in outer relative to inner London2.
The agglomeration model that provided the context for the LFC in 2013 seems to be changing to a more polycentric model of London with more economic and social diversity across boroughs and subregions. These changes also mean the rationale for increased local decision-making and multilevel governance espoused by the LFC has arguably never been stronger.
The pandemic exposed widening inequalities in the city, with a disproportionate rate of deaths amongst the poor, the unwell, those living in crowded, inadequate accommodation and Global Majority communities. In many cases, these were the same people, leading to the devastating concentration of health impacts in London.
At the same time, the pandemic highlighted both the limited efficacy of nationally mandated solutions and the necessity among local leadership of local knowledge. The successful delivery of services and support to communities and businesses provides a strong evidence base to underpin arguments for greater devolution: London boroughs showed what could be delivered when they were given sufficient funding and responsibilities to support local communities.
Room for optimism?
So, what prospect for fiscal devolution in 2023? There may be some glimmers of hope on the horizon.
The economic challenges facing the country mean the government and policy makers may be more likely to entertain more radical policies than in the last five to ten years, particularly those aimed to driving growth – which has been so stagnant in the last decade.
Last year’s Levelling Up White Paper provided a set of long-term ambitions, through 12 Levelling Up missions with objectives to 2030. One of the aims within the twelfth mission is “for every area of the country to have a simplified long-term funding settlement” by 2030, and the government is considering single-pot place-based budgets for the two “trailblazer” areas of Greater Manchester and the West Midlands, which sound remarkably like those recommended in the LFC.
London’s devolution settlement is now over 20 years old. The focus on bringing other areas up to London’s level risks limiting the ability of the boroughs and the Mayor to tackle the 21st century problems facing the capital. Hopefully, the nascent London work-strand within the Levelling Up Advisory Council represents an immediate opportunity.
The Labour party has also begun to set out policy priorities ahead of the next general election, through the Gordon Brown-led Commission on the UK’s Future, which recommended “new fiscal powers” for local government, while the Leader of the Opposition’s speech in early January promised to “devolve new powers over… how councils run their finances”.
Whichever party forms the next government, it appears devolution is back on the agenda.
Reducing inequality, improving productivity, and fighting climate change are arguably the three pre-eminent policy challenges of the 2020s. These will not be achieved by simply doing what has been done before.
What is required is stable, long-term funding, more flexibilities over revenue raising, and greater devolution enabling councils to use their community knowledge whilst strengthening local accountability. This should be done alongside wider reform of the local government finance system.
While London and the UK have changed considerably since 2013, both the logic that underpinned the original LFC and the recommendations it put forward are just as valid today.