Devolution: Should London have power to raise its own taxes?
Calls for the government to expand English devolution and share some tax revenue with devolved administrations – including in London – have been backed by organisations in the capital.
A report by the Institute for Government (IfG) has urged the next government to expand the map of English devolution to 85 per cent of the population in a bid to tackle regional inequity.
As part of this, the report, titled ‘A new deal for England’, calls for pilot trials of so-called tax-sharing with “leading combined authorities”.
It comes just days after London mayor Sadiq Khan won re-election for a historic third term in the capital.
Researchers at the IfG said this could be done by “devolving a small share of national insurance revenue, to strengthen incentives for local leaders to boost job creation”.
This would see a share of tax revenue raised regionally being devolved, but tax rates and bands still being “controlled nationally”.
National insurance contributions (NICs) were specifically recommended for this “as this is the tax most closely linked to local employment”, the report found.
While devolving just five per cent of NICs revenue per capita basis would see Greater Manchester benefitting by around £350m a year.
The suggestion has been endorsed by leading organisations in the capital.
John Dickie, BusinessLDN chief executive, told City A.M.: “The main political parties all talk a good game about devolving power from Whitehall. Now is the time to deliver.”
He added: “Empowering local leaders with the powers and resources they need to drive regional growth is essential if the stalling UK economy is to fire on all cylinders.”
Jon Tabbush, from the Centre for London, argued: “Fiscal devolution would bring England closer to the international norm and act as a major step towards rebuilding local government.
“The real question is why the national government in the UK raises 95p in every £1 of taxes, more than in almost any comparable OECD country.”
Tabbush, who co-wrote the think tank’s recent report ‘Rebooting London’s Economy’, added: “Devolving fiscal power to city-regional government would not just help the UK address regional inequalities – it is also key to enabling London to revive its flagging economy.
“Productivity growth [in London] has been essentially flat since 2007. Fixing our overly centralised tax system would let the capital create an economic strategy to address its crises: our shortage of housing and lab space, our low investment rates, and our skills gaps.”
The IfG report argues that “London’s own economy also compares unfavourably to international comparators” and “deepening devolution and reforming funding holds the potential to boost economic growth”.
It calls on the next government to “review and reform the Greater London devolution settlement” as the capital “will continue to be the biggest engine of growth for the UK”.
Devolution deals with Greater Manchester and the West Midlands now go beyond London, the IfG said, and a future government should consider “structural reform” and new funding arrangements for the capital.
Polling by the Centre for Cities think tank, in March, suggested voters believe mayors and local areas should hold more power.
Other than healthcare, the majority of people across all mayoral areas thought policies including transport, crime and business support should be run by mayors or councils, they found.
While Labour has previously said it wants to “give power away and put communities in control”.
Speaking in March, leader Sir Keir Starmer announced Labour’s plan for “full-fat devolution”.
He outlined their “new Take Back Control Act that sets a presumption towards devolution, and new powers for mayors over transport, skills, energy, and planning, so they can rejuvenate our high streets and generate growth for every town and city”.
The current Conservative government has said it is committed to devolution, stating in its annual report for 2022-23: “By 2030, every part of England that wants one will have a devolution deal with powers at or approaching the highest level of devolution and a simplified, long-term funding settlement.”
A spokesperson for the Mayor of London said: “Sadiq strongly supports devolving tax powers to London to boost economic growth and build a better, more prosperous city for all.
“The UK remains one of the most fiscally centralised countries when compared to other OEDC countries, curtailing London’s ability to generate the revenue that is needed for economic growth and public services.
“City Hall’s own analysis suggests that this overly centralised system of revenue generation could have harmed London’s growth potential by billions of pounds in the last decade alone, making the call for fiscal devolution essential to Sadiq’s mission to make London a byword for opportunity once more.”