I have not read the Adonis Review on devolving power to English regions that is being published by the Labour Party this morning but I am worried about it, nonetheless.
The plan, as summarised by Labour List, is apparently as follows:
The Adonis Growth Review argues for creating Combined Authorities. Such authorities — formed when a group of local authorities take collective responsibility for functions previously carried out by central government, particularly with regard to transport and economic policy — would act as a means to give cities and regions more power.
The plans that Miliband will unveil (which you can read in further detail below) outline the importance of devolution — moving powers away from Westminster — by using £30 billion to give more power to Combined Authorities, existing local authorities and Local Enterprise Partnerships (LEPs — partnerships between local government and local business, which decide how investment should be made in local roads, buildings and facilities).
In principle the idea of devolving power to localities is good. The problem is that what is being devolved is largely a power to spend. The power to raise money that is proposed should be devolved is on a quite different in scale: each of the proposed new authorities is to be given power over raising its own business rates. Whilst the sums involved with business rates are significant they are not enough to cover the devolved spending.
In that case and, before we get too excited about local income taxes ( which I do not support), land value taxation and even local borrowing ( both of which I do support) let me be abundantly clear that there are real problems with devolving power over spending without providing control over a matching revenue source and that there are massive problems inherent in devolving control of business rates to local authorities. Like it or not, these problems are going to come the light if this proposal is implemented, and need to be explored now.
Firstly, and Margaret Thatcher was right on this one, if there is to be effective fiscal policy then there has to be central control over the economy to ensure that the overall targeting of resources is appropriate in combination with any monetary policy in operation. Devolving too much power over revenue raising undermines this.
Secondly, and perhaps much more importantly, the centre needs to keep power precisely because English regions will never be able to raise sufficient funding from their own potential tax bases to pay for the investment that they need at present because economic wealth is concentrated in the south-east of England. If we are to have any prospect of effective redistribution of both income and wealth in the UK then those redistributed funds have to be passed through central government through general taxation, and not through any form of devolved revenue raising power. The risk is that devolved revenue raising powers will give rise to the obscene prospect of much higher tax rates in deprived areas than would arise, for example, in London, let alone some of the most prosperous greenbelt shires.
Thirdly, and alternatively, if local authorities are given the power to control the level of the business rate as well as to spend its proceeds then the real chance of tax competition between English regions will arise, and that will undermine any chance of raising the revenue that is needed to promote infrastructure spending that is vital to development, rather than advance it. This is the experience, for example, of the USA, where States regularly compete with each other for the location of business, and the absurd situation of negative corporation tax rates arising at local level has now resulted. This has, incidentally, been achieved by refunding part of the equivalent of PAYE contributions to companies to subsidise their activities.
So my word on this one is tread very carefully: this policy in the wrong hands could give rise to massively increased regional inequality in this country, which is the exact opposite of what Labour wants.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I think you’re going a little bit over the top on this one.
If the report really proposes devolving business rates (whatever that means exactly) this can hardly be described as ‘devolving too much power over revenue’. It would only be returning to the situation pre-1990. Granted, local fiscal discipline in the 1980s left a little to be desired, but this didn’t have any appreciable effect on national fiscal policy.
By the same token, devolving business rates isn’t really a sufficient fiscal change to negate central government’s power to redistribute and invest in infrastructure. Business rate revenues are mostly needed for local government’s current spending. There isn’t enough revenue spare to use them for any substantial infrastructure investment, even in the wealthiest areas – not to mention that the scale of business rate revenue just isn’t sufficient to build any meaningful amounts of infrastructure. I don’t know whether the Adonis review is going to claim that business rate revenues are “the answer” for infrastructure investment, but if it does, it’s wrong.
You say that the policy in the wrong hands could give rise to a massive rise in regional inequality. You could say exactly the same thing about the current structure, where centralised infrastructure decisions mysteriously result in massive spending in London at the expense of other regions.
I don’t think we’re going to end up with negative corporation tax either – there are very good reasons why corporation tax should not be devolved (which I think you have referenced in the past).
I think the risk of tax competition is very real and has to be acknowledged now
Local authorities cannot have any real powers without the power to raise money themselves. In the past they had a lot more council housing which brought in rents, which Margaret Thatcher has effectively given to the finance industry. This source of income has dwindled therefore. More council house building would help here, as well as helping those who cannot afford to purchase a home or pay private rent.
If councils cannot raise money themselves they become, as Tony Benn has said, agents of the treasury, bound by their restrictions and dictates. This is an administrative role, not local government.
It would be a good idea for government to dictate the policies for raising the money however. For a genuine Labour government – something like a nationalised bank where local authorities could borrow for capital projects, and have the powers to tax back all the interest for instance. But the decision on how much to borrow should be decided by local democracy ie what is needed locally. Every day spending should be decided locally and taxed back through Land tax, and progressive rates. Central government could dictate that small businesses and those training the young could have concessions, and that local councils must be progressive, but cannot dictate the levels of tax raising as a whole. Local people can vote on that at council elections, in order to regain local democracy.
Sandra
I do believe it quite important that local authorities have the power to borrow, and have argued for that right for a long time so that they can, for example, build social housing that they need, with a revenue stream that can be supported by rents charged.
This, however, is different from an argument about raising local tax to pay for local services where the simple fact is that the capacity to tax varies enormously between local authorities, but need tends to be highest where capacity to taxes lowest. No amount of progressivity can overcome this, the state, at the centre, as to intervene to make sure that redistribution to overcome this problem can take place.
I welcome local democracy. I wish it was stronger than it is. But, we have to recognise the constraints upon it if we are also to deliver social justice.
Richard
I would welcome your thoughts on how this line of thought extrapolates to the Scottish independence referendum. One of the main arguments underpinning the Yes campaign is that there is an insoluble contradiction within devolution, where there is control over spending decisions but not control over revenue-raising.
Scotland takes a risk with devolution of not securing the redistributed funds it has enjoyed in the past under the Barnett formula
All Scottish solutions now on the table create the risk of fiscal instability in the UK and of tax competition
At present tax is redistributed from Scotland to England, not vice versa.
But is spending?
I genuinely don’t know
And are you claiming this because of oil?
And generally, how do you know?
According to UK ‘Government Expenditure and Revenues Scotland’ figures, between 2008/9 and 2012/3, Scotland generated 9.5% of UK tax, but receives only 9.3% of spending.
According to UK ‘Government Expenditure and Revenues Scotland’ figures, between 2008/9 and 2012/3, Scotland generated 9.5% of UK tax, but receives only 9.3% of spending.Â
OK
Accepted
But the margin looks within the range of statistical error to me
I’m not sure I agree, Richard. Devolving power to the regions, done properly, but not as Labour is now proposing, can only be a good thing. What is the point of a council introducing progressive policies when central government controls the purse strings and thus could kill these policies stone dead?
A good idea in my opinion would be to give these regions more or less full autonomy, with tax raising powers much like the states in the USA.
Tax competition is a worry, but doesn’t that largely comes through imposed austerity? If regions can raise their own taxes or do their own bond issues without interference, then progressive policies can be implemented?
Incidentally, I think it would be a big mistake for the Scots to keep the pound (except maybe to peg it to their own currency) or go into the euro. They should have their own financial and tax raising powers and their own currency. Those who control the purse string always call the tune!
Hi Stevo
that argument cuts both ways. My worry with devolution of powers to localities in England is that it essentially means that in heavily Tory areas like Essex (where I live) Labour is essentially abandoning the poor, the disabled and other vulnerable groups to the local Tory apparatchiks. We have seen this happen already under the ConDems with the localisation of Council Tax Benefit and other aspects of the social security system like the Social Fund – in well-to-do areas where the middle class vote gets the Tories in more or less permanently, the poor and vulnerable will be totally marginalised and subject to severe hardship because why would the Tories bother to take their needs into account when formulating policy? Whereas if benefit policy is set at a national level it at least means that there are safeguards in place and local Tories can’t slash spending on certain areas.
Many people in Labour seem in favour of devolving powers to the regions but I often wonder if they have really thought through what the implications are. In some policy areas (e.g. social security) I think a centralised system is a better solution. In others (e.g. planning) I can see more of a role for localism.
Nuance is key – a blog coming up on that
Labour will take no heed of that warning. Devolution was only ever meant to break up England. It had absolutely nothing to do with empowering Celts and everything to do with disenfranchising and disempowering the English. The English fiercely oppose this regional carve-up of England and the wrenching off of their capital, London, as a supposed ‘city state’.
All the rhetoric is about division, stoking up the north-south divide in England, which in itself has always been a deliberate policy of British politicians.
England’s local governance is a matter for the English and should be determined after an English parliament has been established, filled with English people who put England before the Union, just as Scottish MSPs always put Scotland first.