London Finance Commission: Raising the Capital

Baroness Valentine Excerpts

Wednesday 3rd July 2013 Lords Chamber

[Baroness Valentine]

First, I declare that I am chief executive of London First, a not-for-profit membership organisation for businesses based here in the capital. I am also a board member of Peabody housing association.

I congratulate the noble Lord, Lord Harris, on securing this debate today. The London Finance Commission and its report on local government finance might sound arcane but its analysis is in fact at the heart of how we can stimulate growth, not just in London but across our country as a whole.

The commission’s starting point is that the Mayor of London should have a long-term, high-level capital investment plan for the city—a position that manages to be banal and radical at the same time. It is banal because surely every great city ought to have such a plan, and it is radical because local government in the UK just does not do that sort of thing, not least because it does not have the powers or the cash to finance and fund it.

So let us pause for a moment to consider London’s starting point. As the report politely puts it, London, in fiscal autonomy terms, is an,

“outlier compared with other cities”.

Nearly three-quarters of the GLA’s income is through grant, compared with roughly a third in New York and less than 10% in Tokyo. The core competence for a London mayor, therefore, must be good lobbying skills with central government, and particularly the Treasury, to try to get some of our money back at every spending review. This is no way to run a world city and it needs to change. That need is becoming ever more urgent as London accelerates towards a population of 10 million, and maybe more, by 2030.

The commission recommends, in essence, that London government takes ownership of a suite of property taxes raised in London—council tax, business rates and stamp duty land tax—and uses them to create a stable funding stream to support a long-term infrastructure investment programme. This does indeed have the potential to create a virtuous spiral for both the city and the Treasury. New infrastructure will support private sector investment, which creates jobs, adds to private consumption and leads to greater tax revenues for City Hall and Whitehall. This, in turn, supports further, future investment. It is, in my view, a powerful analysis, persuasively made, and a conclusion that could equally be applied to other great cities.

It is also important to emphasise that this is not a bid for more cash for London. The commission’s modest proposal is that the property taxes I referred to earlier simply substitute, pound for pound, existing government grant. However, this simple change has two merits. The first is that it gives much greater certainty to London government that it will have the revenue, over time, to fund investment. This means that it can plan into the long term and, potentially, borrow against that funding. This is substantially more efficient than annual, or even five-yearly, spending settlements. The second is that London government then has a share in growth. If its investments generate prosperity, it has an automatic share in that prosperity. It does not have to go back to the Treasury to haggle.

Those changes would be good, too, for central government in at least three ways. First, it could focus on driving the big policies such as—dare I say?—high-speed rail, which only national government can do, rather than fiddling around with local matters that can best be done elsewhere. Secondly, local government would have a real incentive to support growth. This goes with the grain of the Government’s localism agenda—and puts it on steroids. While London would keep the growth in London’s property taxes, the Exchequer would get the growth on the really big-ticket items such as income tax, national insurance and VAT. Thirdly, local politicians would no longer be able to blame all their ills on the Treasury. If they want more cash, they can make the case for taxing their voters more, or not.

As ever, some details require further analysis—for example, the mechanism to align business rates with council tax and the need to review the levels and banding of the latter. We cannot rationally or credibly base our property taxes on 1990 house prices. There also needs to be a more effective and formal mechanism through which London government consults and listens to business over its budget plans. This is particularly relevant to London, where many of those responsible for generating the city’s wealth do not have a vote on its governance.

However, those important points do not detract from the fundamental strengths of the commission’s conclusions. London, like our other great cities, needs greater freedom from central government if it is to generate the growth, jobs and prosperity that we all wish to see. The Government have recognised this in their localism agenda; the noble Lord, Lord Heseltine, confirmed it in his growth analysis; and the London Finance Commission brings yet greater depth to the arguments. It is time to stop talking about devolution and wrest the cold, although all too alive, hand of the Treasury from the management of our great cities.