London Finance Commission: Raising the Capital

Lord Harris of Haringey Excerpts

Wednesday 3rd July 2013 Lords Chamber

Asked by

[Lord Harris of Haringey]

To ask Her Majesty’s Government what assessment they have made of the findings and recommendations of the report of the London Finance Commission Raising the Capital.

[Lord Harris of Haringey]

My Lords, I am grateful to all noble Lords who have put down their names to speak in this short debate. As somebody who has lived in London all my life, I should explain that my starting point is that London is the greatest city in the world. I would find it difficult for anyone to argue against that. I spent 26 years as an elected politician in London: as a councillor, council leader, chair of the Association of London Government, and member of the London Assembly. I believe that the London Finance Commission should be congratulated on the report that it has produced.

I should explain that the London Finance Commission was established by the Mayor of London and London Councils, which in my time was called the Association of London Government. It was an independent group, chaired by Professor Tony Travers, who is probably the country’s pre-eminent expert on local government finance, and it contained cross-party representation and senior representatives from elsewhere in the United Kingdom, including Stephen Hughes, the chief executive of Birmingham City Council. It published its final report in May, and its recommendations have been accepted by the Mayor of London and by Mayor Jules Pipe, on behalf of London Councils, with both Conservatives and Labour accepting. It has been supported by all four parties on the London Assembly.

The context for this report is that London is the engine that drives growth in the rest of the UK economy. I will give just one example. Forty-one thousand jobs were supported outside London last year simply by Transport for London’s supply chain—24,000 of them in the North and Midlands. That is more than the number directly employed by Transport for London—London Underground, buses and so on—in London itself. In addition, 62% of Transport for London’s procurement spend went to suppliers outside London, with the bulk outside the south-east. That is one example of the extent to which London drives the rest of the UK economy. London also makes a net contribution of over £5 billion in tax to the rest of the country each year.

Even without my bias, London is universally acknowledged as one of the leading international cities in the world. To quote the report:

“It is difficult to envisage a scenario in which London’s economic decline would be favourable for the rest of the UK and we reject the notion which is occasionally articulated that London should be constrained in order to ‘balance’ UK economic growth. In most markets, London is competing as much, if not more so, internationally than against other UK cities. Many foreign direct investment projects that London wins in competition with other international cities provide benefits for other regions, and many tourists who visit London go on to other parts of the UK. Other international cities vie for investment, visitors, students and talent, and in the global competition, London risks falling behind and, in respect of infrastructure, further behind”.

That is the context in which this report was prepared.

London's population is equivalent to those of Scotland and Wales combined—and probably to that of Northern Ireland as well if those here in this capital city illegally are included in the count. Its economy is almost double the size of Scotland and Wales combined, but as the report says,

“while the dynamic of devolution continues to offer new powers and financial freedoms to the governments in Edinburgh and Cardiff (and, indeed Belfast) there have been no proposals to increase the autonomy of London government”.

The commission received no evidence as to why London and other English city regions should not be afforded the kind of decentralised power offered to Scotland, Wales and Northern Ireland.

Yet London’s international status and its continued ability to help drive the rest of the UK economy cannot be taken for granted. Historic population growth in London has already placed considerable pressure on the full range of public services and local infrastructure and this is set to increase from a growing population with increasingly complex demography. London's population is growing at a faster rate than any other region in the country. By 2020, its population will exceed 9 million. London’s school-age population grew by 107,000, at a rate of 8.2%, in the past decade—the fastest regional rate.

London has an inherently mobile and changing population. In 2011, it had approximately 70,000 short-term residents, over a third of all short-term residents in England and Wales. It is estimated that 240,000 households live in overcrowded conditions, with 90% of London’s housing stock built before 1991, and new housing supply meeting housing need in only six of the past 20 years. This means that London has the most overcrowded households in the UK, living in the oldest homes, where the market is not delivering sufficient new homes to match current and future demand.

However, if London’s infrastructure crumbles and the quality of life deteriorates, its ability to attract and retain international business will decline, and that cannot be good for the rest of the United Kingdom. It is economic growth that the commission sees as the potential prize of a further shift of financial and fiscal control to London. As the city population grows to 9 million, then perhaps 10 million by 2030, there will need to be massive investment in enabling infrastructure simply to accommodate these new residents and, indeed, commuters. Beyond this investment to keep pace with the population, the commission is convinced that London would be better able to prioritise decisions about that investment. After all, Londoners know they need new railways, schools, homes, waste facilities and streets. Because of their day-to-day dependence on physical infrastructure, London voters are much more likely than voters elsewhere in Britain to prioritise spending on longer-term investments.

If London had enhanced fiscal capacity to back such investment, there could be an enhanced level of capital spending which would, in turn, produce additional growth and tax yield. London government could then reinvest higher tax revenues in more infrastructure and a virtuous circle would be created. As the report acknowledges:

“London is not a city state. But it could have a greater degree of self-government and thus, in our view, be better governed. The same is true for other city regions. No one can seriously any longer believe that Whitehall always knows best”.

In terms of fiscal autonomy, London is an outlier compared to the other cities that the commission studied. By comparison, it relies heavily on transfers from central government, with 74% per cent of its income received through grant, compared to 37% in Madrid, 31% in New York, 25% per cent in Berlin, 17% in Paris and only 7% in Tokyo. Moreover, London does not have comparable access to the diverse tax bases enjoyed in other cities.

I understand that, in correspondence with the chair of the commission, no less a person—if such a thing were possible—than the Chancellor of the Exchequer, the right honourable George Osborne, expressed support for the commission and stated that,

“under the right conditions, fiscal devolution has the potential to increase the financial accountability of local government and promote additional growth”.

The commission accepted his suggestion that the proposals should be judged against three tests. First, they should be based on evidence; secondly, they should have cross-party support; and thirdly, they should be without detriment to the rest of the UK. The achievement of the commission is to meet those three tests. The report is evidence-based. It has the support of all four parties on the London Assembly, all three parties in London Councils, the Corporation of London and significant, leading sections of the London business community, including the London Chamber of Commerce and London First. What is more, what is proposed would not be to the detriment of the rest of the UK. Indeed, it is likely to be of benefit in sustaining the UK’s future growth.

The commission proposed that any devolution of tax-raising powers would be offset by a reduction in government grant. Moreover, many of the commission’s recommendations could be replicated in other cities. Some cities, such as Manchester, have already evolved governance models from which London could learn.

The report, No Stone Unturned, of the noble Lord, Lord Heseltine, who is not in his place, made a parallel case for devolution to city regions. I hope that the Minister will agree that technical working parties should be established by her department and by the Treasury, with the Greater London Authority and London Councils, to examine the detail of these recommendations.

The London Finance Commission report meets the Chancellor’s conditions. It provides a blueprint for taking forward the localism agenda that the Government espouse. It protects and enhances the position of the rest of the United Kingdom. Above all, it would ensure that London continues to be the greatest city in the world.