London Finance Commission: Raising the Capital

Lord McKenzie of Luton Excerpts

Wednesday 3rd July 2013 Lords Chamber

[Lord McKenzie of Luton]

My Lords, like other noble Lords, I start by thanking my noble friend Lord Harris of Haringey for initiating this debate on the London Finance Commission's report, Raising the Capital. It touches on matters which spread across a range of policy areas and which have broad implications, not least for macroeconomic management of our country. Noble Lords may understand, therefore, if I forgo the opportunity of making new policy announcements this evening—however tempting—but say that we view this report as a serious piece of work that requires proper consideration and analysis. We recognise that it has strong cross-party support and, as the report suggests, its recommendations have potential application for cities beyond London.

The central proposition of the report is that London can grow faster and create more jobs if it has greater autonomy in managing its own affairs, particularly when it comes to planning infrastructure. That autonomy would come from relaxing some of the borrowing rules applicable to local authorities and from devolving certain tax revenue streams. The report’s recommendations are underpinned by research that demonstrated that, compared to other major cities, London has very little fiscal autonomy, although the report recognises that academic research is inconclusive on whether increased fiscal autonomy has a measurable effect on growth.

We recognise, as does the report, that London is an economic powerhouse, one of the strongest growing regions in the UK and one of the world’s greatest cities —indeed, the greatest city, as my noble friend said. That success must be sustained not just in the interests of Londoners but in the interests of us all. It is, after all, our capital city. We should look to it for help to drive our national growth.

We also recognise the case that has been made for investment, which is needed as a direct consequence of population growth to provide housing, schools and primary healthcare. It is also needed to sustain economic growth through improved transport, skills, innovation and research. This case is not unique to London, and we have long been arguing the case for a proper plan for growth and for jobs.

The question is whether the scale and complexity of London's economy and communities mean that they can be addressed only by London government rather than by—as it has been put—23 Whitehall departments. We support a localist approach but, of course, London government is not a homogeneous entity. The 32 boroughs, the GLA and the mayor collectively comprise a vast range of different communities, economic and social circumstances and political make-up. The report recognises that the different interests that the formula funding system exposed in local government could re-emerge at London level should there be greater financial devolution. There is a clear risk that this may be so.

There is an acceptance that, should there be greater financial devolution to London, existing governance arrangements would have to change. The proposition is advanced that it would require new governance systems and structures that are sufficiently robust to cope with a variety of possible situations but sufficiently simple to be efficient. That is a goal worth having, but one more easily stated than achieved, we suggest.

The report bemoans the dramatic budget reductions suffered by local government, reinforced just last week, and makes the point that revenue constraints are inhibiting capital spending. It highlights that the Treasury is imposing additional capital controls over and above the prudential borrowing code and that these could be scrapped. We have debated this issue especially in relation to housing, and it also is not an issue just for London. I believe we had a common recognition that local government had adhered to the prudential borrowing code in a responsible manner, and we were not convinced of the Government’s position that it needed two tiers of capital control. As the noble Baroness, Lady Hamwee, said, local government should make full use of the headroom that the system offers.

We agree that it is time to consider the possible removal or relaxation of the housing capital limits, but only on the basis that prudential rules would continue to apply, as would the rigour of long-term HRA business plans. Measures to shift public funding from personal subsidy to investment in built assets, referred to by my noble friend Lady King, is also something that we consider should be further explored.

The proposal to devolve or assign to London taxes that are currently collected and paid to central government is more problematic. The focus is on property and property-related taxes, so potentially it is easier to establish the locus—in or out of London. Any new boundary lines are likely to open up avoidance possibilities and there would surely be a resource issue to administer these taxes.

Retention of 100% business rates raises issues of how the arrangements would be unpicked from the newly introduced business rate retention scheme and, within London, what needs and resources mechanisms would be required. The more radical tax reforms considered have even greater technical challenges, as the report acknowledges. However, the big question underlying all of this is what it means for the rest of England. Promoting and facilitating growth in London does not have to be at the expense of growth in other parts of the country. Indeed, quite the reverse, and other cities could follow suit. However, there will be a need to ensure that other parts of the country are not left behind, particularly rural areas.

Specifically on fairness, it is proposed that the devolution of tax streams to London could be counterbalanced by adjusting grant levels at the start of the process. However, this will do nothing to stop growing inequality after that. We should consider the effects of devolution of stamp duty land tax in a buoyant property market in London, with revenues going to London not to HMRC.

There is much else to be considered and the report has provided valuable food for thought. I thank my noble friend for bringing it before us and seeking from the Minister a practical way to examine the important issues that it raises.