What Would Happen If London Could Raise Its Own Taxes?

By Londonist Last edited 45 months ago
What Would Happen If London Could Raise Its Own Taxes?

The Bank of London tenner? Photo of Boris Johnson by John Kortland from the Londonist Flickr pool.

Devolution is the new political buzzword, but what does it mean for us? We'll be taking a look at the possibilities for London and our relationship with the rest of the UK but first, Ben Rogers, Director of the Centre for London think tank, explains how giving more financial power to London would work.

London is in many measures an extraordinarily rich and successful city, so much so that it is viewed with considerable misgivings across much of the rest of the UK. But for all its success it faces huge challenges. While the city can be a wonderful place to live for anyone on a decent income, it is an increasingly tough place for people having to get by on more modest means. Contrary to what most of the country assumes, average earnings have gone up more slowly in London than any other region over the last decade, while costs — especially in housing, transport and childcare — have riden more steeply.

What is more, the pressures on ordinary Londoners are only going to intensify as the city's population grows. Official population projections show the city expanding by around a million people over the next decade.

So what can government do to help London meet its growth and population? Over the next few months the political parties will be outdoing one another to convince Londoners that they will find money to invest in London's infrastructure, public services and house building. But perhaps the single most important thing government could do would be to devolve more tax raising powers to the capital. London is very unusual among its global competitor cities in having extraordinarily little power over its finances — almost all taxes raised in the city are set and collected by national government, which then passes it on to Whitehall departments that in turn funnel a proportion back down to the capital. London retains just 5% of its total tax take for local spending, compared to over 50% in New York and over 70% in Tokyo.

So what would a better system look like and how would it help? Two years ago Boris Johnson set up a commission, chaired by the LSE's London expert, Tony Travers, to make recommendations on how the city could be better funded. The main recommendation of the London Finance Commission was that London should be given power over all property taxes raised in the city. In exchange the city would see the grant it received from central government cut. (I sat on the Commission and know that no-one on it wanted to see London gaining at the expense of the rest of the country.)

Giving London control over property taxes would have several advantages. Firstly it would allow London to develop a tax regime tailored to its particular needs. So instead, for instance, of imposing a mansion tax — essentially a London tax designed by national government — it could implement a much needed redesign of the city’s council tax bands. Secondly, it would help incentivise development. One of the reasons London voters often oppose new development is that they worry that they will bear the costs — in terms of increased congestion, or increased demands on public services — without experiencing the real benefits. But if tax from new development went to London government, the Mayor and the boroughs could take steps to ensure that local people benefitted rather than suffered.

Finally, giving London greater control over a proportion of its own taxes would allow London government to borrow money for investment in infrastructure on more favourable terms. As it stands, when London borrows to subsidise its big infrastructure projects, lenders worry about the capital’s dependence on national government grants, and whether or not a changing mood in national government would spell the end of the project. Lenders ramp up prices in order to counteract this risk. A more stable and secure source of income would mean better value for money for London’s infrastructure investment.

Most Londoners don't spend their days worrying about the architecture of local government taxation. But a recent poll showed growing support among businesses and ordinary Londoners for what wonks call 'fiscal devolution'. Over the last few years Scotland, Wales and many of England's cities have got substantial new powers. We now need to make sure London gets new powers too.

Last Updated 26 March 2015