1. Governance
May 6, 2015

The next government should devolve tax powers to every English city – for the sake of all of us

By Dave Smith

As the UK goes to the polls this week, the campaign has been dominated by the reality of having to meet increasing demand for services and public goods while working within decreasing budgets. To meet these challenges, we need to move away from the old centralised model in which the Treasury has the final word on taxes and spending at both national and local level, to a devolved model of power which will unlock our cities’ full potential.

Our recent report Power, people, and places: A manifesto for devolution to Britains Key Cities, shows that our cities are ready to deliver. The group of 26 medium sized Key Cities have already been adding value as fast as any other cities since the recession in 2008, and currently contribute £163bn of Gross Value Added to the UK economy.

What we ask for at this election is increased powers to set and retain local taxes such as council tax, stamp duty, and VAT, while expanding borrowing powers to finance infrastructure investment, particularly in transport and housing. We want to provide a case against the sceptics of devolution who fear that decentralising tax powers will mean rich boroughs and cities will keep higher revenues while poorer areas continue to struggle on low incomes. That is not the case.

Fiscal devolution would enable the establishment of the structures and incentives for local authorities to exploit their own economic strengths and expertise. There is strong international evidence, from countries ranging from Canada and Spain to Switzerland, that fiscal devolution enables different regions to address deprivation, promote productivity and reform public services in the way that best suits local needs. Competitive cities and regions would create a more prosperous and diversified national economy for all of the UK.

Devolution gives cities the chance to think creatively about financing solutions that will allow the UK to meet critical demand for infrastructure, housing and employment. There are a variety of ways in which cities could use fiscal powers to solve these problems for their constituents. For instance, local authorities could retain increased business rate revenues from infrastructure developments to pay off the initial borrowing. This would make it far easier for cities to upgrade their infrastructure, making them better connected and more attractive for foreign and domestic businesses.

Fiscal devolution along these lines would not redistribute wealth to rich regions: instead, it would allow less affluent regions to remedy the disadvantage in infrastructure that has held back their growth so far. Cities can thus be rewarded for innovation and experimentation – and would end up with more revenue to spend on a range of public services for vulnerable constituents.

Devolution of fiscal powers could also deliver housing growth, for example by lifting the Housing Revenue Allowance debt cap. Councils need the power to borrow against rents for future social housing and other projects, to boost the supply that is desperately across the country. This is not about halting redistribution between richer and poorer cities – It’s about enabling the cities with housing shortages to go ahead and solve that problem. And we know that a good supply of housing stock relieves pressure on other services such as social care, and allows the labour market to function smoothly without the distortions caused by a lack of supply.

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Ultimately, fiscal devolution is about rewarding leadership. Cities which embrace a variety of innovative financing solutions will have stronger infrastructure, higher productivity, and better quality of life. They will deliver the answers to problems which a centralised system have created, such as inequality and deprivation.

Our report has estimated that devolution could save the Treasury £2.5bn each year – and £12.5bn over the life of the next parliament. That means more money for public services, and exemplifies the kind of leadership that the public demands.

Efficiency, innovation, and prosperity. This will not divide the country; it will bring us together.

Dave Smith is chief executive of Sunderland City Council and chair of the Key Cities Chief Executives Group.

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