Local Government Resource Review – Incentivising Growth

Tony TraversLSE

The London economy London’s Gross Value Added: £274 billion

(2010) [Workplace-based] Has risen from 56% above UK average to 71%

above between 1997 and 2010 GSE has also pulled away from UK

London’s population: 7.83m London’s share of UK

GVA: 21.5% Population 12.6%

London fell back in 2010, but appears to be growing relatively faster than UK in 2011 and 2012

London’s public expenditure London’s ‘Identifiable’ public

expenditure: £79 billion (2009-10) Plus ‘non-identifiable’: £89 billion

PE as % of GVA = c33% UK = 50%

Public expenditure in London, GSE represents a significantly smaller share of GVA/GDP than in other regions

NE = 66% Northern Ireland = 75%

Public expenditure by spending authority

London total PE = £89bnmade up of:

Central departments c£61bnOf which

- NHS £17bn- Social Security £27bn

Greater London Authority c£10bnBoroughs

c£28bn

GLA and Borough expenditure Revenue (net) £25bn

Of which: GLA

£6.2bn Boroughs £18.8bn

Capital c£4bn Of which:

GLAc£2bn

Boroughs c£2bn

NB: ‘Revenue’ includes education; ‘Capital’ excludes housing

GLA and Borough Income

Council tax £4.3bn Fees & charges* c£2.5bn (NNDR Yield £5.3bn)

Thus, council tax finances c17% of net revenue expenditure

Council tax + NDR equivalent to 38% of net revenue income (inc education)

Council tax and Non-domestic rates in relation to all public expenditure in London – 2009-10

London total PE = £89bn London total taxation = £97-£100bn

Net tax ‘export’ of c£10bn

Council tax (£4.3bn) would fund 4.8% of all public expenditure

CT + NDR (£9.6bn) would fund 10.8% of all public expenditure

The existing local government funding system Local government revenue expenditure

funded by: Council tax Grants [Partly funded by NNDR] (Fees and charges)

Non-domestic rate collected by councils and pooled

Allocated as part of central support to LG

Grant paid, in part, to achieve high levels of equalisation

Expenditure needs Council tax capacity

Equalisation Over many years, England has

evolved sophisticated equalisation grants

Near ‘full’ equalisation for differences in assessed needs and taxable capacity (‘resources’)

As a consequence, any increase in the local tax base is ‘equalised away’

Thus, no incentive to increase tax base Labour government’s ‘LABGI’ experiment

Local Government Resource Review

‘Non-domestic rate retention’ is the primary objective

Councils will keep (a large proportion of) their NDR yield

‘Tariffs’ and ‘Top ups’ to achieve ‘no change’ in Year 1 (2013-14)

Part of overall NDR yield kept by central government to ensure LG expenditure fits Chancellor’s spending plans

Incentives Councils will keep growth in their NDR yield, as tax

base grows Though, any underlying relative growth at the point of

revaluation will not be retained Bad for authorities such as Westminster, the City and

Camden with rising RVs within existing properties Good for authorities such as Tower Hamlets, Newham and

Hackney with opportunities to develop new sites Limits on growth for authorities with relatively large

NDR bases % growth in NDR yield from year to year will determine

maximum growth in income/expenditure Thus, Westminster, City, Camden pay a ‘levy’ on their

growth Also protection for any authorities with low growth or falling

RVs

The current system

Council tax

(NNDR) Grant Spending

Authority A 60 (1000) 40 100

Authority B 60 (50) 140 200

Total spending

300

The new (2013-14) system – (a) with no change from current system

Council tax

NDR Tariff/Top up

Spending

Authority A 60 1000 -960 100

Authority B 60 50 +90 200

Total spending

300

The new (2013-14) system – (b) each council’s NDR yield rises by 1%

Council tax

NDR Tariff/Top up

Levy Spending

Authority A 60 1010 -960 -9 101

Authority B 60 50.5 +90 0 200.5

Total spending

301.5

Will such incentives work? Hard to be sure…no evidence from UK in

modern history, or when there was such ‘tax competition’ in the past

NNDR in London is £5.3bn within an economy of £274bn – less than two per cent of the economy

Though the marginal impact on constrained council budgets will be sufficient to be felt

Pressures to replace falling (previously central grant) income may be greater than desire to deliver faster economic growth?

Councils will be able to operate the system in ways that maximise the NDR yield

‘Pooling’ arrangements of two or more councils could work together to increase their yield

‘Bi-lateral’ agreements could work even better….

The new (2013-14) system – (b) each council’s NDR yield rises by 1%

Council tax

NDR Tariff/Top up

Levy Spending

Authority A 60 1010 -960 -9 101

Authority B 60 50.5 +90 0 200.5

Total spending

301.5

The new (2013-14) system – (c) each council’s NDR yield rises by 1%, but formal pooling arrangement

Council tax

NDR Tariff/Top up

Levy Spending

Authority A 60 1010 -960 0

Authority B 60 50.5 +90 0

Total [A+B] 120 1060.5 -870 -7.5

Total spending

303

The new (2013-14) system – (d) overall NDR yield rises by 1%, but bi-lateral agreement with all of rise in Authority B

Council tax

NDR Tariff/Top up

Levy Spending

Authority A 60 1000 -960 0 101

Authority B 60 60.5 +90 0 210.5

Total spending

310.5

Complex negotiations and agreements needed to agree pooling or bi-lateral agreements

Game Theory expertise needed to convince councillors (and developers) that pooling and bi-lateral agreements designed to maximise NDR yield growth could increase London (or a part of London) yield

Developers can be offered NDR reductions and, possibly, other incentives to move their development

Easier across a boundary than an ‘area’ agreement?

Other issues New Homes Bonus

Councils now keep the yield of council tax base growth Planning reforms

Neighbourhood Forums and planning Adds complexity to planning decisions, especially where

there are major city centre developments Possibility of non-domestic to domestic use changes

without planning permission GLA response

Borough:GLA share of NDR growth not yet determined GLA has ambitious plans for NDR retention, and sets

London Plan Tax Increment Financing

Conclusions LGRR and NDR retention have been put

forward by the government as key elements in their growth strategy

Impossible to know (yet) how the new local tax incentives will affect boroughs’ behaviour

Likelihood that boroughs with significant growth potential, but where 100% of growth is retained will be most affected

Newham, Hackney, Southwark, Lambeth? A modest, but, interesting reform…

But not a radical reform of local government finance

Local Government Resource Review – Incentivising Growth

Tony TraversLSE