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Compared to their international counterparts, UK cities are often singled out for their lack of control over policy-making and the taxes generated in their cities.
But things are about to change. From 2020 local government will retain 100 per cent of business rates which will replace the current centrally-decided and allocated Revenue Support Grant. Given the current trends it is likely that, by then, the revenues generated by business rates will be larger than the revenue support grant by about £6 billion, as shown on the graph below.
Source: DCLG, Revenue account budget; Collection rates for council tax and non-domestic rates in England.
So in 2020, when all business rates are retained by local government, this £6 billion ‘boost’ for local government will represent a £6 billion ‘loss’ for central government. We know already from government statements that the change will be accompanied by a transfer of additional responsibilities to local authorities, and consultations are under way to determine what those responsibilities should be.
Looking at what local government delivers in other countries provides some insights into what the consultation will conclude. Whilst there is a usual suite of services delivered by local government in other countries, including road maintenance, planning or school building, in some countries local government also controls substantial additional services.
In Sweden, local government accounts for 47 per cent of total government expenditures, considerably higher than in the UK where 25 per cent of expenditures are local. Healthcare is largely decentralised and nearly all of health expenditure is covered by local government, which is divided in two tiers. Counties – the higher tier – usually manage primary care and hospitals, while municipalities – the lower tier – are in charge of social care. Central government expenditure in health is quite limited and is mostly directed towards defining policy guidelines and supporting places that need additional support through grants.
In New York City the Mayor has control of a $78 billion budget, by far the largest city budget in the country and also larger than most US states. This huge budget means the city delivers a vast number of services, including housing, police and fire protection. Education, in particular, is one of the largest city government portfolios, with the city being responsible for providing education to more than one million students.
Local government is more limited in France, with only 20 per cent of public expenditures spent locally (the figure is 25 per cent in the UK). But large cities and Metropoles (which roughly compare to combined authorities in the UK) are in charge of transport provision, which is funded through a specific business tax. For example in Greater Lyon, this tax accounts for the largest share of transport revenues – 40 per cent of the total – whereas national grants only account for 2 per cent. As a result Greater Lyon is largely reliant on its own resources when it comes to transport. This local taxation system, operating since the 1970s in large urban areas, has enabled the city to raise revenues to develop transport infrastructure, such as the underground system.
So with those examples in mind, what should central government in the UK consider devolving to local government? As we highlighted in our recent report Beyond Business Rates, the emphasis should be on giving local authorities funding and control over issues where local action can make a difference. For instance, in high demand cities such as London, Oxford and Bristol where housing is very expensive, the housing benefit bill is increasing rapidly. Devolving responsibility for the payment and operation of housing benefit to these cities would create a stronger incentive to both run a more efficient system and to build more homes to meet demand.
Ultimately, the local government funding system that we put in place needs to better align taxes and expenditure with control over delivery in order to create ‘virtuous cycles’ and incentivise behaviour that can both improve public services, reduce inefficient spending, increase tax revenues and boost economic growth.
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