The analysis above sets out the geography of tax and spend across Britain. It raises seven main implications:
- The majority of taxes are raised in cities, but spending is more evenly spread. Cities account for 9 per cent of land in Britain, but generate 64 per cent of all economy taxes. They also generate higher amounts of economy taxes per worker than non-city areas. This means that policies to pursue both growth of the economy and an increase in the overall tax take will require an urban focus.
- Large cities are punching well below their weight, which reduces the total amount of tax raised in the UK. Although our large cities make large contributions to the overall amount of tax generated in the UK, the majority of them punch below their weight. The economy tax take per worker in the city-regions of all large cities is below the national average. If the city-regions of Manchester, Birmingham and Leeds were to increase their average economy tax take per worker to just the national average they would generate an extra £9.4 billion per year – equivalent to over three quarters of the Government’s proposed cuts to the welfare budget.
- The Greater South East makes a large contribution to the total amount of tax generated nationally. At the heart of this are a number of smaller cities, such as Reading, Cambridge and Milton Keynes, which punch well above their weight. Policymakers should continue to make the most of these places in their continued effort to bring down the deficit.
- City centres of core urban authorities tend to be home to the most productive jobs. Local authorities play very different roles within their city-region economy. The core urban authorities are home to a large share of jobs, particularly higher paid jobs. This is seen in the greater role that labour taxes and business rates play. The other local authorities are home to a large share of the workers that generate these taxes, and this is reflected in the greater contribution that council tax makes to their overall tax take.
- Policies aimed at encouraging economic growth and managing future public expenditure will need to recognise these relationships – the core authority is likely to host the majority of growth in high-paid jobs in the future, but it will be reliant on its neighbours for housing and the provision of public services to the workers who fill these posts. Therefore, combined authorities should span the geography over which people live and work.
- Providing an incentive for growth at the local level creates benefits for all. An argument often used against fiscal devolution is that allowing some places to keep their increased tax take penalises others who do not benefit from the redistribution of the increased revenue in those areas with fiscal devolution. But economic growth increases tax take across all types of economy taxes.10 While fiscal devolution would allow areas to share in some of the proceeds from growth, the majority of these proceeds will continue to be sent back to the Exchequer. This means that increasing the size of the pie generates income for everywhere, even if a particular area is allowed to keep a bigger slice.
- The case for the devolution of property taxes is most developed, but they account for a small share of the overall tax base. Unlike workers, land and property are tied to a place, and so the devolution of such taxes to combined authorities does not distort the system in the same way as income tax would.11 But the analysis above shows that property and land taxes play a much smaller role than labour taxes, accounting for around 11 per cent of total tax take at the national level.
The analysis above also raises five main issues that require further work:
- Do the current suite of property taxes provide the right incentives for growth? Business rates encourage the creation of buildings with large floorplates, which incentivises the building of low value distribution sheds over the building or refurbishing of city centre office space in some areas. In discussions around the devolution of specific taxes, consideration needs to be given to the incentives that these taxes create. The structure of land and property taxes may also want to be reconsidered, with a shift towards taxing the value of land rather than buildings.
- Should local areas get to keep some of the non-property taxes that they raise? Taxes on labour are by far the largest generator of tax income in local areas. While the devolution of the setting of income taxes is unlikely to make much sense, there is a question as to whether local areas should be allowed to keep part of any increase in labour taxes that they could reinvest in their local areas, which in turn would incentivise cities to increase the total amount of taxes generated for the Exchequer. If Greater Manchester was to keep 1 per cent of its total income tax take (£520 million) for three years this would more than pay for the recent £400 million extension of the city’s Metrolink system to its airport.
- Does the creation of place-based budgets through devolution offer a way to reduce public spending? Spending on public services is the largest part of spending in local areas. Most public services are delivered in silos, creating overlap and a lack of co-ordination. Devolving budgets to places, and allowing them to set how this money is spent – on prevention as well as outcomes – may help public services become more efficient. There is little evidence available on how much money this could save. But a modest 2 per cent efficiency saving12 across all of the combined authorities and LEPs presented above would deliver a £4.3 billion saving per year.13
- What geographies should powers be devolved to? Local politics have meant that the formation of combined authorities has been far from straight forward. Thinking about where tax is raised and money spent should be used to help inform how local authorities come together in the future.
- To what extent should tax and spend at the local level be directly linked to one another? Local authorities are the only public bodies that must balance the books locally. The lack of a link between the rest of tax raised and money spent in a locality raises questions as to whether a greater link should be provided between the two and how best this could be achieved.