THE BLOG

Raising the Capital: Report of the London Finance Commission

30/05/2013 15:01 BST | Updated 29/07/2013 10:12 BST

We recently saw the publication of the London Finance Commission report. Set up by Boris Johnson last year, this independent review tackles a range of complicated issues facing the way in which infrastructure and public services are funded in the capital. Compared to the current debate raging about Europe or the latest crisis to hit the NHS, this may all sound rather mundane. Local government finance is an arcane subject at the best of times. But if implemented, the commission's blueprint could change forever how we are taxed and how resources raised from voters and businesses are spent.

The report's message is clear: for London to continue to fuel its own growth and succeed internationally, it needs far greater control over its own destiny. The Commission's chair, Professor Tony Travers of the LSE, notes that only a fraction of the taxes raised in London - just seven percent - is determined by the representatives elected to spend them. At over fifty percent, New York's figure is more than seven times higher.

Dating back to Tudor times, Britain has one of the most centralized tax and spending set-ups for any developed democracy. As a proportion of GDP the report notes that Canada's ratio of local and regional spend is nine times higher than that for the UK. In France - hardly a paragon of devolved government - the ratio is nearly three times greater. This nationalisation of fiscal power is a mirror of political potency. On everything from new tube lines, to council house building, Whitehall rules the London roost.

The report calls for the Mayor, councils and London business to develop an investment plan for the city covering transport, housing and other vital infrastructure. This would be fuelled in part with funds from stamp duty on housing sales, a tourism tax and in the future, road pricing. Control of council taxes and business rates to the capital would be handed back to town halls. All future tax revenues would be retained. There would be a corresponding pound for pound reduction in central government grant.

The Commission envisages that fiscal devolution would create a virtuous circle of incentives to boost economic growth and increase accountability. Tax competition between authorities would help to ensure efficiency. London's tax revenues would rise and fall with the fortunes of the city. These factors should help to ensure spending decisions are taken wisely.

If implemented, the recommendations of the Commission would mark a dramatic shift in the balance of power between Whitehall and city halls. With the population in London heading for ten million by 2030 (an increase of around two thousand a week), the case for change in how the city secures its future infrastructure investment needs is more urgent and compelling than at any time since the war.

Inevitably there will be risks and challenges. Important questions over the impact on the rest of the country remain. Formal checks and balances to protect businesses and voters will be needed. But none of these problems are insurmountable. If the economic crisis has taught us anything, it is that policy makers should maximize opportunities for the UK economy and employment. With a globally competitive and dynamic economy, London is the engine-room of UK growth. The Commission clearly believes that its reforms would make London a more productive, competitive and accountable city. After decades of micro-management, its leaders are asking to take control of the city's destiny. Ministers should heed that call.