This week’s report from the Office for Budget Responsibility on fiscal sustainability made for sombre reading for those concerned with public spending choices for local services and economic development. The longer-term options seemingly involve the inevitable pain of cuts in public spending matched by increased taxes over the course of decades.
But we feel there is a way out of this fiscal quicksand, one in which the unleashed potential of our localities galvanises and leads the way to national renewal. Our case is this. Granting councils additional financial freedoms - such as the ability to set their own taxes or devolving national taxation from central government – would empower communities to help kickstart a national COVID-19 economic recovery.
It is against this backdrop that a new study by Localis, commissioned and published by the Local Government Association(LGA) today, finds that - across the western world - local government has been able to react with greater power and autonomy than in the UK.
The UK economy remains one of the most centralised in the developed world. Localis’s report ‘Fiscal Devolution, adopting an international approach’ finds that local authorities in Germany, Switzerland and Holland can access a diverse range of revenue sources and are able to adjust and introduce local levies in consultation with their residents and businesses.
The Dutch approach to fiscal autonomy is like the UK, with fiscal devolution limited. Municipalities have the power to set their own taxes, if agreed with central government, for example a real estate tax, sewer tax and pollution levy. A tourist tax is in place in Amsterdam.
Municipalities in Germany have the power to set rates for the local business tax – the Gewerbesteuer. This tax has forged a closer connection between business and place, with firms knowing they are funding local growth and regeneration for their employees and the community. A city tax was introduced in Berlin in 2014 and income tax is distributed across the three levels of government.
In Switzerland, the levies of taxes are determined through frequent referenda. Fiscal sovereignty at this level also means that a positive case for raising the tax level can be made when people see the value and standards of the public services they receive in return. As local referenda are so frequently conducted with high levels of engagement, their acceptance of the system, including taxes, is greater.
The examples from continental Europe neatly disprove the bogey-man argument that fiscal devolution should always lead to a ‘race to the bottom’ or an iniquitous postcode lottery. Far from it. The evidence suggests instead that without greater decentralisation of local government finance, the levelling up agenda will fail to provide either the targeted economic development support to rebalance regional economies or the social infrastructure to cement place prosperity.
The Government has committed to releasing a wave of investment across and country to bounce back from the pandemic. For their part, the LGA wants to work with government on how its forthcoming devolution and recovery White Paper can explore options for greater fiscal freedom for local communities in support of this aim.
This should include the power to raise more money locally, for example through a tourist or e-commerce levy, and have greater control over how national taxation is spent, such as income tax or a share of fuel duty to invest in roads.
How can we get there? We suggest a joint HM Treasury/Ministry of Housing, Communities and Local Government (MHCLG) led consultation – to be undertaken by the LGA and the Chartered Institute of Public Finance and Accountancy - should identify the most popular options for local levies under fiscal freedom.
The suggested Commonwealth Games tourism levy in Birmingham should be extended as pilot schemes in the MC9 group of combined authorities, with the LGA and MHCLG working with them to determine any redistribution within the combined authority areas.
Finally, Government should also work with councils to develop a German-style infrastructure and connectivity indicator for distributing monies from the Shared Prosperity Fund to ensure our non-metropolitan areas can also level-up.
Fiscal freedom must become a crucial part of ensuring every part of the country is to bounce back from the economic shock we face. As we look ahead towards the long process of economic and social recovery, this gap in local power and autonomy across England risks seeing our communities fall ever further behind.
Councils want to work with the Government on how local communities can have the freedoms and flexibilities to play a lead role in the nation’s economic recovery and better connect local leaders to decisions made about how money is spent and raised for the benefit of their communities.
Local government’s call should be is simply this. Give us the fiscal tools and we will help national government begin and finish the recovery job - and kickstart the jobs recovery.
Jonathan Werran is chief executive, Localis