Ministers have committed to ensuring City Hall retains some locally-generated income tax but Centre for Cities wants the government to go further, reports Kumail Jaffer, Local Democracy Reporter
Central government grants for mayoral authorities like London’s should be replaced by a mix of income and corporation tax sharing, according to a think-tank.
Seven of the 14 regional mayors in England, including Sir Sadiq Khan, currently receive integrated settlements, defined as a single grant that supports funding across economic policy areas such as transport, skills, employment support, and housing.
This amounts to almost £5billion in grants per year, including £2.16bn for the Greater London Authority (GLA) – equivalent to £237 per Londoner annually.
Ministers have already committed to ensuring mayoral strategic authorities (MSAs) retain a share of locally-generated income tax receipts as well as promising greater retention of business rates.
The Centre for Cities thinktank has now called on the government to go further, recommending that ministers give Khan 2.3% of income tax raised in the city and 0.8% of corporation tax to match the current grant, while allowing City Hall “much more control” over the budget.
The report states that “income tax should provide the bulk” of funding for mayoral authorities, referring to it as the “workhorse of the local finance system”.
They believe this would also ensure fairness across different mayoral authorities in terms of how much money each receives because any cash raised over a maximum amount would be subject to a process called equalisation. This is where excess money over that maximum is shared out with other mayoral authorities to ensure fairness.
They added: “In contrast, corporation tax should be the ‘carrot’ of the local finance system – it should represent a smaller share of local funding but it should be exempt from equalisation, to provide the strongest possible growth incentive to MSAs.”
This would mean there is no ceiling on how much actual money can be retained from corporation tax, albeit capped at 0.8%.
Oscar Selby, an analyst at Centre for Cities, told the Local Democracy Reporting Service (LDRS) that the changes would allow the mayor to “have much more control” over City Hall’s finances.
“Any increase in the local tax base – thanks to local economic development and pro-growth policy measures – will lead to a direct increase in resources – meaning more funding for public transport, housing and local services that are currently partly funded by a flat cash grant from Whitehall,” he added.
“And if the capital wants to borrow money [from that pot] to accelerate new development projects, it has a direct source of revenue to act as a guarantee on any lending. We won’t see the mayor going cap in hand to the chancellor for new sources of revenue.”
Bassam Mahfouz, Labour’s oversight spokesperson on the London Assembly, said: “London is the engine of the UK economy. But too often we find ourselves [going] cap in hand to Whitehall for access to the funds that we generate.
“Whilst more power being devolved to a local level is important, without the ability to raise the funds to match, it’s meaningless.
“Greater fiscal devolution must be a central part of any new devolution deal. As discussions continue ahead of the autumn budget, I support calls for London to have more revenue-raising powers of its own and the ability to retain more of the taxes raised here.”
He agreed it would give the GLA “much-needed control over how we invest in the change people are calling for on housing, transport and public services, whilst helping to drive good growth across every postcode in our great city”.
As tax receipts grow, the authors of the report also recommend a ‘Swiss style’ system of distributing money around the various mayoral authorities, whereby a levy is placed on any income tax revenue above a defined threshold. They say redistributing this cash annually would ensure poorer areas aren’t left behind.
The authors also propose business rates reform to provide an incentive for mayors to stimulate economic growth.
In London, a bespoke arrangement is currently in place that reduces central government’s share of business rates to 33%, gives the GLA 37%, and the London boroughs 30%. But the report suggests that ministers should devolve their share to all MSAs, as is currently done in the West Midlands and Greater Manchester.
“At present, the highly centralised local finance system is designed around the principle of equalising funding between places according to the gap between local need and their local tax base,” the report says.
“This penalises places that successfully deliver good growth in their postcodes. A place becoming more prosperous and growing its tax base sees reductions in grants from central government.
“By following these recommendations, it is possible to design a system of fiscal devolution that provides a strong growth incentive in every MSA and guarantees them a fair level of funding both in the short and longer term.”
The proposals would see an estimated £21.5billion devolved to mayors over four years to 2030, assuming historic growth rates.
Khan has long called for the capital to retain more of the income tax revenue it raises. In 2019, a City Hall report revealed that London retains “barely 6% of all the tax paid by Londoners and businesses, compared to 50% in New York and 70% in Tokyo”.
“One of the best ways of maintaining shared prosperity across the country is to give city regions more control over tax revenues,” officials said.
At the moment, London contributes about £4 in every £10 that the government raises, while 5% of all tax revenue raised in England stays with mayors and local authorities and 95% goes directly to Whitehall.
MSAs are unlikely to get tax-raising powers under the current government, despite the prime minister’s push for extensive devolution. However, plans to roll out an overnight visitor levy could give mayors the ability to raise millions by early 2028.
Under the plans, local leaders will be able to bring in a levy as a percentage of the cost of hotels, bed and breakfasts and other types of accommodation rather than a flat fee. In London, this is not expected to exceed 5%.
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