Local Government Resource
Review – Incentivising Growth
Tony Travers
LSE
The London economy
 London’s Gross Value Added: £274 billion
(2010)
[Workplace-based]
 Has risen from 56% above UK average to 71%
above between 1997 and 2010
 GSE has also pulled away from UK
 London’s population: 7.83m
 London’s share of UK
 GVA: 21.5%
 Population 12.6%
 London fell back in 2010, but appears to be
growing relatively faster than UK in 2011
and 2012
London’s public expenditure
 London’s ‘Identifiable’ public
expenditure: £79 billion (2009-10)
 Plus ‘non-identifiable’: £89 billion
 PE as % of GVA = c33%
 UK = 50%
 Public expenditure in London, GSE
represents a significantly smaller share
of GVA/GDP than in other regions
 NE = 66%
 Northern Ireland = 75%
Public expenditure by spending
authority
London total PE = £89bn
made up of:
Central departments
c£61bn
Of which
- NHS
- Social Security
Greater London Authority
Boroughs
£17bn
£27bn
c£10bn
c£28bn
GLA and Borough expenditure
 Revenue (net)
 Of which:


GLA
Boroughs
 Capital
 Of which:


GLA
Boroughs
£25bn
£6.2bn
£18.8bn
c£4bn
c£2bn
c£2bn
NB: ‘Revenue’ includes education; ‘Capital’
excludes housing
GLA and Borough Income
 Council tax
 Fees & charges*
 (NNDR Yield
£4.3bn
c£2.5bn
£5.3bn)
Thus, council tax finances c17% of net revenue
expenditure
Council tax + NDR equivalent to 38% of net
revenue income (inc education)
Council tax and Non-domestic rates in
relation to all public expenditure in
London – 2009-10
 London total PE = £89bn
 London total taxation = £97-£100bn
 Net tax ‘export’ of c£10bn
 Council tax (£4.3bn) would fund
4.8% of all public expenditure
 CT + NDR (£9.6bn) would fund
10.8% of all public expenditure
The existing local government
funding system
 Local government revenue expenditure
funded by:
 Council tax
 Grants [Partly funded by NNDR]
 (Fees and charges)
 Non-domestic rate collected by councils and
pooled
 Allocated as part of central support to LG
 Grant paid, in part, to achieve high levels of
equalisation
 Expenditure needs
 Council tax capacity
Equalisation
 Over many years, England has
evolved sophisticated equalisation
grants
 Near ‘full’ equalisation for differences
in assessed needs and taxable
capacity (‘resources’)
 As a consequence, any increase in the
local tax base is ‘equalised away’
 Thus, no incentive to increase tax base
 Labour government’s ‘LABGI’ experiment
Local Government Resource Review
 ‘Non-domestic rate retention’ is the
primary objective
 Councils will keep (a large proportion
of) their NDR yield
 ‘Tariffs’ and ‘Top ups’ to achieve ‘no change’
in Year 1 (2013-14)
 Part of overall NDR yield kept by
central government to ensure LG
expenditure fits Chancellor’s spending
plans
Incentives
 Councils will keep growth in their NDR yield, as tax
base grows


Though, any underlying relative growth at the point of
revaluation will not be retained

Bad for authorities such as Westminster, the City and
Camden with rising RVs within existing properties
Good for authorities such as Tower Hamlets, Newham and
Hackney with opportunities to develop new sites
 Limits on growth for authorities with relatively large
NDR bases



% growth in NDR yield from year to year will determine
maximum growth in income/expenditure
Thus, Westminster, City, Camden pay a ‘levy’ on their
growth
Also protection for any authorities with low growth or
falling RVs
The current system
Council
tax
(NNDR)
Grant
Spending
Authority A
60
(1000)
40
100
Authority B
60
(50)
140
200
Total
spending
300
The new (2013-14) system – (a) with
no change from current system
Council
tax
NDR
Tariff/
Top up
Spending
Authority A
60
1000
-960
100
Authority B
60
50
+90
200
Total
spending
300
The new (2013-14) system – (b)
each council’s NDR yield rises by 1%
Council
tax
NDR
Tariff/
Top up
Levy
Spending
Authority A
60
1010
-960
-9
101
Authority B
60
50.5
+90
0
200.5
Total
spending
301.5
Will such incentives work?
 Hard to be sure…no evidence from UK in
modern history, or when there was such
‘tax competition’ in the past
 NNDR in London is £5.3bn within an
economy of £274bn – less than two per
cent of the economy
 Though the marginal impact on constrained
council budgets will be sufficient to be felt
 Pressures to replace falling (previously central
grant) income may be greater than desire to
deliver faster economic growth?
Councils will be able to operate the system
in ways that maximise the NDR yield
 ‘Pooling’ arrangements of two or
more councils could work together to
increase their yield
 ‘Bi-lateral’ agreements could work
even better….
The new (2013-14) system – (b)
each council’s NDR yield rises by 1%
Council
tax
NDR
Tariff/
Top up
Levy
Spending
Authority A
60
1010
-960
-9
101
Authority B
60
50.5
+90
0
200.5
Total
spending
301.5
The new (2013-14) system – (c) each
council’s NDR yield rises by 1%, but formal
pooling arrangement
Council
tax
NDR
Tariff/
Top up
Levy
Authority A
60
1010
-960
0
Authority B
60
50.5
+90
0
Total [A+B]
120
1060.5
-870
-7.5
Total
spending
Spending
303
The new (2013-14) system – (d) overall
NDR yield rises by 1%, but bi-lateral
agreement with all of rise in Authority B
Council
tax
NDR
Tariff/
Top up
Levy
Spending
Authority A
60
1000
-960
0
101
Authority B
60
60.5
+90
0
210.5
Total
spending
310.5
Complex negotiations and agreements
needed to agree pooling or bi-lateral
agreements
 Game Theory expertise needed to convince
councillors (and developers) that pooling
and bi-lateral agreements designed to
maximise NDR yield growth could increase
London (or a part of London) yield
 Developers can be offered NDR reductions
and, possibly, other incentives to move
their development
 Easier across a boundary than an ‘area’
agreement?
Other issues
 New Homes Bonus

Councils now keep the yield of council tax base growth
 Planning reforms



Neighbourhood Forums and planning
Adds complexity to planning decisions, especially where
there are major city centre developments
Possibility of non-domestic to domestic use changes
without planning permission
 GLA response


Borough:GLA share of NDR growth not yet determined
GLA has ambitious plans for NDR retention, and sets
London Plan
 Tax Increment Financing
Conclusions
 LGRR and NDR retention have been put
forward by the government as key
elements in their growth strategy
 Impossible to know (yet) how the new local
tax incentives will affect boroughs’
behaviour
 Likelihood that boroughs with significant
growth potential, but where 100% of
growth is retained will be most affected
 Newham, Hackney, Southwark, Lambeth?
 A modest, but, interesting reform…
 But not a radical reform of local government finance
Local Government Resource
Review – Incentivising Growth
Tony Travers
LSE