Neva Sadikoglu-Novaky and Jonathan Werran: Brexit gives the chance to have full fiscal devolution

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Neva Sadikoglu-Novaky is visiting fellow at Localis and Jonathan Werran is the chief executive of Localis.

Published: May 7, 2019 on www.conservativehome.com


There are two strong arguments for why Brexit is an opportunity to pursue fiscal devolution.

Firstly, regardless of how everyone voted in the referendum, the post-Brexit reality will be one in which we will have to decide if we continue down the path of localities being kept dependent on leftist redistribution policies or if we pursue the Conservative philosophy of empowering them fiscally.

Secondly, it is worth noting that it would be a betrayal of those who voted to leave the EU, were controls and responsibilities vested in Brussels to be simply transferred wholesale to the remote Whitehall empire. A centralist command and control system that stifles the promise of fiscal and economic devolution is by no means what voters understood by taking back control.

So radical and purposeful localism should be the default operating system for the post-Brexit political economy. From a perspective of national renewal, it really comes down to a matter of choice how we passport regulations, controls and economic development monies from the centre to our localities.

Our local government is currently hugely dependent on fiscal redistribution – local businesses and individuals pay taxes that are collected nationally with a small percentage then being sent off to Brussels. This money is then redistributed back from Brussels and Whitehall to our localities with much bureaucracy along the way. Our government is bringing in the Shared Prosperity Fund to replace the EU’s structural and investment funds that targeted regional development but the redistributed regional handouts from this new Fund are not to be sniffed at. Given the UK’s status as a net contributor to EU coffers, it would be fitting, as Kwasi Kwarteng has argued, for this to be a baseline from which we could offer a generous Brexit dividend. It would be fitting, but not sufficient.

We need to rethink not just how we devolve and decide on matters that support place prosperity, but also how we finance local projects. This means liberating our areas from the dead hand of a decision-denying Treasury and the fiscal straitjacket of the Ministry for Housing, Communities and Local Government.

We don’t need to rehearse the international statistics that the UK among is the most centralised among all developed nations. Ministers are keen to point out that local government now accounts for more than a quarter of total public spending, but this is still lower than the OECD average. Most importantly, local government raises less than five per cent of total tax revenue – mainly from those tried and trusted regular sources, council tax and business rates.

Council Tax remains ossified to property bands set by Chris Patten. While we are partying like it’s 1992, the leader of Westminster City Council, Cllr Nickie Aiken can only lament a top charge of £1,500 per annum on Hyde Park properties worth a cool £100 million. Meanwhile, in Leave-voting stronghold Gateshead in the north east, where the median salary of a resident is a full £21,272 less than in Westminster, Council Tax is more than double that in the Conservative flagship borough for a top-band property.

Business rate retention is a positive step towards decentralisation. However, it is far from enough to meet the twin pressures of rising demand and fewer resources. As part of a suite of local tax-raising powers, business rates could be a key fiscal policy lever for councils, but in isolation and with councils otherwise constrained, the policy is of little overall effect.

We need to be bolder in our vision for local government finance and strive for tax competition. Why shouldn’t our cities in the north, for example, who are finding it hard to attract businesses and subject to a brain drain, not be able to levy taxes for businesses and households so as to give themselves a competitive edge? If we did allow for such tax competition, we might finally start seeing more balanced growth. From among the 30 OECD countries with comparable data, we have the sixth highest regional economic disparities and between 2000 and 2016, we experienced the fourth largest increase in disparities.

Through fiscal competition, we could truly have a Northern Powerhouse and give our Northern cities a fairer chance at competing with the likes of London and the south east. The appeal of Ireland – an EU English speaking country offering low taxes – may even be curbed through English local tax incentives that would stand at stark contrast to the EU’s efforts to harmonise taxation policy among the EU member countries.

Naturally, a baseline and an upper limit for such taxes would need to be agreed. In Germany, the base rates of taxes which the regional government can levy are agreed between the regional and federal government. German regions have taxes that they levy and keep like vehicle tax, lottery tax, inheritance tax, real estate purchase tax and beer tax. There are others that they share with their federal government like the personal income tax, corporate income tax and value added tax and part of this shared tax is then redistributed to support the poorer regions. We could pursue a similar model that would allow for some level of continued redistribution, while giving the space for tax competition to work its charm.

Socialists will warn against tax competition saying it could lead to a race to the bottom, but Conservatives should look much more warmly to a system that could help achieve a race towards lower taxation.