Level 21

There is an argument to be made for regional levelling-up, even in the pages of On London. Poverty and ill-health may be spread throughout the country, but the productivity gap between London and other UK regions and cities is wide and has been growing. In 2018, London’s workers generated an average of £46 per hour worked compared to an average for £32 for England’s other city regions. And that gap is wider than in most other European countries.

This productivity gap results in significant fiscal transfers from London to the rest of the UK – nearly £4,000 per head each year. Building higher productivity in other UK regions should, in the long-term, help rebalance tax and spending across the country, as well as improving the lives of citizens. As the Prime Minister said in his levelling-up speech this morning, making every UK region as productive as London would make a huge difference.

And there are ways of stimulating productivity outside the capital. One is to invest more in research and development (R&D) in universities outside the golden triangle of London, Oxford and Cambridge, as was recently recommended in a report for NESTA. Another would be to accelerate development of Northern Powerhouse Rail, connecting the major cities of northern England and complementing the north-south connections of HS2.

But there are at least two problems with this approach. One is cost. However much the PM asserts that “this is not a zero-sum” game, commitments cost money. Northern Powerhouse Rail would cost around £40 billion and levelling-up R&D spending would require about £4 billion extra each year. Both projects could generate significant returns in terms of productivity and tax revenues, but over the less electorally-helpful longer term.

That connects to the second problem, which is that both of these projects would directly benefit larger cities, helping to create and connect hubs of economic activity and growth in places such as Manchester, Leeds, Newcastle and Birmingham, which already have strong research universities. But few of these places vote Conservative in large numbers (the West Midlands is an exception, which may explain the choice of Coventry as the PM’s speech venue), nor is building their HE-led knowledge economy guaranteed to secure more votes.

The “red wall” votes that the PM is keen to shore up are from smaller towns, outlying areas, places that feel more left behind. It is true that if investment in cities was successful indirect benefits would spread much wider. Just as towns like Brighton and Basingstoke benefit from their proximity to London, smaller towns and cities clustered around the norther cities would gain.

There would be jobs directly created to support new city enterprises, commuters and hybrid workers spending more money locally, and new opportunities opened up so that, as the PM said, people wouldn’t have to move away from where they grew up (though speaking as someone who grew up in villages and small towns, I can tell the PM that getting away was my priority, not a terrible burden).

But I’m not sure the government is ready to make the case that urban investment helps everyone. The urban-dominated ‘Northern Powerhouse’ didn’t get a mention, nor did investment in R&D, nor did major rail infrastructure. Instead we had a breathless litany of initiatives – Football pitches! New roads! Cycle Lanes! Hydrogen! Will Jennings and colleagues recently described this as “governing as political spectacle”, committing to projects that make a quick, visible and maybe superficial difference, rather than a longer-lasting and systemic one. We’re back to Tony Blair calling, in a leaked memo, for “eye-catching initiatives with which I can be personally associated.”

It was positive that the speech turned to devolution and local leadership towards the end, though galling to hear the PM complain about how centralised the UK is, given how Sadiq Khan has been treated in recent months. It sounds like the forever-delayed Devolution White Paper may yet inform the Levelling Up White Paper expected in the autumn – though talk was of county-level devolution deals where local leadership aligned with government objectives, rather than a new settlement between the centre and localities.

Levelling-up itself remains elusive. There were nods to closing the productivity gap in the PM’s speech, but too much was given over to a generic but worthy list of ways to make places and people’s lives better across the country. These are important, but while they may mitigate regional imbalances, they don’t really address them. We’ll have to wait for the White Paper to see how the PM’s levelling up plans balance the serious and strategic, with the superficial and electoral.

First published by OnLondon, 15 July 2021.

‘Levelling-up fund’ is thin and cynical

Five days after the 2021 Budget, are we any clearer what “levelling up” means?

One thing is clear. It doesn’t mean investing to tackle London’s problems, even after the damage done to the capital by the pandemic. Only two of London’s boroughs (Newham and Barking & Dagenham) are included in the priority tier of local authorities eligible for the new £4.8 billion Levelling Up Fund. The three prioritising ‘place characteristics’ set out in the Fund’s Prospectus could have been designed to exclude the capital:

  • Need for economic recovery and growth;
  • Need for improved transport connectivity; and
  • Need for regeneration.

It’s not yet clear how these are quantified and compared (or precisely what “regeneration” means), but the first two work well enough to rule out London, which is distinguished by a persistent mixture of dynamism and deprivation alongside an enviable transport network. Boroughs like Westminster and Tower Hamlets have intense poverty among their residents, but also have three times the economic output per head of the UK as a whole, and twice that of other big cities like Manchester, Belfast and Edinburgh.

So this is not a fund for London, or for investing in the needs of people rather than place. And there is a case to be made for that: even London’s most fervent advocates would recognise that there are places in the UK that urgently need investment in connectivity and economic activity. You could even see a precursor in Michael Heseltine’s City Challenge programme of the early 1990s: selecting and investing heavily in a few urban centres, following a bidding process, which would in turn power up new enterprise and opportunity around them.

But that doesn’t seem to be how this Fund will be applied. The prospectus invites local authorities to submit one bid each for up to £20 million (£50 million in exceptional cases for big transport projects). Twenty million is a substantial sum, but hardly transformative – and significantly less than was allocated to City Challenge bidders 30 years ago, when 20 cities received £37.5 million each (around £72 million in today’s money). Assuming £2 billion is handed out in the first round, this would enable 100 bids to be funded. It looks as if spreading the jam wide and thin is the priority.

This may also explain the variety of places in the priority tier. It includes most major city centres (apart from London and also struggling smaller cities like Sheffield, Plymouth and Portsmouth). But it also comprises “Red Wall” marginals and prosperous suburbs and rural areas such as Richmondshire (I suspect to the Chancellor’s embarrassment), Lewes and Trafford.

Poverty is not confined to the inner cities, but not every smaller town and rural area is struggling either. Some lack economic powerhouses and transport hubs, but nevertheless have prosperous populations of commuters and retired people. You can see the government’s problem here: it is hard to distinguish struggling from successful smaller towns without giving a higher weighting to deprivation measures, and  doing that would have pushed the focus back towards London and the other big cities.

The language of the prospectus seems to fudge things further. It makes a very tentative and non-economic case for infrastructure investment:

“Investing in infrastructure has the potential to improve lives by giving people pride in their local communities; bringing more places across the UK closer to opportunity; and demonstrating that government can visibly deliver against the diverse needs of all places and all geographies.”

Elsewhere, the prospectus talks about funding projects that “bring pride to a local area”, about “infrastructure that has a visible impact on people and their communities”. It starts to sound as if the purpose of the fund is performative. It aims to give the appearance of activity and impact in the next three years, redeeming the electoral promise made to “Red Wall’ constituencies, rather than seeking any lasting change, let alone the type of economic rebalancing that has evaded ministers for decades.

Either I’m being deeply cynical or the Levelling Up Fund is. There’s no sense of strategy, of how “levelling up” might be achieved, or even of what it is. A bold government could focus a critical mass of investment on the places and projects that could maximise prosperity and opportunity, or it could hand funding over to local politicians to allocate in line with local priorities. Instead, we have the continuation of centralised munificence, infrastructure investment by supplication.

The Mayor of London and borough leaders have expressed anger at how the Levelling Up Fund has ignored London’s needs. If I was leader of a northern city, I might be angrier still.

[First published in OnLondon, 7 March 2021]

Property taxes need reform, but changes must be fair to Londoners

Britain’s domestic property taxes are in a terrible state. Council Tax bands are still based on house valuations made in 1991, and the 30 years since then have seen huge variations in house price growth between different places and properties. Stamp Duty is a tax raised on people when they move house, which has the effect of gluing up the property market and of encouraging people to stay for longer in homes that are too big or too small for them. What can be done to change this unsatisfactory situation? And what might the implications be for London of any major reforms that might be tried?

One idea that has been gaining currency in the run-up to the budget is flat rate property taxes, with home-owners paying a set proportion of their property’s value each year. Research by WPI Economics suggests that a tax of 0.48% of values could generate enough revenue to replace both Stamp Duty and Council Tax. And the Fairer Share campaign suggests that such a tax would leave 76% of UK households better off.

Property value taxes have a lot to recommend them (as do more ambitious proposals, such as land value taxes, and more modest reforms, such as new Council Tax bands). They are a lot more progressive than other taxes: Council Tax for the most expensive properties is only three times the rate it is for the cheapest properties, whereas property prices can vary by a factor of more than 100.

There would be issues with implementation: for example, transitional measures would be needed to avoid “cash-poor” owners of larger houses being hit by such a dramatic hike in taxes that they might be forced to sell in a hurry. But there’s a bigger problem for London. Levying property value taxes nationally at a flat rate would represent a massive shift of the tax burden onto London from the rest of the UK. The Fairer Share website suggests that communities outside London would pay £6.5 billion less in property taxes. As their proposal is intended to be fiscally neutral overall, that means London would pay £6.5 billion more.

Such a shift may have populist appeal at a time of “levelling up” (though maybe not for the many Conservative MPs in London and the south east whose constituents would suffer), but it ignores the fact that Londoners are as much victims as beneficiaries of high house prices. Incomes in London are higher than in the rest of the country, but they are much closer to the average once housing costs are taken into account. And low-paid Londoners, who earn little more than counterparts elsewhere, are already particularly squeezed: London has the highest rates of child poverty in England.

Adding £100 a month to Londoners’ tax bills (in line with the “capped” Fairer Share proposals) would drag incomes in the capital below the national average, even before other costs of living were taken into account. On top of that, Londoners will be struggling in the wake of a pandemic that has hit the capital hardest: in December 2020 London had seen the steepest rise in benefit claims of all the UK’s nations and regions, and had the second highest rate of claimants (after the West Midlands).

There is still a case for tax reform, and the budget would be a good opportunity to announce a careful review. But, as the London Finance Commission (set up by Boris Johnson and reconvened by Sadiq Khan) argued, this should take place on a regional basis, not through nationalising local taxes. The overall fiscal flows between different parts of the country could be preserved (perhaps with a review every few years to take account of how different regions have prospered), while different regions could set property taxes that reflected the specifics of their housing market – with different Council Tax tiers, flat rate taxes, or exemptions and discounts applied to reflect local economic circumstances.

And this is not to argue against London paying a fair share to the rest of the UK. London’s taxpayers made a net contribution (taxes minus public spending) of nearly £40 billion in 2019. And that’s fair: London has more productive businesses, high-spending tourists and rich residents – or at least it did in pre-pandemic times. But squeezing the capital further, as the UK struggles to recover, would look extractive, blinkered and self-defeating rather than fair. 

[First published in OnLondon, 28 February 2021]