Crossed wires on paying for infrastructure

In giving the green light to the next stage of planning for Crossrail 2 in the 2016 Spring budget, the Chancellor has taken the right decision for London and the UK. Transport for a WorldCity, the National Infrastructure Commission (NIC) report published a few days before the budget, powerfully made the case that Crossrail 2 is vital for sustaining economic vitality. The NIC estimates that the capital could pay for more than half of the £33 billion cost. But the detail of how London pays its share goes to the heart of our antiquated and hopelessly dysfunctional local government finance regime.
Ever since the Jubilee Line extension was built in the late 1990s, boosting land values so much that these could have paid for the project three times over, governments have wrestled with dilemma of big infrastructure: the costs fall on the public purse, but many of the benefits (and in particular property value uplifts) accrue to the people and businesses who are most directly affected.  Property owners who pick the right numbers in the infrastructure lottery get a windfall at others’ expense.
As public spending has tightened in recent years, the search for clever ways of funding big projects has become more and more intense.  Money borrowed for the Northern Line extension to Battersea will be repaid through developer contributions and ringfenced business rates, and commentators have suggested that Crossrail 1 was only spared the axe in 2010 because 60 per cent of its costs were met by Londoners and London businesses.
The Crossrail 2 package proposed by Transport for London follows the Crossrail 1 pattern by loading most costs onto London’s businesses and property developers. 18 per cent of the costs would be met from future fares and property deals; 20 per cent would come from a supplement on business rates (about a five per cent increase in the tax bill for most larger businesses); and 17 per cent would come from a Mayoral community infrastructure levy on new development. 
But householders get off very lightly.  Only 1.4 per cent of the cost of the project would come from council tax, specifically from rolling forward the Olympic precept that Ken Livingstone introduced in 2006 (memorably comparing it to the cost of a Walnut Whip for the average household every week).  The precept currently adds £20 per year to the average ‘Band D’ household, around 1.5 per cent of the annual bill.
So where’s the problem?  London’s booming businesses and rapacious developers get hit with the tax bills, lightening the load on ordinary citizens.  This may look like good news, but given the state of London’s property market, this funding package would do almost all the wrong things.  Charging an additional community infrastructure levy will threaten developers’ bottom line, which could just as easily result in delayed development, raised sale prices, or reductions in other social benefits like affordable housing, rather than in reduced profits.  And higher business rates may be reflected in higher prices or slower wage growth, or may even push businesses away from London.
Modest London-wide council tax increases, on the other hand, will do nothing to capture the increased desirability and value accruing to homeowners, particularly those nearest the new rail lines, who will get the mother of all free rides (one possible exception being Chelsea, where affluent residents are protesting against a new station).  In fact, Crossrail 2 may make matters worse for Londoners struggling to get on the housing ladder, pushing prices even higher in the districts that it opens up.
So the Crossrail funding package proposed for London could increase the costs of doing business in London, and hike the value of property, creating an unearned and largely untaxed bonanza for those living nearest stations, and pushing prices further our of reach for everyone else.
As the NIC report points out, the package proposed is constrained by the scope and structure of taxes raised locally.  TfL are working with what they’ve got. As the London Finance Commission pointed out in 2013, London’s council tax bands have not been revalued since 1993, when £320,000 defined the top tier of property values, rather than representing a bargain, £200,000 below the average house price. 
Regular (perhaps annual) revaluation would be fairer, allowing tax rates to be better tailored to the real values of homes and to capture some of the benefits that new infrastructure brings to home-owners in the shape of rising house prices.  If new infrastructure dramatically increased values, council tax would reflect this, and a proportion of the new tax revenues could be top-sliced to repay money borrowed to pay for the investment in the first place.
The obstacles to council tax revaluation have been seen as practical as well as political.  Practically, the exercise would be complex and call for careful callibration, but we shouldn’t make too much of this.  The technology we use to track property values has changed out of all recognition since 1993.  When anyone can check the value of their property against the local market with a few clicks of a mouse, a revaluation would not require a new Domesday Book.
There would be winners and losers, and political controversy, but these problems aren’t insuperable.  Transitional reliefs would be needed, as might measures to allow tax to be deferred so that cash-poor owner-occupiers were not forced to move by sudden tax hikes.  And Labour’s proposed ‘mansion tax’, a far blunter instrument than recalibrated council tax, did not do the party too much damage last year in London, the city that would have been hardest hit.
Other taxes could help to fund infrastructure too.  Stamp duty and capital gains tax do actually reflect rising property values, though they only kick in when property changes hands, and in the case of capital gains tax they do not apply to people’s main residence.  Nor are these currently available to the Mayor or the London boroughs, though the Government could at the very least extend the principle it applied to the Northern Line extension by allowing the Mayor to repay borrowing using tax revenues that would normally go directly to Whitehall.
In times of continuing austerity, booming London will have the devil of a job convincing the rest of the UK, let alone the Treasury, that it deserves massive public subsidy for infrastructure, however much other regions actually benefit from its growth.  London is booming, and should pay its fair share.  But without more comprehensive devolution and more control over its taxes, the capital will struggle to secure its future prosperity.

Cuts back

[First published on Municipal Journal blog, 26 November 2015]

Yesterday\’s Autumn Statement came at a challenging time for London. The capital\’s growing population is facing spiralling house prices, and putting pressure on infrastructure and services – from homelessness and social care to transport.

The Chancellor’s housing announcements took centre stage. The London Help-To-Buy scheme will raise the equity loan available for new homes from 20 to 40 per cent, reflecting the limited impact of the scheme in London to date. But the long-term impact on affordability is more questionable.  If the scheme does not stimulate extra supply it will merely inflate a house price bubble. 

The Chancellor also extended eligibility for shared ownership.  Applicants will no longer have to meet locally-set criteria of living or working in a particular area or profession, and the income cap will be raised to £90,000 in London. But as Centre for London’s recent report Fair to Middling observed, the model doesn’t work for everyone; social rent, affordable rent and other forms of low-cost housing are also an essential part of the mix.

We don’t yet know the detailed allocations for local government in London, but the cuts appear to have been a lot less severe than many feared.  The Chancellor boasted that cash expenditure by local authorities would be as high in 2019/20 as it is in 2015/16, but real terms spending will nonetheless fall by seven per cent over the four years, and will drop sharply over the next two years before recovering. 

It could have been a lot worse – many were forecasting real terms cuts of 30 per cent or more, but the continued squeeze will not be easy, especially coming on top of the five lean years that saw London boroughs\’ spending falling by around 28 per cent in real terms.  As Centre for London\’s analysis of the last round of cuts Running on Fumes showed, London boroughs have been resilient in coping with austerity to date.  Over the next four years, the quest for efficiency savings will continue, and front-line services are unlikely to escape unscathed.

But the headline figures mask a quiet revolution.  Revenue support from central government will fall from £11.5 billion to £5.4 billion over four years.  The balance will be made up by retained business rates and council tax, forecast to rise from £29 billion to £35 billion over the same period (the figures do not take account of plans for full business rate retention).  Many will welcome this devolution of fiscal responsibility, but questions of distribution and fairness will loom ever larger, as poorer boroughs, facing greater demands on services, struggle to grow their business tax base, and hesitate to impose permitted council tax rises to support social services. 

Major London capital projects receive a boost: funding for the \’Olympicopolis\’ cultural and educational complex in Stratford has been announced (again), and the Government will bring land at Old Oak Common under single control.  Further east, the extension of London Overground to Barking Riverside will enable higher quality development of one of London\’s longest-delayed sites, and investment in Ebbsfleet infrastructure should support the realisation of the new \’garden city\’ recommended by Centre for London.

One of the most dramatic changes is to Transport for London’s funding.  Alongside pledges of an £11 billion in capital investment, the revenue grant that makes up 6 per cent of TfL’s annual costs will be phased out, saving £700 million by 2019/20.  TfL will be expected to make up the shortfall through efficiency savings, through increasing fares (another blow to London\’s modest earners), or by generating revenue from the land it owns across London.  This land has long been eyed as a potential source of housing; with TfL’s budget under pressure, the incentive will be to maximise value.  Expect some fiery discussions about tenure mix and commercial value.

It\’s been a long time

I\’ve been distracted, having holidays, not smoking, all sorts. I\’ve also been reading Robert Caro\’s biography of Robert Moses, The Power Broker.

The book is a monster of nearly 1,200 pages, and its subject comes over as pretty monstrous too. From the mid 1920s to the 1960s, Robert Moses dominated public projects in New York, covering the five boroughs and Long Island with new toll roads, beaches, parks and bridges, creating the type of alienating, car-dominated urban landscape that Jane Jacobs has taught all good urbanists to despise. He achieved these feats through a combination of thuggish arrogance and low cunning, with unattractive top-notes of racism and class prejudice.

And yet, governor after governor, and mayor after mayor, found him indispensable, unsackable. Whatever his methods, Moses got things done, and he got them done within electoral timescales. When he was building his first parks on Long Island in the mid-1920s, he had $1 million out of a total of $15 million. Instead of completing a few projects within budget, he assembled land for a much larger number, thereby forcing NY State Congress to vote him the remainder. Caro reports him as saying: \”once you sink that first stake, they\’ll never make you pull it up.\”

What would Moses have made of Crossrail\’s latest faltering step forwards? When I worked on the Jubilee Line extension project in the mid 1990s, Crossrail was the next big project. Offices were being set up, and engineers recruited. And then, nothing. And now, maybe something? But breakthroughs are reported so frequently, and to so little effect, that it\’s hard to feel too excited by the news.

We seem to be very good at stopping big projects happening in the UK. The Treasury feels that it has been burned by so many wannabe-Moses characters, that it publishes volume upon volume of guidance on stopping big projects. The safest answer is always \’no\’. Soon after London won the 2012 Games, I had a meeting with a senior civil servant. \”You\’ve got the Treasury in an awful spin,\” he said. \”You\’ve robbed them of their three standard strategies: delay, descope and say \’no\’.\” At the IOC meeting in July 2005, London (Jowell, Livingstone, Coe) put some stakes in the ground. They won\’t be quickly forgiven.