City of London could gain £2.16bn annually under tax sharing plan
Think-tank Centre for Cities proposes replacing central government grants with a share of income and corporation tax.
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A new proposal from the Centre for Cities think-tank suggests replacing central government grants to City Hall with a tax sharing arrangement. The plan recommends that London should receive 2.3% of income tax and 0.8% of corporation tax generated within the city. This shift aims to provide the Mayor of London with greater control over finances and stimulate economic development.
Current Funding and Proposed Changes
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Currently, mayoral authorities in England, including London, receive integrated settlements, which are single grants covering areas such as transport, skills, and housing. For the Greater London Authority (GLA), this amounts to nearly £5 billion in grants annually, with £2.16 billion specifically for London, equivalent to £237 per resident. The Centre for Cities argues that this system should be reformed to allow for more local revenue generation.
The think-tank's report highlights that London currently retains only about 6% of the taxes paid by its residents and businesses. This contrasts sharply with cities like New York and Tokyo, which retain significantly higher percentages of their locally generated tax revenue. The proposed tax sharing deal would see income tax forming the primary source of funding, described as the 'workhorse of the local finance system', while corporation tax would act as a 'carrot' to incentivise growth, being exempt from equalisation processes.
Benefits of Fiscal Devolution
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Oscar Selby, an analyst at Centre for Cities, stated that the proposed changes would empower the mayor with more control over City Hall's budget. Any increase in the local tax base, driven by economic development and pro-growth policies, would directly translate into increased resources for public transport, housing, and local services. This would reduce the need for the mayor to seek additional revenue sources from the central government.
Bassam Mahfouz, Labour's oversight spokesperson on the London Assembly, supported the call for greater fiscal devolution. He noted that while London is a significant contributor to the UK economy, it often requires central government approval for access to its own generated funds. Mahfouz stressed that devolving power without matching revenue-raising capabilities is ineffective and that greater fiscal autonomy is essential for investing in housing, transport, and public services.
The report also suggests reforms to business rates, advocating for the devolution of central government's share to all mayoral strategic authorities (MSAs). This would provide an incentive for mayors to stimulate economic growth. The current system in London sees central government retaining 33% of business rates, the GLA 37%, and London boroughs 30%. The think-tank's proposals could see an estimated £21.5 billion devolved to mayors across England over four years to 2030, assuming historical growth rates.
What Happens Next
While the government has committed to allowing mayoral strategic authorities to retain a share of locally generated income tax and greater retention of business rates, the Centre for Cities is urging ministers to go further. The think-tank's recommendations are being put forward as discussions continue regarding future devolution deals and potential budget allocations ahead of the autumn fiscal statement. It is unclear if or when these specific tax-sharing proposals will be adopted by the government.
Questions this report answers
+What is the Centre for Cities' main proposal for City Hall funding?
The Centre for Cities proposes replacing central government grants to City Hall with a tax sharing deal. This would involve London receiving a specific percentage of income tax and corporation tax raised within the city, rather than relying on grants.
+How much money could London receive annually under this new proposal?
Under the proposed tax sharing arrangement, London could receive approximately £2.16 billion annually for the Greater London Authority. This figure is based on 2.3% of income tax and 0.8% of corporation tax raised in the city.
+What are the potential benefits of this tax sharing deal for London?
The think-tank argues that this deal would give the Mayor of London much more control over the city's finances. It would also provide a direct incentive for economic growth, as increased tax revenues would lead to more funding for public services.
+How does London's current tax retention compare to other global cities?
London currently retains only about 6% of the taxes paid by its residents and businesses. This is significantly lower compared to cities like New York, which retains around 50%, and Tokyo, which retains approximately 70% of its locally generated taxes.
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