London could gain £21.5bn under new tax devolution plan

A thinktank has recommended that London receive a direct share of income and corporation tax raised within the city, replacing the current system of central government grants. The Centre for Cities proposal suggests that Sadiq Khan, the Mayor of London, should be allocated 2.3 per cent of income tax and 0.8 per cent of corporation tax generated in London. This change is intended to provide City Hall with significantly more control over its budget for key services such as transport and housing.

Funding model shift

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Currently, mayoral authorities like London receive Integrated Settlements, which are single grants covering areas including transport, skills, and housing. For Greater London, this amounts to approximately £2.16 billion annually, or £237 per resident. The Centre for Cities argues that devolving tax revenue would create a more direct link between local economic development and the resources available for public services. Oscar Selby, an analyst at Centre for Cities, told the Local Democracy Reporting Service that this would mean any increase in the local tax base, driven by local economic development, would lead to a direct increase in funding for transport, housing, and other local services. He added that this would remove the need for the Mayor to seek new revenue sources from the central government.

The thinktank's report states that income tax should be the primary funding source for mayoral authorities, describing it as the "workhorse of the local finance system". Corporation tax, while a smaller component, should be exempt from equalisation processes to incentivise growth. This means that any revenue generated from corporation tax above the capped percentage would not be shared with other authorities, providing a stronger incentive for mayoral areas to foster economic expansion.

Potential financial impact

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The proposed changes could see an estimated £21.5 billion devolved to mayors across England over the four years leading up to 2030, based on historical growth rates. This fiscal devolution aims to address concerns that London, despite being a significant contributor to the UK economy, retains a small fraction of the taxes paid by its residents and businesses. A City Hall report from 2019 indicated that London retained barely six per cent of its tax revenue, compared to much higher figures in cities like New York and Tokyo.

Bassam Mahfouz, Labour's Oversight Spokesperson on the London Assembly, supported the calls for greater revenue-raising powers. He stated that while devolving power is important, it is meaningless without the ability to raise matching funds. He believes greater fiscal devolution must be central to any new devolution deal, enabling the Greater London Authority to invest in housing, transport, and public services, and to drive economic growth across the city.

Future considerations

While significant tax-raising powers for mayoral combined authorities are unlikely under the current government, plans for an overnight visitor levy could provide mayors with the ability to raise millions by early 2028. This levy would allow local leaders to charge a percentage of accommodation costs, with the rate in London not expected to exceed five per cent. The report also suggests reforms to business rates, proposing that central government devolve its share to all mayoral combined authorities, similar to arrangements in the West Midlands and Greater Manchester.