27
Examination of witness
George Osborne.
Q18 The Chair: Welcome to the Lords Economic Affairs Committee. This is the second evidence session of our inquiry into fiscal devolution in England. We are delighted to have the former Chancellor of the Exchequer George Osborne here. We are very grateful for your time. Thank you so much. I should say the session is being broadcast live on parliamentlive.tv and a full transcript will be taken, which we will share with you shortly afterwards to make any corrections of fact.
Can I start, Mr Osborne, by asking you a general question about the purpose of devolution? Particularly, what is the prize of having fiscal devolution? Is it a prize in terms of accountability and local democracy? Is it a prize about innovation and locally generated growth? Is it a prize to do with greater equality? How do you see the trade-off between these different contending claims about what fiscal devolution might achieve? It is just a small question to start off with.
George Osborne: First of all, thank you very much for inviting me. I am flattered and honoured. If I look back at my time as Chancellor, there were two major acts of fiscal devolution that I was involved in, and both of them speak to the different motives for fiscal devolution, to answer your question.
The first was, post the Scottish referendum, the big devolution of tax-raising powers to the Scottish Parliament. That fits into your first category of democratic accountability, reflecting the desire, as expressed in that campaign, for Scotland to be in the United Kingdom but to have more control over its future. I would put that more in the democratic bucket.
There were also acts of fiscal devolution within England, starting in Manchester but in other parts of England as well, such as the West Midlands and the north-east. There is no doubt that there was an element of encouraging local democracy, but that was not the primary objective. The primary objective was the second one that you have set out, which was to encourage innovation, to try something different and essentially to attempt to rebalance the economic geography of the country away from London and the south-east.
The Chair: Did you find that the evidence was persuasive when Treasury officials talked to you about whether fiscal devolution of the sort you were contemplating would generate greater economic growth? Is that a persuasive argument that is borne out by facts and comparative evidence?
George Osborne: I loved and love Treasury officials, but they were not massively keen on either initiative, to be honest. To be fair to them, two of the most senior officials at the time were instrumental in both plans. Lord Macpherson, as Permanent Secretary, was very keen on making the Scottish devolution package work. John Kingman, who was the Second Permanent Secretary, was instrumental in helping me deliver the Manchester deal, which created the Mayor of Manchester, which turns out to have had lots of implications. Without him, I would not have been able to pull it off.
That was the very senior leadership. Of course, the Treasury’s orthodoxy, which I am sure will come on to discuss, is scepticism in the best sense of the word, which is testing whether this is really going to stand up and endure, as you would hope the Treasury does.
The Chair: Lastly on this, 10 years on from that period, do you think the claim that fiscal devolution can be a promoter of sub-national growth is a strong one?
George Osborne: Yes, I do. There was a fallow period, let us say, for a number of years in the latter half of the last decade, as the country got diverted and focused on other issues. At the tail end of the Tory years, there was an attempt to return to concepts such as the northern powerhouse and fiscal devolution. There was some innovation around single budgets for areas. Under this Government, I thought it was encouraging that Rachel Reeves, the Chancellor, mentioned fiscal devolution as one of the three pillars in her recent Mais Lecture. Let us be honest: we have not moved on a huge amount since 2014 or 2015.
There are two things that have changed. One is obvious, which is that we still do not have another answer to how do we get other parts of England growing? Secondly—I can say this now I am not in Parliament—there is less confidence that the centre can deliver economic growth and prosperity. There is less of a sense of, “We know it all”, here in Westminster and Whitehall. There is less confidence there, which was not the case when I was in office or when Tony Blair or Gordon Brown were in office. There was a confidence that we could find the answers.
Q19 Baroness Wolf of Dulwich: My questions follow on directly from what the Chair has been asking. If fiscal devolution works and local areas do indeed innovate, it is by implication going to be the case that some are likely to do better than others. This is always something that is brought up as a concern. There is a belief that postcode lotteries are unacceptable to the electorate and so on. Is this something that we just live with? Is it something that is genuinely a serious problem and obstacle?
George Osborne: The short answer to your question is yes. It is integral to devolution that you are going to get different outcomes rather than national uniformity, but it is a truth about Britain that there is already a postcode lottery in the sense that where you are born, which you have no say in, has quite a big impact on your chances in life. The prosperity of different parts of the country is very different, so that is already the case.
There is a question, which I might suggest is something that you want to might want to consider as a committee, about whether you are trying to create a perfect model, like the founding fathers of the United States 250 years ago, where every state has the same powers, rights, controls and whatever else. Florida has the same powers as New York. Do we go for a model that is a bit more paternalistic but may be more in tune with the history of England at least, where areas that demonstrate that they are well governed, have a history of good governance and have capability earn the autonomy? Of course, purists would object to that because it feels paternalistic, but it would avoid some of the poor outcomes that a neater universal approach might deliver.
We may come on to this, but the Treasury or the national Government’s underlying concern about devolution is, “We are always going to have to bail out the failures”. The country is not going to tolerate a large city going bust and there being no trams and buses and mass unemployment in one place.
The earned autonomy model is certainly how I approached it. I picked Manchester for two reasons. First, I happened to be an MP in the Manchester orbit. I was a Cheshire MP. For a boy from Bayswater, it was good for me to get out of the M25. Secondly, Manchester had already established a serious history of competent, serious, pragmatic and non-ideological local government. You had had a succession of Labour leaders of Manchester City Council, Graham Stringer and then Richard Leese, who had worked with Conservative Governments, and Michael Heseltine most notably, in the past and were very keen to engage.
Back in those days, there were not many local Tory MPs; there are not many now either. I was with one other MP, or what passed for a local Tory MP. Richard Leese and Howard Bernstein, the chief executive of the council, reached out for me. They wanted it to be bipartisan. This was when I was in opposition. When I got into government, there was already a set of relationships.
Manchesterism is a real thing. It is transferable to other cities, but you have to learn the lessons of it. It has to be pragmatic; it is about growth first and then how you spend the money, not the other way around; it is about attracting inward investment from overseas as well as from other parts of the UK; it is bipartisan; and it is very focused on delivery. The current mayor is part of the story, but, as he would accept, he is only part of the story. There are other parts of England that have partly got there. It was and remains a special case. The evidence is that it has delivered stronger growth for the Manchester region than other city regions.
I defer to people with more experience on this, but I do not think 50 years ago you would have said that Manchester was set up for success versus other large northern cities. It made its own destiny.
Baroness Wolf of Dulwich: Can I come back with just one follow-up question? You are basically making the argument that in this country, England, with its past and its current make-up, piecemeal and earned devolution is much more acceptable and practical than going, “We will have a big bang”?
George Osborne: Yes, I think so. I was only about two or three at the time, but I had in my head Ted Heath’s local government reorganisation as a disaster to be avoided. I do not know where I picked that up; I guess I was a bit politically nerdy and followed these things.
When I was creating the mayors—we did one in Manchester, one in the West Midlands, one in Teesside initially and one in Liverpool—I thought that, rather than trying to force it all through and impose a local government reorganisation, it was better to use carrots rather than sticks. Frankly, I was the Chancellor, not the Local Government Secretary. I could use the things in my toolkit rather than having to get Cabinet agreement.
It was also complicated. I am very proud of the Government that I was part of, but it was a coalition Government. Understandably, my Liberal Democrat partners were like, “Hold on”. Nick Clegg said to me, “If you want to go for it in Manchester, go for it, George”. I am very grateful to him for saying that because, without that, the Government would not have thrown their weight behind it.
Q20 Baroness Penn: You have described the evolution in Manchester with the city deal and the mayoralty, which then became the basis of the northern powerhouse. After your period in office, there was a more fallow period and people have now returned to this question. What should the next steps be in terms of devolution, particularly fiscal devolution, in an area such as Manchester, which is already at the forefront of where we have got to on this question?
George Osborne: I can come back later, if you want, and talk more about the northern powerhouse because, although it ended up being quite an enduring slogan, there is a real economic theory behind it that is important to understand.
On where to go next, Governments can be bolder with acts of fiscal devolution. There are two sides to fiscal devolution. The first is literally giving areas more tax powers. I know we are not talking about Scotland at the moment, but it has a different set-up. It can and indeed has varied income tax rates. It now has six income tax bands and quite a different income tax structure from England.
In local English areas, you could certainly do things such as give an area the option of having a local tourism tax, which is much debated. In Manchester and Liverpool, there is already a sort of voluntary tourism tax in the business improvement districts, but it leaves out app-based things such as Airbnb. You could do that.
We ran business rate retention in Manchester, where you retain the uplift in business rates above an assumed baseline. I do not see why lots of other places could not be doing that. The council tax precept is often the main way that these areas raise money.
Those are acts of revenue-raising. The other thing you can do, which is how this whole thing started in 2012 with the first city deal in Manchester before we got to the 2014 decision to create the mayoralty, is you shadow the tax revenues. You apportion more of the tax uplift in an area. The Treasury makes a calculation of what income tax receipts from Leeds are projected to be. If Leeds is able to beat the mark, it gets a share of the money from income tax, national insurance and so on.
It is a cute headline, but rushing towards every city setting its own income tax and national insurance might end up creating a pretty balkanised system. In Scotland it is not such an issue because the Borders is pretty rural, but along the border you get people living in England and working in Scotland. If you were doing the northern cities or the south-east, it would be a bit more complicated to have different rates of income tax for different counties.
Baroness Penn: You mentioned the theory behind the development of the northern powerhouse. Do you want to expand a bit more on that, going beyond the Greater Manchester model to the northern powerhouse?
George Osborne: The brains behind it was Lord O’Neill. He had done a report for something called the Cities Growth Commission, which was essentially a think tank. He had initially identified the Manchester-Leeds area, with the Pennines down the middle, as an economic agglomeration that could work if Manchester and Leeds did more to co-operate rather than thinking themselves as two entirely separate entities. He pointed out that the Central line in London is longer than the distance between Manchester and Leeds. People in London would not think anything of living at end of the Central line and going to work in central London or whatever, but that kind of traffic did not happen.
I alighted on that. I was like, “Let us try something difficult. Let us try to address the north-south question, rather than just saying, ‘We support things in the north because we love the north’”. That is how I would characterise the approach of previous Governments: they branded things as pro-north. I worked with Jim O’Neill, who people will know is not a signed-up Conservative by any means and was close to the Labour leadership in Manchester. I ultimately brought him into the Treasury as a Government Minister. We worked on how you could make this agglomeration theory work in practice or how policy could support agglomeration. We included Liverpool, Hull, Bradford, Newcastle and so on. If you take the central Pennine belt from Liverpool to Hull, that is a more natural economic area.
Not all of it was delivered, but it would have been delivered, I like to think, if I had hung around. We came up with the concept of a rail line that would connect them. We pushed for the creation of elected mayors, which did not exist previously, at least in mayoral regions such as Manchester and Liverpool. We backed the things that were economically significant in those places, which was not a nostalgia for past industrial glories. We were not trying to recreate the Industrial Revolution.
If you look at Manchester, it was the big teaching hospitals and the university. Those are the economic jewels, along with some of the cultural institutions. It is the same in Leeds. We doubled down on these things by, for example, centrally supporting the creation of a graphene institute in Manchester because graphene had been discovered there. Back when it was okay to have the Chinese President visiting, we took him to Manchester in order to encourage inward investment. It was a collective plan.
I am going on a bit, but I gave the speech in the Power Hall of the Science and Industry Museum in Manchester, which is why it was the northern powerhouse, and sitting in the front row was the Labour leader of Manchester City Council and the then Labour Mayor of Liverpool, or the central part of Liverpool. From the beginning, it was a cross-party effort.
Baroness Penn: In your experience of developing that and seeing where it has got to now, is it something that still needs guidance and support from central Government to drive it forward? What would allow initiatives such as northern powerhouse to be self-initiated and more self-sustaining? Are we at that position yet?
George Osborne: We talked about fiscal powers. I know that is the subject of this report, but there are other public policy powers that you could devolve locally. All those skills budgets are not devolved. We have not properly devolved skills policy. The National Health Service is one of the great national organisations that is not great at devolution but is crucial in many of these places as a big employer and centre of science and excellence. There are lots of things that you could do on the policy front.
On big national infrastructure, I know this is no longer fashionable, but the HS2 line to the north was important. It is good that the current Government have reversed the decision of the previous Government and are now at least taking it to Crewe, which will make it more relevant to Manchester. There is also Northern Powerhouse Rail. These big national infrastructure projects are always controversial and difficult. Every time I go on the Eurostar, I am reminded of how unbelievably controversial and opposed it was. Everyone said it was the biggest waste of money and whatever, and now we are glad we have it. I forced the Treasury to get out the advice on the M25. It is always against all these big projects. I was like, “What was the advice on the M25?” The Treasury wanted a bunch of roundabouts in Hemel Hempstead rather than the M25.
These things are difficult to deliver. The city regions are not yet anything like powerful enough or wealthy enough to deliver them. Even in the US, you have a federal highway system, federal energy policy and so on.
Lord Razzall: I notice Lord Burns has been notoriously quiet on this topic, which leads me into my question.
Lord Burns: That is not my fault, I should say.
Q21 Lord Razzall: You indicated earlier that there has been opposition in the Treasury to fiscal devolution. Do you want to expand a bit on what its objections were and whether you think they were justified?
George Osborne: I described it as “healthy scepticism”. What I mean is the Treasury says, “We are always going to have to be there when the thing goes bust”.
Lord Razzall: It is there now with local authorities, is it not?
George Osborne: It had had this experience with a number of local authorities. In the late 1980s, Hammersmith and Fulham Council had blown a load of money on swaps or something like that. The Treasury feels like, “If you do not have Treasury discipline, money is going to be spent, there is not really going to be local accountability and we are going to end up having to cough up”. To be fair, there have been quite a few examples of that.
In London, you had a succession of mayors who froze Tube fares because it was politically popular. When TfL goes bust, everyone goes, “Please can the Treasury bail us out?” In the end, the Treasury did have to because you cannot let the Tube system stop. It is that sort of scepticism.
I was always accused of talking too much about Manchester. I thought, “That is not the worst thing to be accused of”. What was interesting about Manchester is that it came up with the policy ideas. It was not the Treasury. It was Howard Bernstein, now sadly deceased, who would say, “How about this earn-back scheme? How about this business retention idea?” It was John Kingman and the growth team in the Treasury—they were brilliant, hard-working people—who engaged with it and made it work.
The Treasury officials were critical. Again, I am a bit unchained now. The other government departments were not going to do any of this. Note to anyone who ever becomes Prime Minister: do not run against the Treasury because that is your department, if you make it work for you and you get your Chancellor working for you.
Without the Treasury driving it, it would never have happened. The Department for Communities and Local Government was not interested. The Department for Education was not interested. DWP was not interested. Transport is one of the more centralised departments. It required a strong Treasury, Prime Minister and, in the case of that Government, Deputy Prime Minister all to say, “We are going to make this happen”, and then the Treasury officials did what Treasury officials are brilliant at doing, which is making it happen.
Lord Razzall: How do you balance the risks of fiscal devolution—Birmingham is a good example at the moment—against its potential? How do you balance the risks against the rewards, in your own mind, bearing in mind that you are no longer Chancellor.
George Osborne: Yes, it is an interesting case. The mayoralty of the West Midlands has proved to be more effective than Birmingham City Council. Birmingham City Council has had a long history of trouble under lots of different political leaderships, whereas the mayoralty of the West Midlands has been a real success. I know the mayor has changed, but I will put a plug in for Andy Street because he did a really good job.
I should also say that these mayoralty have attracted leading business figures and former Cabinet Ministers. I do not want to predict the future, but it is quite possible that over a 15-year period two of Britain’s Prime Ministers will have come from being mayors, which is quite a change in British history.
Lord Razzall: On balance, you would go for it rather than have the Treasury’s healthy scepticism.
George Osborne: As I say, the Treasury is quite right to ask the searching questions and to put in guardrails. You just do not want to be so watered down that in the end you have nothing to offer. Some of these devolution packages on things such as skills have ended up being too watered down. You have to take some risk. After all, what are you really risking? The economic performance of the rest of England has not been good enough.
The other thing to watch—I would say this to Parliament as well as to Ministers—is the constant desire to impose national ring-fences and regulatory requirements on local authorities and devolved areas, which are often born of perfectly admirable intentions. There is some scandal or terrible story in the social care sector, and then Parliament passes some law that says, “Every local authority needs to do this or that with social care”. There are plenty of different examples.
We end up with tons of different ring-fences and pockets. Every Prime Minister wants their own local pot to go and tart up the town centre in marginal seats and all that kind of thing. That is the thing that ends up, over time, eroding the aspiration of devolution.
Q22 Baroness Wheatcroft: Leading on from that, I wonder whether that urge from the centre has made the country, which, after all, has really strong regional identities, so slow to devolve power. Fiscal devolution or the lack of it may be part of that. There has been a desperate urge to keep everything at the centre. Compared with other countries, we are way behind. Why might that be? Is it because of this knee-jerk reaction to scandals and so on? Is it because of a lack of strong leaders? You have mentioned several times how good Manchester’s leaders were over a long period. Compared with Birmingham, for instance, that has been noticeable. What is the major obstacle to devolution in this country and how are we going to overcome it?
George Osborne: I have an undergraduate degree in history, so this is about my limit. First of all, the history of this country is very different from the history of Germany or Italy. England was a central state a long time ago. There are parallels with France. We have had a central state for hundreds of years. Secondly, the big 20th-century innovations of Government, such as the National Health Service and the welfare system, were centrally run projects and organisations. That reinforced it.
The third thing is something that is one of the great assets of the country, but it does not always feel like that if you are in Liverpool, Manchester or Leeds, which is the outstanding success of London in a European or indeed global context. London being the global international city means that everything else within 100 miles is in its orbit. That has reinforced it.
London is a huge asset. We used to try this in Manchester, but it did not always work: “It is a huge asset that you are a couple of hours away by train from one of the biggest and most successful cities in the whole world”. That is not a bad thing; that is a good thing, but of course that is not how it was always felt. It is the same thing as the London disease of thinking that nothing that happens outside the Circle line or the M25 counts.
Those are all reasons, but you can also find in the 19th century strong English political traditions of civic pride and power, with Joseph Chamberlain and all that.
Baroness Wheatcroft: Are there other obstacles that are going to prevent more devolution going forward?
George Osborne: The whole thing is a lot easier if you have some money to grease the wheels. If it is all in the context of paring back and trying to make the state function in an economy that is not growing enough, the whole thing becomes harder because it becomes more about, “Why am I losing out?” rather than, “Why am I gaining?”
People who know me know I am pretty critical of some Conservative Governments, but I am very critical of this Labour Government, who have missed the chance. You come in. You have a huge majority and mandate for change. Where was the big devolution package that they should have devised in Opposition to back up, by then, their mayors? The sad thing about politics is that those opportunities do not come around that often. They come around every 10 or 15 years, when you have a new Government with a big majority. That is definitely a shame.
Baroness Wheatcroft: The Chancellor has said that fiscal devolution is the pathway that she wishes to follow. Do you see devolution without fiscal devolution as being any possibility at all?
George Osborne: Fiscal devolution does not have to be brand new taxes. In her Mais Lecture, she immediately said, “The overall tax burden cannot go up”, which is a national constraint. You could argue that, if people in Manchester or Merseyside vote for a local mayor who says that they are going to put up taxes, why should a Chancellor of Exchequer say, “No, I am setting the overall tax rates in the country”?
The Mais Lecture was important. Personally, I think it is the best speech that she has given as Chancellor. It had a good passage on AI, but you are not asking me to talk about that. We do not know what is going to happen inside the Government, but I hope that whoever is running the country in the next few years will stick with that theme.
Baroness Wheatcroft: You have said that wherever people are born is the luck of the draw, so you cannot be constrained too much by thinking about some people doing well and others not so well. Is it a problem that, if some regions really prosper, people will leave the non-prospering regions to go to them?
George Osborne: First of all, labour mobility is a good thing. It is one of the great engines in the United States. In my lifetime, the south-west of the US has gone from being one of the poorer parts of the US to one of the richer. There has been a rejuvenation of the south in the US in places such as North Carolina.
I know that is maybe beyond the scope of your report, but there are lots of things you could do, such as council housing tenure and stuff like that, that would help unlock more mobility. You should not stand in the way of people wanting to move, but at the same time, as a country, you cannot just abandon communities and places and say, “The industry has gone. There is nothing we can do”, particularly the cities.
There is a thing that I should have said right at the beginning. The thing that I never found the right answer to, which no Government that I am aware of have found the right answer to, is the stranded towns. It is one thing to have Manchester, Leeds, Newcastle and Bristol, the big urban concentrations, and the communities around them, the Wakefields, Boltons and Burys. They can fit into the economic success of that city. There has been a big bounce-back of cities globally. Fishing or mining towns, towns where there was a natural resource, are a much harder effort. No one has come up with a towns policy, not just here but in continental Europe and the United States. It fuels quite a lot of the politics in these countries.
It is hard. You end up with these pots, which every Prime Minister thinks is their unique invention. The Treasury dusts down the town centre fund, hands it over and it gets announced. It does not really address the fundamental economic prospects of the community and how you might change those.
Q23 Lord Petitgas: Earlier, you mentioned two broad guardrails. One is that it should be earned and not awarded. The second is the healthy scepticism from Treasury. If you were to go into a little bit more detail, what are the other mechanisms, apart from elections, et cetera, to ensure that the accountability and responsibility that is effectively granted by these further rights, as it were, to tax and spend, is done in the best possible way?
George Osborne: You have to accept that Governments have endlessly wanted to hold local authorities responsible. A succession of non-nationalist UK Governments have wanted the Scottish Government in Edinburgh to be held more accountable for what is going on in Scotland. The same is true in Wales.
You have to be realistic that, to some degree, the prize of being the national Government is that you also attract quite a lot of the responsibility. Even in a much more federalised country such as the US, the US midterm elections will tend to be a referendum on the performance of the Washington Administration, even in the governor races. You have to be a bit realistic about how much local accountability you can insist on.
When I was negotiating the Manchester deal in 2014, the Greater Manchester councils—there were 10 of them—had formed this Greater Manchester group. They really did not want a mayor. They did not want an elected mayor. They wanted power to rest with this conglomeration of Manchester councils, the leadership of which was Richard Leese in the city council. Indeed, the current leader of Manchester, Bev Craig, is doing a very good job in Manchester as well. I felt that having an elected mayor had worked in London. This was something that the Tories had been against and had then finally come around to. I thought you needed a person who people could identify with, know who they were and hold accountable. That was just human nature. That was the element of accountability.
That was the quid pro quo. In return for what the Manchester grouping wanted—they wanted the devolution of key powers, including economic planning, skills and housing; the housing fund, which ended up helping build those skyscrapers in Manchester; and more transport money—the price was that they had to suck their teeth and have an elected mayor.
Lord Petitgas: I have one follow-up question, which is more of a curiosity for me. At this point, we are just starting this process. If you look at the experience of Manchester or your experience at the time and you think about the grouping of things that were devolved in terms of the right to spend and maybe even the ability to tax, would you trim that or expand it? Would you change the mix? Are there some lessons learned from that?
George Osborne: The part that has not gone as far as I hoped it would go and gets very little attention, even though it is the only place in England where this happens, is the devolution of some control over the NHS and social care to Manchester. There have been some early studies. There was a Harvard study that said life expectancy in Manchester has done better than some other places in recent years. That was an attempt to solve the great conundrum of social care, which is to take social care, which was under local government control, and force it to work with a nationally run NHS in Manchester.
That devolution has not gone as far as I would like. In fact, when we began preliminary discussions with London, they did not want it. They were like, “You can look after the London NHS”. There is also a whole set of other policy issues—it is not just about economic growth, but they are all related—around health care, public health and social care. That is an area that you could do more with, to be honest.
Q24 Lord Prentis of Leeds: At the moment, if there is a problem at a council, the commissioners can be called in. We have seen that in Birmingham, Northampton, Croydon and a number of others. If you move to the idea that we are talking about—I do not want to appear negative, but it is an issue of risk that has to be addressed—what would the control mechanisms be for a council or a region that gets things badly wrong?
George Osborne: You are quite right. This is always the balance. When do the parents intervene?
Lord Prentis of Leeds: Yes, exactly.
George Osborne: There are measures, as you have identified. You can put local authorities into special measures. If you had a failing region, there are audit bodies, and ultimately the national Government could take special powers to intervene and so on. That would be more to deal with corruption, cronyism or something that was not just poor policymaking or bad decisions, but something that has gone wrong.
It is interesting. I should say that the Merseyside mayor, Steve Rotheram, has done a good job. In some ways, Merseyside is historically a harder place to run than Manchester. Even though there have been all sorts of problems in Liverpool local government, the mayor of Merseyside has done a pretty good job. It does not necessarily all go bad at the same time.
You need a high level of audit and control. Personally, I think—it is not for this inquiry—there are gaps right at the top of the British state in the way that a Prime Minister can behave that have been exposed in recent years and not necessarily plugged.
Lord Prentis of Leeds: Just while I am asking the question, I do like the idea of the Manchester-Leeds conurbation. It is only 555 years since the Battle of Barnet. It would be quite difficult to get people together on that, but they do need a railway.
George Osborne: They do need a railway. The thing about that railway—I lived for 20 years in the Peak District, so not too far away—is that the rail authorities and rail engineers keep telling you that all you need to do are some local line improvements. It is a bit like the high-speed rail argument. I know there are lots of people who do not agree with me on this, but sometimes, as a nation, you need to go, “It is going to cost, but this is a huge piece of infrastructure. You cannot entirely prove what the economic benefits are going to be in the future, but you kind of know that they are going to follow”.
In my day job, I work at an American AI company, OpenAI. It has just taken a brand-new office in King’s Cross. When I was growing up, King’s Cross was not the right place in London to hang out. There was a huge effort by Government to sort out that area and different parcels of land. Lots of companies went bust trying to do that. Ultimately, the economic benefit to the UK is huge. Google DeepMind has just opened a massive headquarters there.
Some of these things, including the TransPennine railway, would do a lot. It is not going to eliminate the rivalry between white and red rose, but it is going to bring everyone a bit more closely together. You can extend it to Liverpool and Hull. You could make it right across that band. The challenge is how to include the north-east of England in that. That is a bit further away.
Q25 Lord Burns: I used to travel from Durham to Manchester to go to university, and I know exactly the problems that are associated with that. I just wanted to clarify something. I am hearing that there is some limited room for tax devolution, but it is not enormous in terms of the things that you have mentioned, and basically fiscal devolution really boils down to the spending side of the business. The main areas that you are outlining are things such as transport, planning, skills, housing and health. Universities are, in a way, devolved already. Is that a fair summary of where you are? After all, that is more or less what has happened in London in terms of the enormous success that London has had.
George Osborne: Yes. In my lifetime, London has gone from, whatever it is, 36 boroughs or something to a mayor who is a recognised national figure. There are things like single ticketing across TfL. They feel like small things, but that still does not exist in the north. I created Transport for the North, and my idea was to replicate Transport for London. Prioritising Tube improvement in Barking is not seen as a loss for Hammersmith. We still have quite a long way to go.
Essentially, the components that the public sector controls are around economic development in an area. What Manchester did well was it got the private sector to do the heavy lifting. It had a very constructive relationship with the private sector. The point about fiscal devolution on revenue is that you got the benefits of that. You were rewarded for it. There was a reason to give planning permission because you got more money. This is a trite argument that is very familiar to this committee, but otherwise what is the incentive for a local politician to say yes to any planning at all? I have represented a greenbelt constituency in Parliament. Every time I said, “It would be quite nice to have some new homes around here”, the village would be up in arms and all the retired MPs in the village would lead the campaigns.
Q26 Lord Burns: You quote the example of the Treasury and the M25. I had two of these in 1990 when the Treasury did not wish to do the Jubilee line extension or Crossrail. With Crossrail, it came up with plans to use existing lines that went around King’s Cross in order to get to the other side of London.
George Osborne: Lord Burns, I love the Treasury officials. I am still great friends with lots of Treasury officials. I had nothing other than a brilliant experience. You know them and I know them. The current team are really excellent people. I should mark in Parliament the retirement of Kevin Whelan, the Chancellor’s Messenger, who has been doing that job for 40 years, starting with Nigel Lawson. He retires this week. He has handed a few bad Budgets to No. 10.
On the very first day that I was Chancellor—I had come in with an austerity programme—I was advised, “Cancel Crossrail. You can do it now. Nothing has been built yet. Cancel the Tate Modern extension and cancel the Francis Crick Institute at King’s Cross. None of them has been built. We will immediately save some money if we do not do those. It will be a lot easier than cancelling things that already exist or ongoing programmes”.
Lord Burns: In 1990, John Major said to the Treasury, “You must do one of these projects. You cannot block them both”. Of course, we did the Jubilee line extension, which opened on millennium evening.
My point is that political influence and the political willingness to take decisions that have some really long-term consequences is a crucial part of making the Treasury the most effective that it can be. If you leave the Treasury alone, in a sense, without political leadership, you will get those sorts of conclusions. When people talk about the Treasury being the people who control this, a lot of this is about its relationship with its political masters.
George Osborne: I believe I had a good and healthy relationship with the officials. I hate this idea that the politicians are the masters and they are the servants. They are two different professions that work side by side in partnership when it is effective.
I agree. The Treasury is sceptical of big projects. They always overrun. They question whether the political consensus is going to stay there for the whole project, which is not what happened on HS2. One Tory Prime Minister cancelled the other Tory Prime Minister’s project.
Where would the country be without the M25, the Channel Tunnel or the original motorway programme? There are a load of things that we need to do. I will give you a list. There is Crossrail 2, for a start, which is the north-south line. There is the extension of the Bakerloo line into south-east London and Northern Powerhouse Rail. There are lots of things that we need to get on with. They take years to deliver, even with the best will in the world.
Q27 Lord Butler of Brockwell: Lord Burns and I were in the Treasury even before Kevin. Just talking about deal-based devolution, the President of the United States would remind us that there are two sides to a deal. When you were negotiating the Manchester deal-based devolution, you had a lot to give them. What did you regard them as being able to give you other than promises?
George Osborne: They gave us credibility in the north of England. I was doing it because I thought it was the right thing to do, but it was the key to us being able to say, politically, that we were a Government for the whole country; we were not just for the better-off half of the country or the south-east or whatever.
I do not need to tell you because you have seen it all, but, when you do these jobs—certainly this is how I felt—you have to have half a mind on survival and half a mind on what you are going to be talking about 10 years later before some select committee. If you do not focus on the survival, you are out tomorrow.
Every time I take the Elizabeth line, there is a little bit of me that goes, “Thank God I ignored that advice to cancel it on the first day that I was Chancellor”. You have to have some political leadership and some Civil Service leadership that has a purpose: “We have to manage through, but what are we really trying to get to? What are the bigger things that we are trying to achieve while we are, very fortunately, doing these jobs?”
Lord Butler of Brockwell: Do you regard deal-based devolution as a progressive process? In other words, is it something that goes on over time and, if they deliver, you give them more?
George Osborne: Yes, I think so. It is too cute to jump to some national scheme that is going to work because different bits of England are different. I would run with what works and encourage the parts where it is not working so well to follow the example of the parts where it is.
It is interesting. Once we did the deal in Manchester, very quickly Merseyside, Teesside—Teesside was not an obvious place where that might happen—and the West Midlands got their act together. Think about all the local rivalries in the West Midlands, which we were just talking about. Trying to get Coventry and Birmingham to agree on things was not straightforward.
Other places took longer. West Yorkshire took a long time. I had to overcome some political issues. The Tory part of the Cabinet that I was part of was like, “We are just going to have a Labour mayor”. I was like, “In Manchester, we do not have any Tories anyway”. We ended up with Tory mayors in Birmingham and Teesside. One of the people who objected to the plan later took credit for their election.
Lord Butler of Brockwell: That leads me on to the final question that I want to ask. If you were advising us or indeed Rachel Reeves about the approach to devolution, do you think this ought to be a progressive process or a big bang?
George Osborne: It has to have some sort of big bang element to it. You have to force the Whitehall departments—the Department for Transport, the Ministry of Housing, Communities and Local Government, the Department for Education and the DWP—to cough up. You need the strong central authority of a Prime Minister. This is something that we came to three or four years into Government.
Far be it for me to say it, but, if there is a new Labour Prime Minister, this is something that you want to do quickly and early, not least so you might be able to see some of the benefits. It is not all for the long term. You can start to accrue some of the political benefits in the medium term. They are probably focused on canvassing at the moment.
Q28 Lord Carrington of Fulham: Is the devolution that we have at the moment a bit of window dressing? There has been picked off the obvious examples, such as Manchester, Birmingham, Merseyside and even Teesside. They do not really have fiscal devolution. They have incentives to do things, to push them in the direction that central Government think they should move in. The incentive is financial. It would not really come until they have serious tax-raising powers themselves and indeed more seriously, because they would need this as well, independent borrowing powers from the Treasury.
Are either of those ever going to be realistically possible, given the size of the areas that are likely to have this devolved? Manchester perhaps could. Birmingham or the West Midlands perhaps could. Once you get beyond those, the economic size of any further areas is going to preclude them from having serious tax-raising powers. By that, I mean that a serious percentage of their expenditure has to be raised by taxation that is under their control. For a serious percentage, you are probably looking at close to 50%. Is that possible?
George Osborne: I do not think so, certainly not any time soon. Some of these taxes, such as business rates and council tax, are not insignificant. We did attempt corporate tax devolution in Northern Ireland partly because of the border with southern Ireland, which at the time had a much lower rate of corporate tax.
You can work with some of those taxes, but at the moment it is a stretch to say that you could have a Manchester rate of income tax, national insurance or VAT, which are your big three revenue-raisers. It would not be impossible to say 2p of the revenue from basic rate income taxpayers in Manchester is going to go to Manchester. That could appear as a precept on your tax bill. If Manchester, Bristol or wherever else does a good deal that encourages growth, more money would flow to that area and so on.
You are right that a one-size-fits-all is harder. Underpinning all this is the fact that, as I said right at the beginning of the conversation, we are a nation. Richer areas send money to poorer areas. Some of those areas are national assets.
I agree. It cannot be too neat. It has to be evolutionary. It will be better and stronger in some places where there is more of a natural economic cluster than other areas. I have said that I do not really have an answer at the moment to the stranded towns, which is quite a big political challenge for mainstream parties.
Yes, I agree with you. It would be quite a revolution from where we are today. Our local authorities and even our mayors are very micromanaged. It does not need to be like that. As I say, some of the shine has come off the feeling that Westminster and Whitehall know best.
Lord Carrington of Fulham: It is not just the micromanaging. It is the other side of it. When things go wrong, they will blame central Government. They will always say to their electorate, “We would have done this differently if we had not had constraints from Whitehall telling us that we could not”.
George Osborne: We have not talked so much about Scotland. The history of Scotland is very different, but there has been meaningful fiscal devolution. I did the deal with Scotland that gave them the control to set their own rates of income tax. As I mentioned, there are now six bands of income tax. There is a 43p rate, a 45p rate, a 48p rate and a 19p rate. Generally, taxes are higher in Scotland.
Has that meant that the Government in Edinburgh do not blame the Government in London when they fall short? For sure they do, but at least from what I see—I do not live in Edinburgh or Glasgow—I feel like there is more scrutiny of what the Scottish Government in Holyrood is up to. There is more of a local political culture. There is more accountability. Does that mean that the people of Scotland only have in mind the performance of the Holyrood Government when they are voting? No, but people are entitled to make their own decisions.
You were my local MP a long time ago. When people vote, they are either voting for the local MP or they are voting for who they want to be the Prime Minister. Democracy is a complicated thing.
Lord Carrington of Fulham: Finally, borrowing powers seem to me to be crucial. If you are going to have devolution, there is an issue if they cannot borrow separate from being part of public sector borrowing requirement. In other words, if they are not going to be counted in the national borrowing, they are going to stand alone. That is a huge step.
George Osborne: Yes. Interestingly, we negotiated with the Scottish Government. The one power that they have not much very used is the borrowing power. I think it is because they do not want to reveal that the markets will take a dimmer view of their creditworthiness than the UK. They do not want to reveal that, which is why they are not using those powers.
To come back to Manchester, we did create borrowing powers for Manchester in the devolution deal. The housing investment fund, which is what has created the new Manchester skyline, was explicitly a fund of future anticipated tax receipts, which they could borrow against and essentially reduce the cost of borrowing for developers who could then start the projects.
There are some devolved borrowing powers. Personally, I think the change in the fiscal rules nationally that allows you to net assets off against investment or spending is quite a good thing. It was done to try to create a bit more breathing room. As long as it is done with credibility and honesty—“Is this really an asset that we are paying for?”—it will make some of these schemes easier to borrow money against. Clearly, a railway line is costly to build. It is very hard to get the private sector to build a railway line. Once it is built, it probably will lead to lots of spillover economic benefits. You can help with the borrowing against it as a result by anticipating those.
Q29 Lord Liddle: I wanted to follow up on that. In the case of Northern Powerhouse Rail, I thought it was a very imaginative concept that you pushed forward. Nothing much has happened over the succeeding decades since you launched the idea. It is in the very long-term public investment plan of the Labour Government, but I suspect it is probably going to be nibbled away to pay for increased defence spending.
Could part of the money for this bold project, which I think is absolutely essential to the revival of the north, be raised by giving the metropolitan mayors along the route, acting as a consortium, the powers to borrow the money, levy taxes to pay the interest and, using development corporation powers, buy land where they are going to allow housing development in future? That could be very lucrative as well.
George Osborne: In the scheme of things, the Government spend over £1 trillion a year. This railway line—I have not checked in on the latest costs—is somewhere between £10 billion and £20 billion over a 10-year period. Compare that to the housing benefit budget.
Cost is not the obstacle, really. The Treasury used to present me with a chart that said, “You cannot build the new nuclear deterrent, build a nuclear power station and do High Speed 2 all at the same time”. I said, “If they all happen on time and in the same year I agree, but that is very unlikely”. There will be a natural spreading of the cost. It does not peak in one year.
I completely agree with you that you can anticipate. You already see it around the redevelopment of Manchester Piccadilly station, which is rejuvenating that area of Manchester. If you look at where the High Speed 2 station is going to be in Birmingham, which is coming because the London to Birmingham route is under construction, that is rejuvenating that whole area already. Birmingham New Street was redeveloped by Andy Street. You are right. You can anticipate. You can make reasonable guesses and assumptions about the economic benefits that are going to accrue.
There are two challenges on the cross-Pennine railway. The first is—I may be being unfair, and I am very happy to be corrected—a kind of Network Rail orthodoxy, which is, “Why do you not improve the existing TransPennine line?”
Lord Liddle: Yes, to electrify the line.
George Osborne: Yes, to electrify the line. It was always, “Chancellor, you might want electrification in your Budget”. It felt a bit Soviet: “We are electrifying the line”. You could do that. There are definitely planning obstacles. It is through a national park. Where there is a will, there is a way. Crossrail is an amazing project. We tunnelled under the most expensive real estate in the world in Bond Street. Okay, it was a couple of years late and a couple of billion pounds more expensive than it set out to be, but it is an amazing achievement compared to some other cities, such as those in America, that have tried these big urban projects.
HS1 has gone straight through north London and ploughed through the Home Counties. It is under construction. There are these huge local objections and lots of problems. Of course, if you live next to one of these things, you probably do not want it.
You have reminded me. There was a HS1. No one remembers it now. HS1 is the line through Kent, the Javelin line, and the high-speed line to the Channel Tunnel. It was hugely controversial. Lots of people opposed it. It was built under a Conservative Government. All the Kent MPs were up in arms. When you look at the regeneration of Margate, there were lots of ingredients, such as Tracey Emin and so on, but the Javelin line was also a big contributor to it. There are people who do not agree with me, and they did not agree with me at the time, but there is a bit of, “Build it and they will come”, to these things.
Q30 Baroness Wolf of Dulwich: I have a very quick follow-up. At the moment, when we do devolve, we tend to devolve this pot, that pot and another pot. How much potential is there in reality, given the nature of government departments, to give mayors or local authorities generally more of an ability to bring pots together? How far could one go on that?
George Osborne: There was a good innovation in the Sunak Government to try to create central pots, where a city or a mayoral region would get the transport money and the skills money and they could move money between the two. There were limits; you could not just move all the transport money into something else. It was a good idea. It came towards the end of that Government so they did not have the chance to push it around the country, but it was a very good idea. I think it was called the single settlement pot or something like that. I would pick up on that idea.
Over the last couple of years I have been waiting for this Government to do the next big Devolution Act, and it never came. Who knows? It might come soon.
Q31 Lord Butler of Brockwell: Could I just invite a quick comment for you on a current proposal for a new local source of taxation? This is the tourist tax. The Government are proposing to introduce this piece of legislation. It seems to me very problematic because the rich areas will raise a lot of money from it, and it will kill businesses in places such as Blackpool.
George Osborne: I am a bit more relaxed than you are. I am not saying there should be a tourism tax. You can give it as an option to areas. If you were a seaside town that wanted to attract more visitors, maybe you would not levy a tourism tax and that would mean that people would go to Blackpool rather than St Ives. I do not know. We have not talked here about the power to reduce taxes or not to levy taxes. As someone who comes from that spectrum of politics, there is an incentive there.
At the moment, there is a voluntary contribution in Liverpool and Manchester in the business improvement districts, which is working quite well. It does mean things such as Airbnb rentals are excluded. From what I understand, I am not sure the company is against that. You have to allow a bit of local experimentation.
Q32 Lord Young of Cookham: I want to follow up the question that Lord Carrington asked and try to get an idea of what fiscal devolution might look like. Say you had delivered the Mais Lecture yourself, which promised by this year’s Budget a road map for future fiscal devolution. That is not a devolution of powers but fiscal devolution. These reforms will represent a permanent transfer of power and resources. What is it going to look like? Is it potentially just 2p in the pound being earmarked and a tourist tax? It seems to me that that is not real fiscal devolution. That is a slight variation of what we have at the moment. What would be in your Budget in November to deliver that commitment?
George Osborne: I do not know. I gave eight Budgets. It was always quite hard to come up with new ideas.
You could say, “We are going to have single settlement pots for every major city. Bristol can choose how to spend the money. Does it want to invest in skills? Does it want to invest in transport? Does it want to invest in both? The Whitehall departments are not going to have a say over that”. You could say, “We are going to go further with NHS and social care devolution. Rather than waiting for Parliament to solve this impossible conundrum, why don’t you work together to help with hospital discharges, freeing up hospital beds and so on?”
We have talked enough about Manchester. Let us talk about Bristol. You could say, “If the mayor and the local authorities in the Bristol area are able to attract the private sector, redevelop the city centre and bring in overseas investment and that uplifts employment, salaries and company profits in the area, you in Bristol will see the benefit of that. The local authority can choose whether to cut your taxes or invest more in local services. You are going to retain all the business rates that you create, if you make Bristol an even better place to invest. You are going to retain all the council tax from every new house that you give permission to be built in the Avon area”.
If you were to do all those things, that is quite a revolution. That is quite a move from where we are today. You could put it together as quite a big package.
Lord Young of Cookham: Is rate capping compatible with fiscal devolution?
George Osborne: Probably not, no, although I did introduce the council tax freeze. I live and learn.
Lord Young of Cookham: Looking at the existing bases that we have for council tax and business rates, are they really robust enough to withstand fiscal devolution and more responsibility?
George Osborne: We were in the same Government. I had several goes at trying to think of a new way to do business rates. Back then it was all about big Amazon warehouses killing the high street. I had the confidence, as you might remember, to say, “Come on, Treasury. Let us try to find a brand new way of doing it”. We just could not make it work. We could not make the sums add up or compensate the losers enough or whatever.
It was one of those undone things. There may be a big solution on business rates that reflects the modern economy. Quite a few Chancellors since me have tried and not gotten it.
Lord Young of Cookham: What about council tax?
George Osborne: I was always a bit more relaxed about a revaluation. Everyone said, “It was done in Wales and it was very unpopular”. Some things in Government are unpopular, but you can get through them.
On the actual structure of council tax, you were part of the John Major Government; I was the photocopy boy. It was actually a very good solution to the crisis of the collapse of the community charge, the poll tax.
I would not change the basis of the taxation, but I would potentially look at a revaluation. It is a bit strange. You are trying to value what a property would be worth 30 years ago. There is a sneaky way of doing it. The moment that you do a home extension or whatever, they come in and push you up a couple of bands.
Lord Young of Cookham: Could we look at the bands?
George Osborne: I was overruled by David Cameron. I wanted to introduce two new bands of council tax at the top end for very expensive houses. From memory, it was £2 million and £5 million homes. I was going to use the money to cut the top rate of tax from 50p to 40p. By the way, I did get the Liberal Democrats to agree to it, but I got overruled by the Conservative Prime Minister. We agreed on almost everything else, apart from a referendum that we held.
The Chair: We remember that, yes.
Q33 Baroness Penn: For either business rates or council tax, one approach to reform, instead of agreeing to a revaluation centrally or working with the Treasury to come up a new way of doing business rates, would be to devolve more power over how those taxes are designed or structured to local areas. That would not necessarily mean any new taxes but a bit more control for local tax bases. Is there a case for devolving or changing the design?
George Osborne: That is one way to do fiscal devolution. It is constrained, but you could go down that route. There is nothing better—again, I was guilty of this—than saying in the middle of a Budget, “We are cutting rates for pubs”, or whatever. You have to take away those temptations.
You could do that and then make local areas accountable. Again, you might find that an area suddenly goes completely bust. Again, I would say, “Let us experiment in the areas that have the capacity, the capability and the proven record of thinking smartly about policy”. As I said right at the beginning, I know that is a bit paternalistic, but it is still a big improvement on where we are today.
Baroness Penn: It might need to be agreed with the Treasury on an overall revenue-neutral basis, but you could have quite different ways of raising that revenue with quite different economic impacts, whether it was on mobility or different businesses in an area.
George Osborne: There is a challenge in both business rates and in corporation tax. These taxes do not really reflect what is happening in our economy and the structure of the modern economy.
Moving taxes from labour to capital is probably where things should be heading. Again, I did take a good look at reforming corporate tax to be something more like a revenue tax. The challenge at the time was the big American tech companies that were earning a lot of revenue in the country but not generating profits. To some degree, that was improved after my time. I made the first go at it, but there was an OECD agreement and successive Chancellors did actually start to improve it. Those tech companies are now big contributors of revenue.
Q34 Lord Petitgas: I know we are running out of time. I was just thinking that we are gently morphing this conversation about devolution into one about tax reform. In a way, does devolution mean that the aggregate amount of taxation in the country is going to be neutral? Are we saying that some of these councils or regions will be able to increase tax? If so, I cannot imagine that is possible, given the fact that central Government is in such deficit. We are going to come, at some point, to this point about giving regions the ability to tax more when, if anything, the tax pressure is up, not down.
George Osborne: Yes. The Government would be able to offload the responsibility for funding certain revenue to the local areas as a result and, in theory, if it wanted to, it could either cut taxes or spend the money on other national priorities.
Q35 Lord Liddle: You have already said something about fiscal devolution in Scotland and Wales. Is there anything that you want to add to that? To me, it seems as though it has enabled the nationalist Government in Scotland to claim that they are a progressive party by having slightly more progressive taxes. It does not seem to me to have been used for any credible or realistic purpose in terms of improving the performance of the Scottish and Welsh economies.
George Osborne: That is a perfectly fair observation, but it is ultimately for the voters in Scotland to pass judgment on. As I said earlier, it is complicated because, as you have seen in the recent Scottish elections, the performance of the national Government remains an absolutely key determinant in those elections. They said they wanted to raise more tax from wealthier people and spend more money. The welfare bill is higher in Scotland and the tax bill is higher.
At some point, if you are a democrat, you would think that people might start to ask questions about whether that has worked as an approach. Historically, when states push higher taxes and higher welfare bills, eventually there is a snapback and a reaction. We could have a long discussion about Scottish politics, but there was a period where you felt there was a bit more focus on the performance of the Holyrood Government.
Q36 The Chair: Can I ask a nerdy Treasury-ish follow-up question on that? Given that the Scottish Parliament is raising more taxes from its population than English people are paying to their Government, is there a case for reducing the Barnett differential, the amount of public spending per head that Scotland gets? Scotland gets about 19% more per head than England. Do you see those two as going together? Politically, it would be extremely difficult. What is your view about the relationship between those two things?
George Osborne: Every time I took a look at the Barnett formula, the Chief Secretary, whose constituency was Inverness, took a dim view. The Treasury always used to convince me that it was not really worth the candle and that a needs-based assessment of Scottish spending, if it was similar to England, would also lead to lots of money going to Scotland. I cannot remember. I am afraid I will have to gen up on this, but the Barnett formula eventually tapers. It is taking quite a long time.
There is another thing. Certainly, I believe this, but not everyone will. Part of your job is to keep the UK together. Sometimes things are a bit messy and do not quite add up. One of the things that I say to people outside politics is that voters and politicians are not always and often not at all motivated by economic efficiency or maximising profit and growth and whatever for a country. That might be an example where keeping the UK trumps running the country at maximum economic efficiency.
Q37 Lord Newby: A lot of the discussion tends to be, as Lord Burns has said, about expenditure and the devolution of decision-making there rather than tax. I would very much like to come back to tax. The one tax that you were very much involved in devolving was business rates. It was 50% and now in some places it is 100%. Are you still a strong advocate of that? How successful has it been?
George Osborne: There are signs that it has been pretty successful. It is a very clear and straightforward incentive. The powers for a mayor, city authority or set of city authorities to make a place more attractive for business investment are quite straightforward and well understood as a playbook. You can almost immediately see the benefits.
As I mentioned earlier, council tax receipts from new-built homes would be another option. That did not used to be the case. You used to get nothing for allowing a new house to be built in your area. None of the additional council tax would come to you. Yes, business rates can be pushed on.
Lord Newby: The good thing about business rates, in a way, is that it is understood, it is happening and you can make the case. Once you have gone beyond that and possibly done the tourism tax and other small things, the challenge of devolving revenue-raising powers rapidly becomes a lot harder. What do you do next? If you were forced, having been successful with devolving business rates, to go beyond that and say, “We have done that, but we want to do the next thing”, what would the logical next thing be?
George Osborne: It would be corporation tax. There are some evasion issues. We have this in Northern Ireland, where someone just has to put a brass plate on an office in Belfast, but the real economic activity will be in the mainland. You can live with a bit of that. It took me a long time to understand this, but you can live with a bit of messiness and not everything being perfect. Why not allow certain city regions to have lower rates of corporation tax to attract business investment? Corporation tax is not one of the really big revenue raisers, so you are not risking your central funding model for the national Government.
Stamp duty is another one. You could give local powers to vary rates of stamp duty. Stamp duty was given to the Scottish Parliament.
There are other things that you do not really think of as national taxes, such as congestion charges or low emission zones. National Governments often come in and say that these things are outrageous to try to win local contests. The Manchester Labour authorities under the last Labour Government tried to introduce a congestion charge. I was a commuter belt MP. I was rather in favour. I discovered that almost all my constituents were against. It was a shame that they did not get it through.
Lord Newby: The other thing, which I think you mentioned earlier on, is the possibility of allocating a tranche of a national tax, income tax, national insurance or VAT, to a devolved Administration. Is that genuinely worth it? It is an act of accounting rather than a change in responsibility.
George Osborne: You would also give the additional revenue against a baseline. Again, there would be an element of, “Where do you set the baseline?”
If you expected income tax receipts in Leeds or West Yorkshire to grow by 1% over the next year, and they managed to get it to grow by 3% because they have encouraged lots of employment locally, you could let them have that additional 2% because you have budgeted for the 1%. It is a kind of windfall.
The thing is that you have to be realistic. You cannot really make it work the other way. If there is a recession, which periodically there is, they will have money withdrawn from them anyway by Chancellors and Governments because there is always austerity after recessions. It is a bit of a one-way slide; it is not a one-way bearing.
It comes back to my very first answer to you. In England, you are not doing it to strengthen local democracy. That is not a bad thing. You are doing it to drive economic growth and increase the economic incentives on public authorities outside the south-east of England.
Lord Newby: That model with income tax is an incentive. Like business rates, it is an incentive.
George Osborne: Yes.
Q38 Lord Young of Cookham: I have a very quick follow-up. You mentioned stamp duty and corporation tax as things that might be devolved. What about vehicle excise duty, which used to be collected by county councils?
George Osborne: Are we not moving to a mileage-based system? That was another idea where David Cameron said, “Thanks, George. We are not having the poll tax for cars”. In the recent Budget, the Government have kind of got away with it, although you will be closer to it than I am. I do not know whether the laws have passed.
Lord Young of Cookham: The mileage tax will go to central Government, as proposed. Could it not go to local government?
George Osborne: That would encourage more car use because they would get more money for more miles. If you had a self-driving car tax, that would encourage cities to allow self-driving cars.
Lord Newby: It could have an interesting redistributive effect between rural and urban areas.
Lord Young of Cookham: My question was not about that. It was about the vehicle excise duty.
George Osborne: I am sorry. You are right. We were talking about fuel duty. VED is around car ownership, is it not? I have not thought it through, really. Do you want to encourage more car ownership in an area or not? It is probably an indicator of prosperity, although maybe not anymore. Maybe prosperity is not needing a car because you can take an Uber everywhere or cycle.
Lord Burns: Yes, or how far you have to travel to go to work.
Q39 Baroness Penn: On business rates retention, there is a process of rebaselining after around 10 years—you keep your upside for a period of time—to address this question of equality. That rebaselining can dull the incentive and lead to some gaming behaviour about what the baseline says. There is always a question of how far you would go in allowing local areas to keep, maybe in perpetuity, this upside windfall of greater growth that you would not have otherwise had versus the concern from central Government either about growing inequality between areas or losing some of their central revenue that allows them to spend on a more needs basis.
George Osborne: Again, the truth is that there is no neat solution. There will be changes in the economic geography of the country over time. Even in my lifetime, the East End of London has seen a spectacular change in circumstances. If the original deal had been that Canary Wharf could keep all the money that is generated in Canary Wharf, that would be a lot of money for a very small number of residents.
You probably have to keep the whole system under constant change and review. In a way, I would not make perfect the enemy of the good. We are still in a situation where there is a lot of central control, a lot of balkanised budgets in Whitehall and not many incentives on local areas to allow for economic development, encourage economic development and investment or work with the private sector. Nudging it in that direction, particularly in the big city areas, would be a good thing.
Baroness Penn: Yes, the risk is that the instinct to rebaseline in too short a time period and not release some of that control could hold you back in terms of the real effect of those incentives.
George Osborne: The Manchester deals did have timelines baked into them, whether they were 10 years or 30 years. The Manchester Metrolink was built with the promise of an earn-back on business rates, which essentially was a shadowing of where the rates might go. That was a 10-year deal. The housing one was a 30-year deal. You are giving some long-term confidence.
Q40 Baroness Wheatcroft: I wonder whether there is a stage at which competition between areas could become counterproductive. Take free ports, for instance. Would that be something that Government could devolve completely and let the best win, or should central Government retain some sort of structure over things like that?
George Osborne: I had a version of free ports with the enterprise zones. Rather than having 20 enterprise zones—I was guilty of this—or free ports, the ones that work are where national Government throw their effort and resource around a project such as Canary Wharf. You take a couple of distinct projects and create a special planning authority and so on.
Enterprise zones and free ports are pale shadows of those 1980s development corporations, which, it should be noted, were very unpopular often with local people at the time. The Limehouse Link tunnel was very opposed by people in the East End of London at the time. I used them. Rishi Sunak had free ports. This Government have a version of them. There are artificial intelligence zones in Teesside and south Wales. That is more in the survival bracket of politics than the long-term part.
The Chair: We have covered a huge range of themes and questions. Thank you so much for your time and for being so willing to discuss all that. It is very interesting also to hear you claim ownership of the first wave of Manchesterism. There are other people who are not yet in Parliament who may think they are the inheritors.
George Osborne: He was the enormous beneficiary of it.
The Chair: “Osborne claims Manchesterism”—I can see the headlines.
George Osborne: It was a partnership, including with the Mayor of Manchester. Let us see how he does.
The Chair: Thank you very much again. With that, I can say the meeting is now closed.
