26
Examination of witnesses
Dr Jonathan Carr-West and Thomas Pope.
Q69 The Chair: Welcome to the Lords Economic Affairs Committee’s fifth evidence session of our inquiry into the hot topic of fiscal devolution in England. We are delighted to have two experts with us: Dr Jonathan Carr-West, chief executive of the Local Government Information Unit, and Thomas Pope, chief economist at the Institute for Government. We are very grateful for your time. Thank you so much for coming. This is being broadcast on parliamentlive.tv and a full transcript will be taken so that we can share it with you after the meeting to make any factual corrections.
Can I start by asking you a general question about the case for devolution? We are an Economic Affairs Committee, but there are contending rationales for significant devolution. Do you think that the question of enhancing democracy and the power of local politicians is a good enough argument for devolution, irrespective of the case for it positively affecting economic growth and economic outcomes, or do you not think that?
Dr Jonathan Carr-West: The short answer is yes.
The Chair: Excellent. We like short answers.
Dr Jonathan Carr-West: It is. Localism has a series of benefits. It has a democratic benefit. All things being equal, decisions should be made by the people closest to them. It also has a series of public good benefits, such as social cohesion, democratic engagement, as I said, and more efficient management of local public services. Targeted prevention is incredibly hard to do. We have seen how hard that is to do from siloed Whitehall departments.
The case for democratic accountability is really strong. I do not think that it is just a soft add-on to growth. The current system blurs accountability. Mayors and council leaders are held responsible for outcomes that they cannot necessarily control. Citizens or residents do not know who to point the finger at when things do not work in their neighbourhood. Is that the council, the strategic authority or the Government? Everyone blames each other. All of that feeds into some of the challenges around declining trust in politics, political disengagement and political polarisation, which we are seeing accelerating around the country. There is quite good OECD analysis to support that. Where you have own-source revenue, that strengthens transparency and reinforces democratic accountability.
Thomas Pope: Building on what Jonathan said, the cases are quite linked, in that lots of the ways in which you think that fiscal devolution might lead to better economic growth or better policy outcomes in various ways run through that empowerment and strengthened accountability of local leaders. There are contending rationales that we may get on to as to why and how fiscal devolution might be good for economic growth. Whether you think it is because it gives local politicians a greater incentive to improve economic outcomes in their region, or whether you think it provides a level of long-term certainty and greater flexibility about how to use money, therefore allowing mayors and other local politicians to do things differently, both of those rationales run through an empowerment principle.
We do not have a house view as to whether it is worth doing just on that basis. As a think tank that tends to focus on how to achieve the Government of the day’s objectives most effectively, we would think about what the Government’s rationale is here. The cases are very linked. As Jonathan says, that lack of public trust in general and that democratic disengagement is itself bad for policy-making, both nationally and locally.
The Chair: I have one follow-up to that. We are talking about devolution in England, which has comparatively very little devolution compared to other nations in Europe and elsewhere. It also has the characteristic of having one dominant area—London and the south-east—politically and economically, you might argue. Does that make devolution harder or more urgent to achieve, in your view?
Thomas Pope: That is a good question. As Jonathan alluded to, there is good evidence internationally that particularly fiscal devolution is associated with stronger economic growth outcomes and generally less inequality between regions. There are reasons to think that that is not just a correlation and that there are some causal relationships there. It is important, therefore, to see the centralisation of our state—a longstanding feature—as something that has led to, or at least contributed to, even if it is not the only cause, that big difference between London and the south-east and the rest.
It is right to say that that dominance of one region over the rest is not shared by other countries, but we should not overstate the equality of other countries. It is not like, in those other places where there is fiscal devolution, the differences between different city regions or administrative regions are only marginal. There are still quite big degrees of inequality. For that reason, there is fiscal equalisation and other mechanisms in place. Certainly the fact that London and the south-east is at a different starting point means that we need to think carefully about the design of devolution, and specifically fiscal devolution, but I do not think that it is a reason to put it in the “too difficult” box.
Dr Jonathan Carr-West: “Harder to do” and “more urgent” might not be mutually incompatible. It could be both. I would argue that it is both. England is a bit weird. We are one of—what?—only six countries in the world that does not have a codified constitution. That makes some of these regional power imbalances much harder to challenge.
We heard a lot about Germany’s basic law yesterday, but it is really interesting. That stipulates that resources have to be redistributed. There has to be uniformity of living standards across the country. That means that, if places are not getting that, that can be challenged constitutionally in the courts. It is a very different set-up.
When you look at countries that have a greater degree of fiscal devolution than we do, which, by the way, is pretty much everywhere, it is not like they are paradises of equality and do not have inequalities, exactly as Tom said. Devolution potentially provides us with mechanisms for dealing with those inequalities, putting equalisation processes in place and, to some extent, depoliticising that, or at least taking it out of the politics of the moment. It becomes part of a constitutional settlement, rather than a political football between the Government of the day and whoever controls those places.
Q70 Baroness Wheatcroft: My question leads directly from what we have just been talking about. Clearly, there are major inequalities in the country. Although I am sure you are right and discontent is about a lack of accountability and all sorts of other reasons, perceived inequality is absolutely one of the reasons why that discontent is particularly rife. I wonder how far you think equalisation needs to go. Should we be prepared to see some of the inequalities not just persist, but potentially, if some areas really make the most of devolution and truly prosper more than they do now, get even greater in some areas? What do you think the public would put up with on that front?
Thomas Pope: It is important to distinguish here between different types of inequality. We could think about inequality of outcomes. We currently have very big inequality of outcomes in this country. We have talked about that. There is regional inequality between economic outcomes, say. You could also think more specifically about inequality of public spending. We currently have a system that tries, as far as possible, to equalise local government resources across places according to need. The amount of revenue that is raised in a place is not well correlated at all with how much we spend in that place, and that is a deliberate choice.
A move towards fiscal devolution, certainly if you wanted to maintain some incentives for growth within that, would likely require that closer link, or at least some closer link, between, at the very least, growth in revenues from your starting point and growth in resources to spend. That implies greater inequality there.
There are services that are absolutely essential—public service delivery, for example—where there is certainly a lower bound beyond which we would not be willing for places to go. There is also a difference between deviation in the short term, when there might be a reset that came along at some point, and deviation in the long term.
It is important to note that most other countries do not aim for this full equalisation of resources in the way that we do. If we look at those other countries that have fiscal devolution, they have strong equalisation mechanisms. They have countervailing transfers from richer places to poorer places. In particular, that is attempting to lift up poorer places to some kind of minimum lower level. They are not aiming for full equalisation and yet, when you look at their outcomes, they have less overall inequality. There are different reasons why that is the case, but you might think that at least part of that is places’ incentive to ensure that their resources are increasing.
Also, there is an imperative and attention so that, if you see that a place is falling behind, there are direct spending and revenue consequences that focus attention not just in that place but also centrally to say, “What is happening there and how do we fix this?” At the moment, beyond the resources and data that the Treasury produces on the effective deficit in each part of the country, there is not a very direct reason for us to worry or a warning signal to say, “Hold on. Why is this place not doing quite so well?” If resources were linked more directly, there would be a lot more attention on that question.
Baroness Wheatcroft: I am sure that that is true.
Dr Jonathan Carr-West: I agree with all that. When we see this work well, it is the places that use equalisation to create a floor and then allow other places to rise above that. Tom talked about the fundamental services that need to be provided, but we do not really have an understanding of what those statutory duties should cost, because we have not reviewed statutory duties for a long time. That principle of having a funding floor based on your statutory duties and then allowing fiscal flexibility that raises places above that floor is very difficult here because we do not have a definition of what the floor would look like, so yes, but it is hard.
When you look at the ones that do it well, such as the Japanese local allocation tax or the German one that I will not attempt to embarrass myself by pronouncing, that is how they work. They have a basic constitutional entitlement and then places can flex themselves above that.
Baroness Wheatcroft: Does it have to be spelt out which services, for instance, or outcomes we will limit the floor to?
Dr Jonathan Carr-West: It probably does. This is a broader point, but it is one challenge that we have in local government in this country. There is something that I am often asked. Journalists call me from other countries and they say, “Where do I find the list?” It particularly happened with Birmingham: “Where is the list of statutory duties?” “Oh, there isn’t one”. “What?” “There isn’t one. It is a million different pieces of legislation”. People think that that is absolutely mad.
Thomas Pope: We may well come on to thinking about the difference between devolving revenue and taxes to strategic authorities against local authorities. With statutory duties, such as social care, increasingly taking up a huge proportion of local authorities’ attention and budgets, you would want to be much firmer on the floor in that instance. That is clearly delivering essential services and there are a lot of pressures to start with in those places.
Strategic authorities, at least to date, have been in a very different place, where a lot more of the money that they have controlled has been linked to economic growth levers, whether that be skills or capital spending on housing, transport and so on. For a start, it is much harder to think about what your minimum provision floor looks like when it comes to capital spending. You might think that that makes it easier to have a bit more variation, but at the same time, if you take that to its logical conclusion, we probably do not want to be making decreasing economic investments in the places that are falling behind and increasing economic investments in the places that are running ahead. You certainly do not get away from this equalisation argument at all. One reason perhaps why, certainly when the Government have talked about this, they have talked about it in terms of mayors, at least in the first instance, is that, when it comes to local government, you have a whole set of extra considerations that make this more difficult.
Q71 Lord Young of Cookham: Can we look at what fiscal devolution actually means? If you look at the Mais Lecture or the Chancellor’s exchange at the British Chambers of Commerce last week, the frontrunner seems to be a percentage of income tax going to the local authority, be it strategic or lower down. Is that really fiscal devolution without any underlying revenue-raising powers for the local authority?
Dr Jonathan Carr-West: The short answer is no.
The Chair: We are loving the short answers.
Thomas Pope: Again, it comes back to what you are trying to achieve by fiscal devolution. If your rationale is linked to increasing growth and your case for change is that places need to have a stake in their success and get more revenues when things go well, or indeed if you want them to have a more certain longer-term settlement that is not dependent on the Treasury every couple of years, both of those things are achieved by revenue sharing and not variation in tax rates.
Lord Young of Cookham: Can I pick you up on that? You said that this would lead to a more certain settlement. If a big chunk of your revenue is 10% of the local income tax and there is a recession, a Government are coming up to an election and they cut taxes, or they have just had an election and they put them up, it seems to me that that may be even less certain than the system that we have at the moment.
Thomas Pope: Yes, that is completely right. I should clarify that, when I say “certainty”, there is an important distinction to be made. There is short-term variation from year to year in how much money you have. Relative to a spending review settlement, which is fixed in cash terms, income tax will vary more. Anything will vary more than that. It is fixed.
That is versus what comes beyond that and having your spending or your settlement linked to what is a buoyant tax source that generally increases in line with the economy, versus what local government has tended to see for a long time of, dependent on each spending review, “What is the money that we are going to have?” If you look at most spending reviews in the last 25 to 30 years, local government tends to come out towards the bottom of that. That is less and less resource that has been going to that sector.
If you think about the types of decisions strategic authorities are wanting to make about longer-term investments, often that would mean having to commit some money beyond the existing spending review periods. They are very limited in their ability to do that under the current system. There is a distinction there between additional volatility in the short term and a more stable settlement in the longer term
Lord Young of Cookham: Jonathan, do you want to amplify your single-word answer?
Dr Jonathan Carr-West: I would add that—Tom said it—the current uncertainty is worse than that. Fine; this year we got a three-year settlement for local government. The eight years before that, we had one-year settlements. It is true that there is uncertainty attached to allocated tax, but it is nowhere near the uncertainty that we have in fact been living with for several years.
We can forward these to the committee if it does not already have them. We have done a series with the University of Northumberland looking at comparative studies of different ways of financing local government. The lesson is that you need variety. It is not optimal to be relying on a single or very small number of funding sources, whether that is devolved or allocated taxes or government grant. Where you give local areas a basket of revenue opportunities, so some local tax powers, some different borrowing powers, some investment powers, some money from central government and some allocated tax, that tends to produce a more sustainable and ongoing system.
Lord Young of Cookham: Can I ask another question that may have a very short answer? Is rate capping or council tax capping compatible with fiscal devolution?
Dr Jonathan Carr-West: I struggle to see how it is.
Thomas Pope: I agree with Jonathan.
Lord Young of Cookham: I have one final question on borrowing powers. At the moment, local government is basically free to borrow, subject to it being affordable, prudential and one other condition, with a reserve power for central government to intervene if they think it is doing something unwise. Would we need any changes to the borrowing powers of local governments, or are they adequate if one went down the fiscal devolution route?
Dr Jonathan Carr-West: They are probably adequate. There are other more interesting things that you could do. For example you can look at some municipal bonds. We tried to get this off the ground in this country and it took forever and did not really work. They are hugely successful in places such Sweden. Has the UK Municipal Bonds Agency closed now? It was this terribly tortured thing. I think that it only issued one bond. We talk about tax and borrowing, but there are other instruments as well that we should add into the mix.
Q72 Lord Carrington of Fulham: Can I carry on a little bit on that previous answer about bonds for local authorities? I suspect that one reason why it has never gone anywhere is because they have an underlying government guarantee, whether explicit or implicit. If they do, they are not really local government bonds in the sense of the Swedish model, or indeed the American model, where, in effect, the local authority issuing the bond has its own credit rating and access to the markets independent of the Government. Is that right?
Dr Jonathan Carr-West: I would need to check. As I say, it came into existence in this country. The former chairman of the LGA, Sir Merrick Cockell, was the chair of it. We had some meetings at the very beginning with the guy from Sweden who had launched it in Sweden. The French basically launched the whole system and started issuing them in the time it took us to even get off the ground. It never really flourished.
One would have to look at the reasons why, which I do not have in front of me. You will often have conversations with the Treasury. It will say that Ministers’ appetite for reform is entirely associated with 100% business rate retention, or now it is going to be local income tax allocation. That will be it. In lots of other non-crazy places, such as France, the US, Scandinavia and Germany, they have this whole range of different tools in their box. We seem to limit ourselves here to trying one thing at a time very laboriously and seeing whether it works.
Lord Carrington of Fulham: Coming on to fiscal devolution in the sense that you have been discussing it, if it is going to be not just an allocation of existing revenues—in other words, local authorities are going to be able to raise their own taxes, decide how much and decide what rates they are going to charge against that to raise that revenue—what proportion of local government expenditure would you need to be able to cover by giving the local authority the power to decide how much it raises? Are we are talking about 30% or 40% of local government expenditure? That determines what taxes you would have to give the power to local authorities to raise.
Dr Jonathan Carr-West: At the moment no one is proposing giving local authorities that sort of tax-raising power. This is an interesting juncture. If we are frank, we do not quite know who is going to be making these decisions and what that pathway is going to be. At the moment, we are talking about allocating some national taxes to strategic authorities.
One question is whether fiscal devolution should extend down to local authorities. I think it should, not least because I am not really clear on the pathway by which the whole country achieves strategic authorities. That seems to be very opaque at the moment. The first question is about which level you are fiscally devolving to, and then which taxes you might allow local authorities to vary. Then your question becomes real, in terms of what amount of their revenue would need to be covered by that. It feels like we are a very long way from that. It is not really possible to answer that, given the mess local authority finances are in and how far away we are from that being a real discussion.
Lord Carrington of Fulham: How do we decide what taxes get devolved? Clearly some taxes, such as the tourist tax or various small add-on taxes like that, are going to raise in some areas a lot of money and in some areas no money at all. They are never going to pay for a significant percentage of local government expenditure, whether it is at a regional level, a strategic level or whatever. How do you decide?
Income tax is always going to be set nationally, one suspects. That seems to be the proposal, so you are not actually allocating income tax. You are saying, “If income tax is at 30p in the pound, we will give 25p to the central Government and 5p to the local authority”. What taxes do you do? Local authorities are presumably going to have to have a reasonable amount of income, which they, notionally at any rate, can decide how to spend.
Dr Jonathan Carr-West: There are two responses to that, which slightly edge your question rather than fully taking it on. First, who decides? You say, “How do we decide?” Who is deciding and where does that decision sit? That is part of the challenge in all this. If we are serious about devolution but are saying, “People in this building will decide which taxes can be done”, is that really devolution?
Secondly, we do not even let local authorities decide on the taxes that are already devolved to them. Local authorities do not set business rates. They have very minor leeway to vary business rates. We have already talked about council tax caps. They have to have a referendum, which I do not think anyone has ever done. Somewhere threatened to once. Again, we are such a long way from that.
My response would be that we need to first fix some of the taxes that local authorities already have. Let us think about how we make council tax a more functional and locally driven instrument that responds to local economies and is linked to local democratic decision-making, so that people can see a connection between how they vote, what their taxes are and what that gets spent on. There is a whole piece around trying to deal with some of the broken bits of what we have now before we start introducing significant new taxes. As you say, there are things such as a hotel tax. In some places it can raise fairly serious revenue, but it is pretty marginal.
Thomas Pope: I do not disagree that there is a bigger piece here, which might be beyond your committee’s scope, on local government finances as a whole. Fiscal devolution should probably be couched within that broader challenge. Council tax should definitely be on the table.
That said, as a more direct answer to your question, there are a set of taxes that are better candidates for making local and those that are not such good candidates. We can learn a bit from the taxes that we have and have not devolved to Scotland and Wales, partly based on how easy they are to allocate to different places. On income tax, it is not so straightforward to know exactly where everyone lives and there is probably a bit of work for HMRC to do there, but it is certainly something that has been possible in Scotland and Wales. VAT is a tax that has been on the table for devolution to Scotland for some time but actually allocating that revenue is extremely difficult. There are practical challenges.
There are also some other criteria. You probably do not want taxes that are too volatile, to the point that we were talking about before, for example if you were to devolve all of stamp duty revenues. Income tax is pro-cyclical. Stamp duty is extremely pro-cyclical. It would not be possible for an authority to base spending plans on taxes such as that. Stamp duty also falls into the box—the Treasury should be thinking about this—where, if we have taxes that we do not think are very well designed and we might be wanting to reform quite significantly, if we put that into part of a local government finance settlement, are we then making it harder to make changes to those taxes and reform them?
As to the point of variation of taxes, it is important to recognise that these other countries that have what we would recognise as much more fiscal devolution do not have widely varying tax rates, on the whole, in lots of different places. Revenue sharing is often a big part of the model and there might be a bit of flexibility to change the rates a little bit. Even in places where there is some of that flexibility, it is not always used. The ability to change tax rates should be on the table, but it is by no means the main potential win from fiscal devolution.
When we are thinking about the design of taxes, we probably do not want to get into a situation where we have very differently designed taxes in different places, not least because the collection mechanism becomes much more complicated. There is an administrative simplicity of HMRC being able to collect on behalf of the whole of England, which it can do quite easily if at least the structure of the system is the same in different places, and then allocating revenue in that way.
Q73 Lord Butler of Brockwell: Could we go on to equalisation measures? Given the desire to promote incentives to grow while removing inequalities, or at least reducing inequalities, what would you recommend as the most effective equalisation methods to apply in England?
Thomas Pope: It is interesting that, if we look internationally at how these models tend to work, there are different models out there but they generally boil down to, as we have talked about a little bit, equalising grants that tax places that are above average and subsidise places that are below average. There is a floor that you make sure that you raise those underperforming places up to, in terms of revenue or the amount that they can spend.
I tend to think of it as a bit like a tax rate. You in effect say that 75%, which is roughly what you have in the German system, of your surplus above the average is taxed, in that it is taken away as an equalising tax or tariff on you. Similarly, there is 75% or so of the gap from the average that those who are below average get as a top up. That is how models tend to work in other countries.
There are two things to note about that. One is that they tend to have been in place for a long time and often have not started as very centralised systems that have then devolved, but have evolved in a different way. If you were to implement that today in England, you would get a lot of inequality in resources between places that would not be a result of tax-induced incentives, because London and the south-east are already doing it a lot better than other places. You generate an amount of inequality that is not related to incentives, but is just related to this new model.
The way that we have tended to do it in the UK, either in the Scotland and Wales example or in the business rates retention example in England, is that we replace grants with some tax revenue on day one, such that no one is any worse off on day one. We say, “You would have got this amount. Through a combination of the tax revenue that you now retain and a top-up or a tariff, you still have that amount on day one, but then we allow you to keep a certain proportion of the amount that you grew above the baseline going forwards”. That is what we have tended to do in England and in the UK in the past. Given the high level of inequality that we start with, it makes sense to pursue something like that.
The big decision that you then have within that kind of system is when and how often you want to reset the system, or whether you want to reset the system. In Scotland and Wales, we have a presumption that that system will not be reset. There is no plan to revisit at some point in 15 or 20 years and change the block grant adjustments to ensure that Scotland and Wales are no worse or better off than they would have been. The presumption is permanent divergence.
Within the business rates retention system, there was no formal timetable for a reset, but we have just had one now. This is where you get quite directly into that trade-off between equalisation and incentives for growth. The more quickly and often that you reset, the weaker those incentives are, because there is a shorter amount of time that an area actually gets to keep the proceeds from that growth. That is a trade-off that the UK system would need to grapple with, but I suspect that, given our starting point, that is probably the most sensible approach.
Dr Jonathan Carr-West: In addition, where is that equalisation decided and by whom? You have places where it is through a very clear formula. We talked earlier about Japan’s local allocation tax, which, by the way, is taking big chunks of national taxation, so 33% of income tax, 50% of alcohol duty and 20% of corporation tax. It is all going into that pool that is redistributed to local authorities.
It is interesting when you look at places such as Italy, where it has the Conference of Regions and Autonomous Provinces. You have local government institutions that are making these decisions about and monitoring the system of equalisation.
The system that Tom just described is one of the clearest explanations of an unbelievably complicated situation. I used to go mad: tariffs, top-ups. It is like the Schleswig-Holstein question. All that was decided in HM Treasury. It gets interesting when you start creating regional bodies, so perhaps a council of the mayors or council of the regions, that start to control some of this stuff, so it is not just a top-down central government diktat but true devolution, in which the regions are coming together with a clear constitutional settlement to monitor a system of equalisation. There is the “How much?”, and the “How does it work?”, but there is also the “Who?” that is really important.
Lord Butler of Brockwell: Would you see an advantage in there being two sides of the same coin? I mean a Robin Hood system, where you take money from the rich to help the poor. You take money from the rich and therefore make economic activity a little less attractive in the rich area, and then you help the poor and make economic activity there more attractive. I think that that is called horizontal equalisation, is it not? What do you feel about that?
Thomas Pope: There are two different points there. One is what the money itself can achieve. Can that money itself help to grow the economy in those weaker places? Then second, if you are thinking through the incentives for local leaders to drive growth in their places, the stronger the equalisation mechanism, the less strong the incentive for that underperforming place to make the most productivity-enhancing investments. They know that much of the shortfall relative to the level that they might attain will anyway be topped up through a tariff.
A lot of this comes down to—and this is true regardless of whether we are thinking about fiscal devolution or not—how we can ensure that the money that is spent in these places, and certainly the money in economic investment terms, is spent in the most effective way. Partly, what you think is the right approach to equalisation depends on how important you think this growth incentive point is. If places do not face a very strong reward for stronger growth in their places, or a very strong penalty for weaker growth, how much is that leading them to not prioritise growth?
I happen to think that, certainly at the strategic authority level, most mayors would say that growth is already one of their priorities. I see more of the benefits potentially accruing from what we talked about before, in terms of a longer-term stream of revenue that they can plan on the basis of, rather than it being the really intense incentive to grow.
Dr Jonathan Carr-West: I agree with all that. As has been mentioned many times, we already have massive disparities. Council tax is double in Hartlepool what it is in Westminster, for example.
You talked about horizontal equalisation or redistribution. We also need to think about the vertical redistribution between different tiers and layers of government. It is not just about moving money between places, though that is important, but also how you are moving money out of central government and down to strategic authorities and then local authorities.
That is part of the challenge of this. It is very hard to think about fiscal devolution without getting into a much more systemic conversation about how we do public services, what is delivered where and who decides. So much of the money that we spend as a country is spent from this square mile here and decided in this building. Unless you are redistributing that as well and getting more spending decisions made at a local level, fiscal devolution is only half the picture. It is an incomplete project. It has to be systematic devolution.
Lord Butler of Brockwell: If you take a very crude model, which is not devolution at all, of having a higher corporation tax for entities in the south-east and a lower corporation tax for entities in the north, you would discourage corporate activity in the south-east and encourage corporate activity in the north-west. What do you feel about that?
Thomas Pope: All else being equal, that is absolutely right. We should absolutely want to have a system where more businesses want to locate more jobs particularly in our second cities outside of the south-east and London. That would represent a rebalanced and overall more economically successful country.
I would be wary of wanting to force that through tax incentives. Tax should be the last reason we want someone to relocate. If you think about it from the perspective of a maybe slightly naive economic model, in general we want the tax system not to distort the decisions people are making. If businesses, in the absence of the tax system, see that London and the south-east is the most efficient place for them to be located, they are choosing a less efficient place to locate because of tax reasons.
The way to true rebalancing is to change all those other factors that are affecting that location decision, whether that be the skills of the people in those other places or the transport system in those areas, such that those places are equally attractive on those terms, and therefore have relocation for those reasons. I would be wary of forcing it through tax incentives.
Dr Jonathan Carr-West: Again, is it not about who decides? The situation as you just described it—forgive me if I misunderstood—was central government saying, “Let’s give lower corporation tax in the north-west and higher in London so that we can move stuff around”. That sort of planned economy approach across a country is quite difficult.
That is different from saying, “Let’s give the Mayor of Greater Manchester, the Mayor of London and the Mayor of Norfolk and Suffolk”—if we ever get one—“an ability to set, or at least vary, corporation tax and spend the money on skills development or infrastructure investment”. They are then taking a whole-system look at their region and the competitiveness of it, in which tax is one part, but so are investments in public services, infrastructure and skills. They are managing that more holistically in order to attract business and get growth, rather than someone sitting in the centre of the web trying to decide which bits need to be raised up and which bits need to be dampened down.
Thomas Pope: This goes back a bit to Lord Carrington’s question about which taxes are appropriate for fiscal devolution. At the point where you are thinking about varying rates in different places, you need to be cautious, probably, of allowing too much flexibility in the rates on very mobile factors of production. There are different ways in which countries try to devolve corporation tax and allocate it to different places, but we know that profits are one of the more shiftable things. You would be therefore concerned about trying to create too much tax competition.
To slightly counter that thought though, tax competition is often a reason people cite for caution about variation in tax rates. It is worth noting that the international evidence suggests that, in general, where there is some level of variation of tax rates, you do not see a race to the bottom. Those authorities often see the benefit of increasing tax rates somewhat, using that power, so that they can spend money in a more popular way.
Q74 Baroness Wolf of Dulwich: I would like to turn to something that you have already raised in passing, which is about the structure of local government, including strategic authorities. In the recent English Devolution and Community Empowerment Act, the focus was very much on strategic authorities, and many of our witnesses have seen that as appropriate. In this country we have a patchwork of authorities for historic reasons. Maybe if we had had a constitution 150 years ago we would not, but we did not and we do not.
Again telling you what you already know, the level of enthusiasm for strategic authorities is quite varied. People feel very strongly, which is why we have Rutland. If we are moving to a more fiscally devolved system, are the Government right to, at least in the first instance, focus so strongly on strategic authorities, or should they be thinking now more clearly about other layers and different tiers of government at the same time?
Dr Jonathan Carr-West: Rutland is one of my members and it is a very fine local authority. In principle, as a plan it made sense to say, “We will focus on strategic authorities first”, when it was also part of that plan that you would create strategic authorities across the country and have—what was the phrase?—mayors from the channel to the Scottish border. That has not been achieved. Amendments made in your Lordships’ House meant that the Government did not get the power to compel places to do devolution.
That makes that plan look a lot less good, because the risk is that you are going to end up with a two, three, or possibly even four-tier system. It is getting complicated now. You have established mayoral authorities, strategic authorities and foundational strategic authorities. You have a whole range of things, each of which look like they are going to get different packages, meaning different packages for each of those tiers and possibly, it looks like, different packages within those tiers, because there is a lot of negotiation going on.
We seem to have moved a long way from the promise to get rid of deal-based devolution and have a framework. In that context it feels far less sensible to be talking only about devolution to strategic authorities, because I think a lot of the country still will not have them. Even in the devolution priority programme areas, so places such as Norfolk and Suffolk and Essex, we have seen changes of administration. The Government do not have the power to compel. It is not at all clear that those places are going to choose to go ahead even with foundation strategic authorities, let alone the mayoral strategic authorities that they are still scheduled to have elections for in May 2028, but that looks very sketchy. It is very uncertain.
Either you need to go back to that plan and say, “We are going to do it to strategic authorities, but then we need to have a road map to strategic authorities everywhere and some way of delivering that”, or you need to think more creatively about what fiscal devolution looks like. I do not think it is desirable just to say, “For those places”—you might say that they made the choices—“that got ahead of the curve, so Greater Manchester, the West Midlands, Tees Valley and the north-east, they are fine. They can have fiscal devo”. Whither Hampshire?
Baroness Wolf of Dulwich: If you are right that fiscal devolution is potentially really important for growth and democracy, I have to say that that does not seem an obvious place to stop.
Dr Jonathan Carr-West: That is my argument. Fiscal devo matters. It matters for growth, but also for democracy. It matters for public service reform, local identity and all sorts of myriad things. That, by the way, is the Government’s argument. If that is right and you are not creating strategic authorities everywhere, yes, why are you stopping there? Why is that only right for half the country?
Baroness Wolf of Dulwich: What would you do?
Dr Jonathan Carr-West: We are where we are. I would have fought harder to keep the powers to compel. If you have a plan for devolution everywhere, do it. I would not have got it mixed up with complex LGR—local government reorganisation—but we have done that.
What I would now do, which I think we should do anyway, is really think about extending fiscal devolution to local authorities, particularly if we are creating larger unitary local authorities. If I were the Government, I would push through with the local government reorganisation. We have gone a long way down that track. We have invested. I work all the time with council chief execs who say, “I now have a full-time job doing local government reorganisation on top of my full-time job running the council”. We have put a lot of time into it. Let us finish that.
You then have bigger unitary authorities. You can start to devolve fiscal powers down to them, so you start. Maybe you start small. I hate to say this, but what about hotel tax? If we are not letting local authorities decide on whether they put a pound or two on a hotel room, what are we letting them do? Maybe start small, but you need to start extending it out to local authorities.
Thomas Pope: I do not disagree with the way that Jonathan has put that. If we are thinking in the context of a road map, which certainly the current Government are, part of the question here is where it makes sense to start and where you want to get to. If the Government are thinking about 10 or 15 years down the road, fiscal devolution stopping just at strategic authorities and not also being a part of how many of the services that local authorities are responsible for are delivered does not make sense as an end point.
At the same time, there is a set of reasons why strategic authorities are a simpler place to start, not least because fiscal devolution to local authorities and funding those local services needs to be tied in with a broader consideration of how they are funded across the piece. That is something where I would not want to bolt on a bit of fiscal devolution now and then work out how it all gets fixed in the wash later.
There is a set of implementation challenges with fiscal devolution. Strategic authorities would operate as a bit of a testbed for some of those things I mentioned earlier about identifying taxpayers in different authorities and so on. How volatile is it? How volatile is that revenue in practice year to year? Are the borrowing powers sufficient? By starting at the strategic authority level there will be an opportunity to reassess how local authorities should be funded.
Baroness Wolf of Dulwich: You disagree. You do not think that we should press ahead with unitary.
Thomas Pope: Not in the first instance, no.
Baroness Wolf of Dulwich: Could I follow up with one other question, which is related to that? If we are going to have fiscal devolution, we also have to rethink our accountability mechanisms. Most of the focus and discussion has been on the relationship between first-tier devolution to strategic authorities from central government. Also, we have to think about devolution down from strategic authorities or unitary authorities. Do you think we need to put some new structures in place on that? Should we bring back or rethink the Audit Commission? What, if anything, do we need to do? Should we just press ahead and then see if any trouble arises, which means we actually, after all, need some more quangos?
Dr Jonathan Carr-West: It is difficult. We have all done things where we really wished we had thought about it more before we got going. We have also all not done things because we spent so long trying to figure everything out that we never got past the starting block. It is very easy in hindsight to know which one it was. That is my way of saying that we should get on with it.
We have accountability mechanisms in local government. Let us not forget that people vote. As someone once said to me, a vote is a vote. A vote for a councillor, a mayor or a Member of Parliament is the same. It is all one vote. People have an accountability mechanism for local government. That is the downward thing.
I guess your question is pushing to what the accountability mechanism for local government from central government is. I am less interested in that. Local government has a sovereignty. It has a mandate. Let it do its thing.
Thomas Pope: For strategic authorities, we are in the midst of a transition—it is quite slow at the moment, but perhaps it will get faster—from accountability being pretty much entirely to central government. If you think even about the integrated settlements that strategic authorities now have, they are held to account through quite a detailed outcomes framework to the Treasury and MHCLG, via the policy departments. That is moving towards—this is one of the potential wins of fiscal devolution—more local accountability.
I agree that there is accountability to the public ultimately. There needs to be an improvement at the strategic authority level in how scrutiny operates. We should recognise, as I think the Government have through their beefing up of scrutiny committees in the devolution Act, that to date scrutiny has been quite weak. That is often exacerbated by relatively weak local media in some of these places. That can mean that there is accountability to the public, but how is the public to know exactly how well their councillor specifically or their council in general is operating?
Moving over time towards more of that local accountability, with more robust scrutiny—and that needs to come with appropriate powers and funding to ensure that those other forms of accountability can operate properly—is the right way to go. We have talked previously about the potential benefit of local public accounts committees. There is no reason why scrutiny committees that are being set up now could not more or less fulfil that function.
You would probably want some way in which those committees could at least act as a warning light system for when, say, the PAC might want to get involved. You might disagree with me on that, Jonathan. There is something about this building and the attention here. If you talk to civil servants, that risk of being pulled in front of a committee and asked to account for something that may have gone wrong is a very powerful thing that, certainly for strategic authorities, does not currently exist in quite the same way.
Dr Jonathan Carr-West: I do not disagree with that. This is why local powers are so important. I totally agree with you on local journalism, but people can see whether their council delivers. When the council says, “We are going to build these houses”, you can see whether it has done it. When the council says, “I am going to look after your granddad”, you know whether it has done it. When it says, “I am going to find a school place for your child”, you know whether it has done it, in a way that you cannot know at the level of national politics. You are not so reliant on the media as a mediating information source.
We do polling with Ipsos every year. Only a quarter of adults in England trust national politicians to act in the best interest of their community. It is less than one in four. 40% trust local politicians to do so, although that is not great; it is still a majority of people who do not. If we are going to start to rebuild trust in politics, that is the base we have to build from.
Q75 Lord Young of Cookham: I have a very quick follow-up to Jonathan. I want to get clear in my mind, following Baroness Wolf’s question, how this would work in practice. Take the 10% of local income tax and the West of England Mayoral Combined Authority, for argument’s sake. Say it gets 10% of the local income tax. 10% of the local income tax for that area is about £500 million. That is more than the mayor’s budget. How do you allocate it between the mayor and the authorities who are doing the heavy lifting?
Dr Jonathan Carr-West: I am not saying necessarily that fiscal devolution to local authorities should come through the strategic authority. We should think about direct fiscal devolution, which is not on the agenda at the moment, I agree. I would go back to my very first point that you need a really clear account of what the statutory responsibilities and costs are for those local authorities.
Part of the challenge here is that it is very difficult for the mayor, the Secretary of State or anyone else. We have needs assessments, but they do not work terribly well. What are we actually requiring from those local authorities? What is it going to cost them to do that? We have not reviewed those duties for a long time. From that, we can form a calculation for how that money should flow.
Q76 Lord Razzall: My context—we have touched on it a little bit earlier—is that, over recent years, there have been a number of crises with individual local authorities, going back to the banking crisis over Iceland and the problems recently of Birmingham, Woking, Croydon and others. Do you have any concerns in this context about the quality of local government and its ability to deal with any powers that have been devolved to it? I know your answer is that voters can always throw people out. On the other hand, do you have any concerns?
Dr Jonathan Carr-West: I guess it would be too flippant to say that I also have concerns about central government’s ability to do all these things.
Lord Razzall: No, I do too. It would not be flippant at all. It would be right.
Dr Jonathan Carr-West: There is a degree of calculated risk there. The primary accountability of local government should be to its voters. I am not arguing that there should be no accountability to central government. I do sometimes, but I do not really think that there should be no accountability to central government. Of course there should. I also think that the more power you give local government, the better it will be and the more people will be incentivised to work for it.
It is pretty grim. If you are the chief exec of a council, you have spent the last 15 years deciding what things to stop spending money on: “What are we going to cut?” You are not building or developing things. Some are, although by and large that gets delegated to other people. It is a pretty grim business. It is quite hard to attract people into that. If you are a local councillor, you do not get paid. I think they have got the pension back now, but it is pretty thankless. We run an awards ceremony for councillors every year. There is the amount of abuse that people get. I used to say that it is a thankless task. It is now not just thankless but whatever the negative of that is. It is an actively vilified task. There are a lot of things we need to do to tackle that and that is really complicated, but giving more power to local government helps to improve its quality. Is there a calculated gamble in that because some places might fall over? Yes.
Under the previous Administration, when we were talking about local government funding, the argument was always that places such as Birmingham have just made really poor decisions. It is not a systemic crisis. Those are not mutually exclusive. If you have a systemic funding crisis, almost by definition the places that make the worst decisions will fall over first. That does not mean that there is not a fundamental problem. We survey councils every year, and 39% of councils are still saying, “If nothing changes, we are going to go into exceptional financial support within the next five years”. I have concerns. Of course I have concerns about local government’s ability to deliver, but I have far bigger concerns about how we are hollowing it out, starving it and not letting it deliver. That is a risk too.
Lord Razzall: You probably agree with me. I was very struck, when I first became elected to a London borough in 1974, that 75% of our revenue was raised locally and 25% came from central government. When I retired from local government 24 years later, those percentages had reversed. Would you agree—I think you do agree with me—that the effect of that is that the quality of people who want to be elected as a local councillor and want to be elected as an officer of a council has deteriorated?
Dr Jonathan Carr-West: I do not think I would agree that there has been a blanket deterioration in quality of the people.
Lord Razzall: No, that is obviously a generalisation.
Dr Jonathan Carr-West: The job that they have been asked to do over the last 20 years has become much harder.
Thomas Pope: That has focused very much on local authorities, which have their own challenges. For strategic authorities, where we have them—in some places they are not even institutions that are set up yet, to Jonathan’s point—there is a question about capacity and capability to deliver.
Lord Razzall: They are new anyway.
Thomas Pope: Some of these institutions start as being extremely small and just having a few officers. If there is a desire to move more quickly on fiscal devolution to that tier in more places, there is going to need to be a more active attempt from central government to ensure that those places can skill up and get the people they need more quickly. Examples of what that could include would be—maybe if we are talking about fiscal devolution it matters a bit less—where programme funding is being devolved also devolving a share of administrative budgets in departments to help encourage that move. There are some departments and teams within departments that are set up on a regional basis. If you are devolving, largely, those activities to strategic authorities and need to quickly skill up those authorities, one option is to move those people and teams across to strategic authorities. There is a challenge here.
There is also the chicken-and-egg problem that Jonathan alluded to. There is little incentive to be in those institutions when it is only difficult decisions, but also you cannot expect these institutions to be fully equipped to deliver the powers that you have not yet given them. There is going to be a transition process there. It should be something that central government actively sees as its role here to help those institutions develop capacity quickly.
Lord Razzall: Picking up your point, do you think moving part of the Treasury to Darlington has been helpful in the north?
Thomas Pope: We looked a bit at the Treasury in Darlington a few years ago. There is a big distinction between moving civil servants out of Whitehall and devolution. They are very different things. When we looked at the Darlington campus a couple of years ago, the consensus was that it had worked quite well in leading to a different set of people getting roles in that place than were getting roles down here, so people who actively did not want to move to or work in London, people with a slightly different experience base and then people who then had a different day-to-day experience.
As a campus outside of London, it was more successful than quite a few others, because there was a real senior push. There were a lot of senior people, including the second permanent secretary, who moved to that institution. I do not think that that, in itself, has been revolutionary for Darlington or the north more generally. At the margin, it has been helpful.
Lord Razzall: Maybe No. 10 in Manchester will be marginally more helpful.
Thomas Pope: That is moving that decision-making power somewhere else. I would see that statement from Andy Burnham, as much as anything, as a signal to the system that his Administration will do things differently. It could be quite a powerful signal in that way. In itself, having those people based in that place rather than Westminster is not going to be the thing that completely revolutionises how those decisions are made.
Q77 Lord Burns: Jonathan, I was very interested to read the annual report on the financial sustainability of local authorities and the rather stark picture it shows about the concern from local authorities about their position. Could you summarise for us what you think are the main factors that have led to the position that the local authorities now have that are giving them such concern?
Dr Jonathan Carr-West: There are supply factors and demand factors. Funding from central government decreased markedly over the years from the financial crash and from 2010. Different people put different numbers on this, but broadly there has been reduction of funding of 40% and a reduction of core spending power by about a quarter. To his Lordship’s point earlier, there was a move back towards a bigger localisation of funding, so councils becoming more dependent on local taxes, council tax and retained business rates in particular, and on charges and things. There has been a change to the way they are funded and, frankly, there is less money.
At the same time, there has been a massive increase in demand and cost in their core statutory responsibilities, particularly adult social care and children’s services. We have been doing that report for 12 or 13 years now. Interestingly, we have seen a bit of a switch there. People are still talking about adult services as the biggest long-term pressure because of an ageing population and working-age adults with severe disabilities who, to be crude about it, live longer than they used to. Children’s services has massively come up in the last few years as the biggest immediate pressure, closely followed now by temporary accommodation.
In both adult services and children’s services, demand has gone up but so has cost. Some of these are really difficult things. The cost of children’s residential placements, for example, has gone through the roof and there is an average profit margin of about 26% in those areas. A lot of private money is being extracted from it. I always think that, although adult social care is a big bill, that is a result of some quite good things. People are living longer and surviving conditions. It seems to me that it is far harder to know why there has been or imagine any non-depressing reasons for the massive growth in children’s services.
If you look at the number of EHCPs councils are giving now, the spend on special educational needs or the spend on home-to-school transport, in all these areas prices are just going up and up. There are some real market failures as well. This is an anecdotal thing. I was doing a session in Cornwall recently with Cornwall Council. It was raining, so I lazily tried to get a taxi from my hotel to the county hall. The man just looked at me and said, “You won’t get a taxi at 8.30 in the morning. They are all doing school runs”. That is repeated across the country and vast sums are being charged to councils to do this. Home-to-school transport in county councils is one of the biggest drivers of financial failure.
You have this perfect storm of less cash and more demand. Those are statutory services, so you cannot say, “We will choose not to do that”. It is the law. You have to do it.
Lord Burns: You both seem to agree that, if we were to have fiscal devolution, it should be extended to local authorities. Listening to you this afternoon, the main question in my mind is whether this all points to the fact that this should be sorted out first before one starts dealing with the strategic authorities and other areas that are even more complicated than this. Are we doing this whole thing the wrong way around? Should we not, first of all, be concentrating on making some devolution to local authorities, but making sure that they are in a position to finance the statutory duties that they have?
Dr Jonathan Carr-West: Yes, but the reality is that we need to do all these things all at once. Is fiscal devo a magic bullet that fixes local government finance? It is absolutely not. Does it help a bit? Yes, it does. It gives them more control and ability to sort of plan over the long term. In response to local government financial issues, people often say that councils need to cut their cloth to suit their means. You cannot do that if you have no control over your means and you cannot do that if you cannot actually cut the cloth because central government decide how big it has to be. You need to do all this. This is why I said earlier that we need to see fiscal devolution as part of package of systemic reform that encompasses local government finance and how we take a local approach to public service provision.
Lord Burns: What is the best way of, in a sense, giving more devolution to the local authorities? Should it be keeping more of their business rates or council tax or greater freedom of what they do with each of them?
Dr Jonathan Carr-West: Yes and yes. Personally—views differ on this—I think business rates is a bit of a 20th century tax for a 21st century economy. Let them keep more of that. Allow places to do some revaluing and re-banding of council tax, even if you are not going to do it overall, as they have done in Scotland, for example, where there is some ability to revalue.
We need a review of councils’ statutory responsibilities. We need to be really clear sighted about what we are expecting from them and give them the ability to join up and really pursue the integrated settlement model. We are dipping our toe into that for strategic authorities. Give places the power to say, “This is how much money we have. This is how we are going to spend it across the public service landscape in this place. These are the preventative levers that will work here”.
This is the Pollyanna-ish bit. You try to move from a constant deficit model of “How are we going to fill this hole?”, where we are just shovelling money into these black holes, to thinking about, “How do we build capacity in this place? What do we need to do so that fewer children in this place require that support? How do we make more older people able to live at home healthily and independently for longer?” Those can be really local decisions but they involve a degree of join-up that you have to have a devolution of both money and of power to do.
There are simple examples. At the all-party parliamentary group we looked at social care 12 or 14 years ago. Local authority leaders would talk about the £20 grab rail: “We go in and put a grab rail in the homes of older people. At a population level, you can be really precise about how many falls that prevents and what sort of saving that generates. All that saving is generated in the hospital trust, we do not see any of it and there is no ability to use that saving to pay for that intervention”. We have not moved on on that. You cannot plan that from here because it is too complex. You have to let local people do it.
Thomas Pope: All those things are true. We should be clear, though, about what we think the different tiers of government are best at doing. This probably is a discussion that we will be having as a country in the coming weeks. When is the strategic authority level, so that slightly higher tier, better equipped than local authority? On those kinds of local public service questions, probably, at times, a strategic authority is too big and a local authority is much more appropriate. On lots of the economic policies, that local labour market level that strategic authorities tend to represent makes much more sense to be thinking about skills, transport and so on. We would agree with that.
To your original question, absolutely, sorting out local authority finance is a massive priority. Fiscal devolution can and should be a part of that. I do not personally see the problem of going first at the strategic authority level, where some of those problems are slightly less acute, where they have quite a coherent set of responsibilities that we expect will be added to, and where they could start to make a real difference with that fiscal devolution now.
Lord Burns: You do not see the local authorities as becoming, in a sense, devolved parts of the regional authorities?
Thomas Pope: They have their distinct roles, although we should not overplay this. Combined authorities are combined authorities. There is a role for local authorities in those areas still, and often delivery of combined authority programmes still runs through local authorities. It is neat for us, as we are developing our models of how things work, to very strictly delineate. That said, there needs to be a decision of where the locus of power is and where the decision is being taken. There is more that local authorities could be doing. There are probably some things that local authorities could be doing that strategically better sit at the combined authority level. There are lots of things that central government are doing that would better sit at either of those other tiers.
Dr Jonathan Carr-West: That is true. We always say that things should be local by default, regional where it adds value and national only where strictly necessary. The combined authority is a combined authority. The local authorities are constituent parts of it. We should not see them as being in opposition. Those combined authorities that have worked well, such as Manchester and the West Midlands, have been quite organic. We did a piece of research where we interviewed people from those places about what made it work. They were all agreed that it worked pretty well, but it had developed quite organically.
If we are going to do it, which we may not be now going to do, everywhere all at once at scale, you probably need to be a bit more codified about what the functional division of responsibilities between those things is and what arrangements support that working, whether that is joint committees, shared memorandums or budget agreements. The time and space that Liverpool or Greater Manchester had to build those institutions does not apply to the next round of mayoral strategic authorities, if they go ahead.
Q78 Lord Prentis of Leeds: As a committee, when we are looking at devolution, we are looking at what works in practice and where there are good examples showing the merits of devolution. When you look at the UK itself, we have experience of devolution. We have the settlements of the late 1990s. You have Scotland and Wales. Northern Ireland may be a different issue. Is there anything we can learn from those devolutions? You have touched on this already as you have gone along, but we have not looked at it in any depth.
Dr Jonathan Carr-West: The lesson I would take, which is maybe not a very positive one, is that devolution at that level has not led to devolution through to local authorities. There is always a risk that devolution gets stuck at a particular level.
Thomas Pope: We should definitely be trying to learn more from fiscal devolution specifically in Scotland and Wales. There are a few things that you learn. One is a bit of a caution that Governments only have so much control over their economies. Scotland and Wales have had differing fortunes in terms of whether fiscal devolution has worked out for them, largely for structural economic reasons that maybe their Governments have not entirely driven. Wales is currently receiving quite a lot more money as a result of fiscal devolution in terms of income tax, even though it has not varied its rates, than it would have done. Scotland, certainly until a couple of years ago—I think it is still the case—is receiving quite a bit less.
There are some quite practical lessons as well, for example that there is quite a lot of variation year to year and variation from forecast. You need to ensure that you have adequate borrowing and reserve powers to allow for that smoothing over time. As I referenced earlier, there are some taxes that we have wanted to devolve and have realised are in the “too difficult” box. I put VAT in there. Corporation tax, to some extent, applies there in terms of Northern Ireland. There have also been some challenges with air passenger duty in Scotland, although that is now coming into place.
Lord Prentis of Leeds: The devolution to Wales and to Scotland included an issue that you raised, which was the devolution of public services. In itself, it was not just fiscal devolution. Surely there is some merit in that.
Dr Jonathan Carr-West: There is. Again this talks to whether local authorities in Scotland are in a substantially better position financially, in terms of public services, than local authorities in England. No, they are not. We devolved to Holyrood, but that did not entail devolution to local authorities. For me, it is a lesson in how you can devolve to national or sub-regional entities, but that does not, in and of itself, drive the power over money or public services down low enough to the level that you really need to get that preventative joined-up approach at a local level.
Lord Prentis of Leeds: If there are difficulties with looking at Scotland and Wales, what about in other countries? Are there areas that we can look at that have been successful?
Dr Jonathan Carr-West: It is never going to work to say, “We should just do what they do in country X”. We have done quite a lot of this work. If you look across different countries, you can see elements from all of them. There are some key lessons. There are lessons around, as I said earlier, having a basket of revenue sources, so having some sort of variety and diversity of revenue. There are lessons around having a settled constitutional approach to this. There are lessons around creating autonomous or semi-autonomous bodies that can work through this and taking it out of the day-to-day, year-to-year politics. Those are some clear lessons that we can learn on aggregate, looking at other countries around the world.
Thomas Pope: I would add that it can be done. These countries have had fiscal devolution for a long time and have managed. While there is always that tension with equalisation, they have managed it in a way that has retained good policy outcomes and democratic legitimacy in those countries.
There is a bunch of specifics that Jonathan touched on and some good general lessons. It is always very easy for us to think, “How could we possibly move to this much more devolved system?” There are unique challenges in England specifically, and the UK in general, in doing that. It is going to look quite different here, but we can look at other countries and see that we are not trying to blaze a trail where no one else has gone before. In a way, we are making relatively tentative steps towards becoming less of an international outlier.
Dr Jonathan Carr-West: Japan did this in a single Parliament. It completely redesigned its local government finance system and devolved it all.
Q79 Lord Liddle: There is momentum behind this topic. There are going to be, I am sure, some announcements in the autumn, and of course at the Budget we would expect something. It is clearly a long-term process thing. The question is about what you do first. What are your recommendations to the Government as to what they should announce this autumn?
Thomas Pope: If the Government are committed to going down the path of fiscal devolution, which I think they are, and certainly if the focus remains that rationale of growth, which was the first point, it makes sense to look at income tax and more flexibility in terms of retention of business rates, in the first instance at a strategic authority level. You probably could do that as soon as the next spending review period, which starts in 2028.
That is a good first step, but I would expect a road map to lay out a bit more detail about how many strategic authorities the Government want to go to first. I would tend towards a slightly broader set than just trailblazers, but probably not to try to go to all strategic authorities currently in operation. You might start just with established strategic authorities or go a little bit broader. The Government should then set out and have a real focus on, whether it is a review or something, local government finance and the way in which fiscal devolution will be a part of a more long-term settlement for local authorities.
Dr Jonathan Carr-West: I agree with that. A system view of local authority finance and responsibilities is needed. There is no point having great fiscal devolution to strategic authorities if the local authorities that constitute those strategic authorities are collapsing. You need to do the local authority piece.
Grasp the nettle on council tax. A review of statutory responsibilities is needed. Give local government and strategic authorities a seat at the table. Make sure that they are part of the conversation and that it is not something that the Treasury is deciding. One of my other rants is about how much I hate the word “devolution”, because it encodes the power structure that it says it undermines. It is all about, “If we are really good, central government will devolve a bit of power to us”. Power should work from the bottom up.
Lord Liddle: To make this thing work, it is not just about tax powers. It is about people having the capacity to make the plans to use the tax revenues in an efficient manner. You could say, “Why has Manchester been a success?” It is because of Howard Bernstein and the high-quality officers who were able to make the thing work. I am from Cumbria. We are having our mayoral set-up election next year. Capacity to actually do anything is quite a serious issue. How would you address that, alongside fiscal devolution?
Thomas Pope: In the short term, there is a set of practical things that the Government can do. That includes, as I talked about earlier, devolving administrative funding. There could be a more formal secondment scheme to get more civil servants into those places. In those policy areas that are set up on a regional basis within departments, you could actively move those civil servants, while making sure that you do not do that in a way that replicates a Whitehall culture within those organisations. That needs to be managed. In the short term, if you need capacity, those are the steps that you could do within six months.
Dr Jonathan Carr-West: Not to laud Japan too much, but you cannot get to the top of either central or local government in Japan unless you have spent time in the other. You have to rotate through. That is really valuable. We have an NHS workforce plan and we do not have a local government workforce plan. We have not thought about it strategically in that way and we should. You are right that capacity is a massive problem.
The Chair: Thank you very much. We have had nearly an hour and three-quarters with you and ranged across a wide range of issues. We are really grateful for your time and wisdom. Thank you so much.
