27
Examination of witnesses
Kate Ogden and Aditi Sriram.
Q80 The Chair: Welcome to the Lords Economic Affairs Committee’s sixth evidence session of our inquiry into fiscal devolution in England. We are delighted to have Kate Ogden, research economist at the Institute for Fiscal Studies and Aditi Sriram, economist at the Institute for Public Policy Research. Welcome. We are really grateful. Thank you for your time.
We are broadcasting live on parliamentlive.tv. A full transcript will be taken, and we will share that with you so that you can make any factual corrections that are needed afterwards.
Could I start by asking you a small question, which is about the purpose of fiscal devolution or rather, more specifically, what the evidence base is or what your views are on whether fiscal devolution is indeed a good way of boosting growth, and under what conditions that might be true? If so, what are the mechanisms or channels by which fiscal devolution can plausibly be seen to be something that you would do if you were keen on boosting growth or productivity in different parts of the UK?
Kate Ogden: First, it is worth saying that fiscal devolution means different things to different people. At its least extensive, it could be about funding and spending responsibilities moving down closer to people and the areas that they affect. You might think that is important if local decision-makers have more information about what is good for their areas and what policies might be appropriate, so you might expect that to lead to better decision-making if there are proper accountability mechanisms.
More along the lines of what is being considered by the Chancellor at the moment is assigning a share of revenues. Here, there are two important rationales and channels by which you might get more growth. One would be giving local decision-makers more skin in the game, more incentives and more rewards. “Rewards” is the term they prefer to “incentives” because they would say they already have incentives. It is about linking what they do to some kind of outcome that they get.
Another rationale for revenue assignment, though, would be actually giving areas something more like a longer-term, more stable source of revenues that might allow them to make better long-term decisions to plan better.
Finally, you have something more extensive still, which would be tax-varying powers. There, you would want to be thinking about tax-varying powers if you really think that local decision-makers and local people can have different preferences about the size of the state, and you want to give them much more control over that.
What are the channels that leads you to? How could that lead to more growth? If you think more information and better reflecting local preferences gives you higher-quality decisions; if you think giving policymakers greater financial incentives means they make different policy choices; or if there is something around funding certainty and ability to plan and invest.
The evidence on these is mixed and not as strong as the consensus sometimes suggests. Conceptually, there are reasons why you might think those channels might lead you to policies that promote or lead to more growth, but it is really difficult to assess causally. We do not have areas in the world that randomly have more fiscal devolution than others, so it is really hard to pin down. There is suggestive, positive evidence.
Two other things come out from the literature. One is that there might be advantages for growth to having more balanced devolution, so that if an area has lots of spending responsibility, it also has some revenue-raising responsibility. Secondly—and this is particularly relevant for strategic authorities—something about the quality and capacity of the institutions that are making policy seems to matter as an important condition.
Aditi Sriram: I will start with an example here. How did we get into this work around fiscal devolution at IPPR? Obviously, we have IPPR North, which has worked on the visitor levy.
I got into this work because of a report that we put out on transport and growth. In that work, we looked a lot into transport across the country. We were asking why mass transit was not being delivered. Leeds obviously comes up as an example of a tram that has struggled to get off the ground, but we see this everywhere. We were speaking to the West of England Combined Authority. A century ago, Bristol had 17 electric tram routes running through the city, and now it has none at all, and 23 smaller cities in France have a mass transit system.
All of this is to say that there is so much growth that we can drive through mass transit, and a lot of other projects that mayors want to get off the ground. That is what got us so interested in this question. If mayors and regional leaders want to build, what is blocking them from building? Over and over again we heard the same story. First, these projects that regional leaders knew would drive growth on the ground were being caught up in Treasury approval processes. That means that projects were not coming off the ground and, even when they were approved, there is delayed funding; it gets cancelled.
Secondly, even when projects are delivered, we know that 96p of every £1 of tax collected goes back to central government. Regional leaders take on a certain level of risk to deliver projects and do not get to benefit from the upside in a lot of ways.
That is what brought us to fiscal devolution. One of the great prizes is something that Kate mentioned as well, which is getting mayors and local leaders building. This is a very specific channel through which fiscal devolution can drive growth by unlocking infrastructure throughout the country and getting mayors building.
Q81 Lord Razzall: Kate, you have touched on the issue I am raising. The current Chancellor is talking about tax assignment, as you indicated. The issue is really whether fiscal devolution will really work without tax-raising powers being given in the devolvement. What do you think about that?
Kate Ogden: There are rationales for looking at revenue assignment, which is not the same as fiscal devolution; it is a slightly lesser thing. I have mentioned those already. There is an incentive channel, and that is clearly what the Chancellor and Treasury have in mind. It is giving those areas a stake.
If you talk to mayors, they will say they already have those incentives. They are already rewarded for generating growth and improvements in living standards. They say, “You do not need to reward us more; you just need to give us the money or the flexibility to do more”.
Lord Razzall: To raise it.
Kate Ogden: I am also not sure fiscal devolution necessarily means more money. It can do, but it does not necessarily. At least the way revenue assignment is being described as being fiscally neutral suggests that, if you were going to give areas a share of an assigned tax, you would either be cutting their other funding to offset that, or you would be giving them more responsibilities. That does not necessarily give more cash.
Does giving them tax-raising powers mean they raise more cash? It might do if they use them. Not all mayoral and strategic authorities use all the precept powers they have already.
Would they be more likely to raise those taxes than central government? They might be. It depends on a few things. One would be how that electoral accountability is working locally. It has been very difficult for areas. No area has successfully held a council tax referendum to raise council taxes because, when you look at that question in isolation, nobody says, “Please raise my taxes”. There is something that central or local government could do if it was not a referendum and if it was broader to look, in the round, at, “Do I want higher taxes and the increased spending that would give me?” That helps. They would have more chance than a council holding a council tax referendum.
I might pause there because I have spoken for about two minutes uninterrupted. They would not necessarily use all the powers they got. We would also worry about what they were raising taxes on. What you probably do not want if you are the Treasury is a race to the bottom of different areas trying to attract a mobile tax base to their areas, and so competing and driving rates down.
Lord Razzall: Some of my colleagues will go on to that. We had a witness last week who said people should start with a hotel tax. It will not raise very much money, but people should have the power to do that and we would see how that sort of thing went. Aditi, what do you think about this?
Aditi Sriram: I would definitely emphasise this problem of a race to the bottom. When we think about the size of English regions and we compare them to other nations that would have states with tax-varying powers, the geographies are much smaller. Tax-varying powers would be quite administratively complex and add a lot of burden to HMRC, which is something that is important to consider.
I would argue that, again, this prize of fiscal devolution is more so the ability to have control over the funding rather than to set the rates themselves. We can meet a lot of the goals that we have currently with fiscal devolution through tax assignment and also avoid the race to the bottom and the administrative complexity of providing tax-varying powers.
Finally, it is really important to be guided by a vision of an end state. What do we want English regions to look like? We want there to be incentives for growth that are not driven by taxes. We do not want regions that are dropping taxes to attract firms. We want firms to be moving to regions and distributing across England because there is genuine growth that is happening across the country. That is important to keep in mind as well, and is maybe an argument against the tax varying that might cause this race to the bottom.
Lord Razzall: It happens in the United States, and states do well or do not do so well.
Aditi Sriram: The geography of the United States makes that different. There is less of that administrative complexity in where people will say that their income or profit comes from.
Kate Ogden: A further point, building on the administrative complexity, is that even if you wanted to give strategic authorities tax-varying powers in the long run, you might want to start by giving them an assigned share to see how they cope with the volatility and how they can manage that before you then go to tax-varying powers.
Lord Razzall: I take that point. You have not persuaded me, but let us move on.
Q82 Lord Butler of Brockwell: Generalising, what would be your principles for choosing the tax-raising powers that you would devolve to local areas? What would be the principles of it?
Kate Ogden: Which taxes? What a great question. That is a question we like at the IFS. One thing you want to think about is what incentives you are trying to create for local areas. Different taxes will create different incentives. If your goal is creating the right incentives, you also need the revenues an area is getting to link to something the policymaker can actually influence with the levers they have. That means you are making areas’ revenues more risky and more linked to local economic performance.
Conversely, you might want areas to have a more stable or a more buoyant source of revenue. That pulls you towards a slightly different set of taxes. You also might want to look at how evenly distributed revenues are. A hotel levy or an overnight visitor levy might have many benefits individually, but it is not going to raise very much in very many areas, so there is a challenge then about how you equalise that.
An important one that came up already in the context of profits is about how easy it is to apportion economic activity to those specific areas. How administratively feasible is it?
There are two other things that get less attention in this debate but are particularly acute when you are looking at tax-varying powers. One is the point about the mobility of the tax base, which we have touched on.
The other is whether the people who are voting for those local leaders are the ones who are actually going to pay the tax. For income tax or property taxes in particular, it is local residents who will predominantly pay them. Taxes on businesses or on sales might be paid by people who do not live in the local area and so are not holding the people setting the rates to account. There is an extra accountability issue there.
Aditi Sriram: I might have very similar views on this. We have come up with four principles that should guide this. Two are on how you would assess a specific tax. As Kate mentioned, there is this idea of buoyancy. We would want tax receipts to be linked to economic growth. That is something we do not see, for example, in council tax. There are those growth incentives or rewards in that.
The second is around anti-avoidance. Obviously, we would want to look at taxes that are difficult to avoid or shift geographically. Again, that is thinking about HMRC burdens.
There are two other principles when considering the entire fiscal devolution settlement or the basket of taxes that we might consider devolving out. One of those is around certainty. Obviously, as mentioned before, the ability to plan both for services and infrastructure very much relies on having certainty over the long-term revenue that is coming in so that you can borrow against it and plan for a long-term horizon.
That leads to the second point around diversification, because certain taxes will come at different points of the year. For example, if we are thinking about income tax, that comes in monthly with pay as you earn, but then you would have a big spike when self-employment income tax comes in. We might consider incorporating multiple taxes so that it is possible for strategic authorities or local authorities to borrow to smooth against that lumpy tax take.
That leads us to the kinds of taxes that might work best. Within this, income tax comes out on top because it is buoyant. We find that, compared to other taxes such as VAT and corporation tax, there is less ability to shift.
We think that property taxes could play a role. Currently, there are a lot of problems with how property taxes are set out. Stamp duty land tax is a tax on transactions, and council taxes are based on valuations that are not current. There could be a role because incorporating a share of property taxes could mean that regional leaders could benefit not only from wage growth and the extra employment that you would see with growth; they would also be able to benefit from housebuilding and from increases in property values.
Lord Butler of Brockwell: Applying those principles, if you were now advising the next Prime Minister, what taxes would you recommend that he devolve to local areas as their taxes to raise?
Aditi Sriram: I jumped the gun a bit and answered that before. Income tax and property tax are probably our best bets. In our conversations with mayors, national insurance contributions have come up because, although it is at the same threshold, it is collected month on month, and so there would be more tax take if national insurance contributions were devolved out. It is still an open question as to how much we want these social insurance contributions to be devolved. Also, corporate tax is quite easy to shift. If corporate tax can be shifted across national borders, it can definitely be shifted across regional borders.
Kate Ogden: I would agree that there is a compelling case for wanting areas to have a diversity of taxes. That is not something they have at the moment. They are heavily reliant on property taxes.
From my perspective, that is less about the timing of when revenues are received within a year, because you would need to be thinking anyway about how central government was working out what share of what and then deciding to pay it over. Central government could do a bit of that in-year smoothing for areas; I would expect them to do so. Different taxes give you different incentives and expose you to different kinds of economic risk. Those are the two reasons I would argue for a diverse basket.
We agree that income tax is the most promising candidate. It is buoyant in the sense that you do not need rates to be put up for revenues to increase. They increase automatically as there is more growth and more economic activity, so that is quite appealing. If it was paid by residents, there is an accountability mechanism there.
There are some administrative challenges with income tax. Currently, there is no statutory requirement for individuals or employers to update HMRC with their actual address. That has been solvable in the case of Scotland, but it has some challenges. We would probably need some upgrades to some IT systems, but it is feasible.
One major challenge with income tax, though, is that revenues are quite diverging across the country. They would be much higher in some areas than others, and that is particularly due to where high-income taxpayers live. Because we have a very progressive structure of income tax, where those high-income people live and how their incomes change year to year is more volatile than the incomes of lower-income people.
That leads you to wanting to consider how you devolve income tax, if income tax is the way. It would not need to be 10% of all income tax raised in an area. You could instead think about, for instance, 3% on the revenues raised in each tax band. That means the revenues that are devolved are less diverging and less volatile. It also gives you equal incentive to increase the incomes of people who are basic-rate and higher-rate taxpayers, because that gives you the same 3% increase in revenues, whereas if you just devolve 10% of revenues, then if a basic-rate taxpayer earns a pound more, you get 20p more; if a higher-rate taxpayer earns more, you get 40p or 45p of that. Devolving income tax in different ways gives you incentives to care about the incomes of slightly different people.
Lord Butler of Brockwell: I am very interested in you using the word “incentive”. You would think that any tax-raising powers were a disincentive. They are not a disincentive to the people raising them, but a disincentive to growth.
Kate Ogden: Yes, you might think raising tax rates would disincentivise growth. The logic that lots of people are bringing to revenue assignment is that, if you give areas some share of the benefits if those incomes increase, then you are incentivising those policymakers to do good-for-growth things.
Income tax is nice because it is about earnings of people in a place, whereas existing property taxes reward commercial property development. Business rate retention rewards an area where the value of local commercial property is going up; it is an attractive place for businesses to site themselves. Income tax gives you incentives to improve transport so that people who live in your area can connect to jobs even in neighbouring areas. It gives you incentives to boost skills, so it is rewarding areas, policymakers and authorities for slightly different economic improvements.
In general, we at the IFS have been sceptical of corporation tax in the past, because of some of the issues of it being very difficult to work out where corporate profits are generated. If you have a business that operates in multiple areas, is it the headquarters that is generating the profits or the warehouse? That gets quite difficult. Maybe you could use robust proxies to allocate out corporation tax, such as gross value added. There are other measures you could use.
On NICs, just because you brought it up, in general we are a bit more sceptical of that. We prefer income tax because it is levied on a broader base. It is not just income from employment; it is also from dividends, property, self-employment and pensions. You are spreading it over a broader base.
Q83 Baroness Wheatcroft: This is just a quick question. To some extent you answered it, Kate. I just fail to see how devolving income-tax-raising powers can do anything other than what you both are opposed to, which is to hasten the race to the bottom. You talking about it being an incentive to generate growth locally but, nevertheless, the areas with the highest income tax will be able to generate more growth. There seems a slight contradiction there.
Kate Ogden: There is. Part of it is seeing this in isolation without a broader equivalisation that would need to sit alongside it, which hopefully we get on to, because equivalisation is the important missing piece in lots of this.
Baroness Wheatcroft: Then where does the incentive come from?
Kate Ogden: You can design that so that you preserve incentives at the margin.
Q84 Baroness Penn: We are coming on to equalisation. I just had a follow-up on the conversation so far. Either on that incentives or rewards piece or on the more predictable—even though it may fluctuate—income stream compared to annual or even three-yearly local government settlements, is there an amount or a level at which you would need to assign taxes for that to have those effects?
If you are getting 1% of income taxes raised versus 20%, that has quite different effects on either the reward or incentive side, or on the amount of revenue that you have predictability on or that you know is coming to you even if it fluctuates. Is there a view that either of you have on the scale at which you need to do this for it to have an effect?
Aditi Sriram: As Kate mentioned before, there is a hope that this devolution road map will be fiscally neutral. You are basically transferring fiscal power out to regions.
You would imagine that going from 1% to 20% just changes how much is delivered out of Whitehall and how much is delivered by mayors. That is inherently a trade-off, but at this point we have strategic authorities and local government at all different levels of maturity, so you would want to gradually increase the amount that is devolved out to ensure that there is the institutional capacity to deliver the kinds of services and infrastructure that might have flown out of Whitehall at the present moment.
Kate Ogden: I agree that the capacity point is important on this. The scale potentially matters more if you are on the funding certainty planning horizon. It might matter less for incentives because what matters there is not the overall share of revenues but how exposed you are at the margin. You could have them getting a very small share but 100% of extra growth, or you could have them having a much bigger share but much less exposed at the margin. I am not sure the overall scale is easy to answer on that lens.
On scale, if whatever is proposed is to be fiscally neutral and requires taking funding off authorities or giving them more responsibility, the scope to do that is much greater with local authorities because they have so much more funding already. They have much broader responsibilities in what they do and could potentially take on more, whereas strategic authorities have much less funding at the moment, so there is less to take off them. They also perhaps do not have the capacity in all areas to deliver a huge range of new services very quickly.
Baroness Penn: To come on to what I said I would ask about, you have already raised the equalisation mechanisms that might or would need to sit alongside any further devolution. What are the factors that should guide the decisions in deciding both how much revenue should be equalised across different places, and then also the most efficient or effective mechanisms by which that could be achieved?
Kate Ogden: There is not a correct level of equalisation. For local authorities, with the big local government finance reform that has just happened, the Government have definitely taken quite a strong view on the amount of equalisation there should be there. Differences in the council tax bases of different areas are 100% equalised for. They are only exposed to council tax revenues to the extent their bills differ from the national average.
They have also opted for full equivalisation of needs. Assessing how much areas would need to deliver the same range and quality of services everywhere, they have taken what you could raise if you set your council tax bill to the average and what your share is of national need. They have tried to fully equalise.
If, though, your theory of change is this incentive-reward point, you might not want to fully equalise. You might be more comfortable having areas diverging over time. The question of which taxes comes back here, because you might want more equalisation and more insurance against volatility if you are expecting revenues to be very volatile year on year.
Also, we can think of equalisation in two steps. There is the starting point or what you do when you first set the system up. With both business rates retention and devolution to Scotland and Wales, there was a no-detriment principle: that when devolution first comes in, you will not be better or worse off for having had revenues devolved.
Subsequently, there is a question of how you keep a system updated over time. Business rates in Scotland and Wales, for example, work very differently on that score. Without getting really into the weeds of business rate retention, there are tariffs and top-ups in that system. When it was first brought in, if areas were assessed and they would be able to raise more than their share of national need, then they pay a tariff; if they would be able to raise less than their share of need, they get a top-up. The top-ups pay for the tariffs.
Those top-ups and tariffs have been increased in line with inflation over time. Areas gain if their revenues have grown more quickly than inflation and they lose if they have grown more slowly. Across the whole of England, revenues have grown more quickly than inflation over the past 15 years. That means the degree of equalisation has gone down. Even if all areas had grown by the same amount, you would see those tariff authorities gaining and the top-up authorities losing.
An alternative would be to have those tariffs and top-ups changing in line with national revenues. Then, instead of doing well if you beat inflation, you do well if you beat national income tax growth.
The Scotland and Wales example is really helpful here. They have a different system of block grant adjustments. They do not just equalise between areas; there is also an adjustment such that, if national revenues go up or down, areas do not feel the pain of that. If revenues fall everywhere, then the Scottish Government are somewhat insulated from that because the block grant adjustment moves.
The impacts of these different design choices get really technical really fast, but we are attempting to model them and we would be very happy to have follow-up chats to talk about this even more in the weeds, if that is helpful.
Aditi Sriram: I am glad that you explained tariffs and top-ups, because I was going to explain that. That is an interesting place to start around business rate tariffs and top-ups because we have a system of redistribution and equalisation that we can build off of. Everything that Kate mentioned is this trade-off between redistribution and growth incentives. The frequency with which you change or reset the tariffs and top-ups basically decides what that trade-off is. If you spend a longer period of time before resetting the tariff and top-up, that means that you lean more towards these growth incentives because you are allowing local leaders to retain more of the growth in their tax take.
I would agree with all the points that Kate made. There is a question of equalisation between regions, but there is a bigger question. If this road map is fiscally neutral, how does central government protect all English regions in the context of a recession or a drop in tax take across the board? An equalisation mechanism should also keep that in mind and consider how that runs up against being fiscally neutral.
Q85 Lord Razzall: You are talking about equalisation and revenue. I would like to look at equalisation and service, because everybody becomes obsessed with equalisation with more fiscal devolution, but if we look at the two major services that are provided locally at the moment, the hospital GP service is funded centrally and social care is funded locally. It is quite clear at the moment that we have totally unequal provision across England of both those services under our existing system. Why is that not relevant to equalisation in terms of fiscal devolution?
Kate Ogden: It is. If you are talking about citizens’ right-style services, be it education or public health, you might think that everyone, wherever they live, should expect some kind of minimum standard of service.
Lord Razzall: We do not have that at the moment.
Kate Ogden: We do not have those defined rights; some countries do. You would be more at, “We should do more equalisation and make sure that, in the areas that fall behind, it does not affect the quality of those kinds of services”.
Lord Razzall: My point is that one of the arguments against fiscal devolution is that it will create inequality. My point is that we already have inequality, so we are not building on an equal system.
Kate Ogden: We are not. The hospital versus social care example is interesting. Arguably, we have more consistent hospital services, at least, than we do social care services.
Lord Razzall: That is a big “arguably”.
Kate Ogden: On assessing needs, the Government have just done a big exercise to produce updated needs assessments for a range of local government services. That is a substantial exercise and it embeds lots of political judgments in it, but it has those updated needs assessments.
We do not have good needs assessments for the kinds of services that strategic authorities deliver. It is much easier to think, “Okay, I want consistent social care service. How many old people do you have? How ill are they? What are the labour costs in different areas?” You can think about how to get to a measurement there.
When it is investment spending or economic development-type things, it is much harder to think about how you would go about assessing relative needs. It probably matters not only what areas are like currently, but how much investment they have received in the past and how quickly they are changing, because that is where investments in new infrastructure really matter.
Lord Razzall: You can see from my question where this leads me to.
Q86 Lord Reid of Cardowan: This is just a quick aside. In terms of devolving revenues to devolved entities, I am not sure that Scotland is a good example, because it is so heavily influenced, as you both know, by the Barnett formula, which was a temporary expedient adopted some 60 years ago and retained against the wisdom of many people, including, incidentally, Joel Barnett, who wanted to get rid of it. I am not sure that is a template for other areas.
I am interested in the question that Baroness Wheatcroft asked as regards equalisation. Maybe I picked you up wrongly, but am I right in thinking that you said that yes, it is true that, for instance, if you devolved a percentage of income tax, the rich areas would tend to get richer vis-à-vis the poorer areas? It would seem to be illogical that that would be the case. If you have reduced the central Exchequer monies by the percentage that you are passing to the devolved areas, there is less money for the centre to equalise compared to hitherto. Is that not a formidable risk?
Unless you have a worked-out mechanism right from the start for equalising at the lower level between these, you will on two counts run the high risk of the rich areas getting richer and the poor getting poorer. That is, first, that they start from a higher base, and, secondly, that we are reducing the amount of money to the Exchequer, which is the main vehicle at the moment, imperfect though it may be, for equalisation between regions.
Aditi Sriram: To start off with, it is right that the fiscal devolution road map takes very seriously the extent of regional inequality that exists. That cannot be overlooked. With that being said, it is regional inequality that has come in a framework that is quite centralised. We might even say that regional inequality and centralisation might be quite orthogonal to each other. Just because we devolve does not mean that we become more unequal because we have evidence that, in a centralised state, we have still ended up with regional inequality.
With that being said, in my last answer I spoke about this trade-off between growth incentives and redistribution. Maybe what we want out of the road map, in starting with such stark levels of inequality, is to design a system that is more focused on redistribution at the outset, because, as Kate mentioned, there are already incentives for growth. Regional leaders and mayors are interested in growing for lots of different reasons, not just to capture the reward. Maybe in the design of the road map we err on the side of redistribution and, because it is a road map, we move towards, in a more equal England, having more growth incentives or rewards.
Kate Ogden: Precisely then on the income tax and whether it necessarily means rich areas getting richer, at the start you do not have to give areas the same percentage of income tax raised in their area. You do not have to do that and not take other money off them. You could give areas a proportion of the growth in future income tax revenues without necessarily giving London, which has much higher income tax revenues per capita, a huge wodge of cash at the start. You could introduce this at the start so that, in year one, no areas get more or less funding than they would have done otherwise, and it is only the change over time that they are exposed to.
Then there are two ways. You might still worry that some areas are growing faster for reasons that are not the result of great policy by the Mayor of London; it is something else structural about London, for instance, and we do not necessarily want to keep rewarding them with higher revenues.
As well as tariffs and top-ups, business rates do this by having safety nets and levies. The safety nets act as a floor, particularly where there are services where you would not want areas to see their revenues fall below a certain point. There is a safety net that catches the areas that are struggling. That is paid for by a levy on the areas that are growing particularly quickly. The areas that grow fastest do not get the full benefit of the extra bit at the end that is used to pay for the safety nets.
Another thing that is part of the problem or at least is designed into the system of the Barnett formula is that there is no reset on that. There is just indefinite divergence. You would probably want some kind of reset in whatever system was brought to bring revenues and needs back together periodically or on a rolling basis.
Q87 Lord Prentis of Leeds: Just looking at the purpose of devolution, I am not clear from the way that the discussion is going what the primary concern of devolution is. Is it redistribution or is it growth in wealth? Many of the issues you talk about are redistributing wealth rather than seeking growth. What is the primary purpose of devolution?
To go on from there, this is not about every local authority; 40% do not have sitting mayors. When equalisation becomes part of the answer, will each relevant local authority not believe that, “Whatever happens, I am going to get funded”? If it goes wrong, then they will have redistribution and the money will come in through a different hole. Does that come in from central government?
Kate Ogden: On the purpose of fiscal devolution, it depends who you ask. People have very different theories in mind for why this might be a good thing. There is not one clear answer out there. That is a totally unhelpful answer.
In my view, it is not primarily about redistribution. You could achieve that by giving areas different amounts of grant funding. You do not need to assign a share of revenues or give them tax-raising powers to redistribute. You can do that in other ways.
Where economic growth comes in is particularly when the focus is on those strategic authorities that are functional economic areas anchored around a city or a few smaller settlements. The kinds of powers to have lead you to think, “Maybe it is strategic planning or strategic transport or something about skills”, where the levers they have are about growth. We clearly need more growth in this country, and that should clearly be a priority of any Government. That is why growth comes into this at this present moment so strongly.
On the risk that central government is always a backstop, that is a risk. It is more of a risk if you are giving areas new borrowing powers, which you might want to. If you are giving them more of the risk and volatility, maybe you want to allow them to borrow to smooth that over time themselves.
You could restrict those borrowing powers, though. To go back to Scotland and Wales, they have power to borrow to the extent that their forecast for income tax revenues that they are going to get differs in outturn. There is a reconciliation that happens a few years later and they can borrow for those gaps. That helps them smooth things. You might worry less about moral hazard and authorities doing interesting things with borrowing powers there if you are restricting their powers to managing volatility in the short term.
Aditi Sriram: I do not have too much to add. We would argue that growth is the prize in fiscal devolution, and redistribution is what you have to consider to meet the goal of growth without causing inequality, which we do not want for lots of reasons. I have a lot of pieces to add on the borrowing piece, but that might come later.
The Chair: That comes later on, yes. Thank you.
Q88 Lord Burns: I have a couple of observations, first of all. You say that present inequality might be the result of the present centralisation that we have had, but I would also make the case that the differences would have been even greater without a significant degree of centralisation.
Also, you started by saying that the major problem with the existing arrangements is that there is not sufficient confidence in the resources that these areas will be receiving from the Treasury for their infrastructure programmes. We also know that at local level, of course, local authorities have been squeezed relative to their statutory requirements.
You then went on to describe what is, to me, an enormously complicated set of arrangements for tax-raising powers or tax-using powers to prevent the rich areas benefiting over the poorer areas. When people talk about the tax system being complicated, you were describing something that was even more extraordinary in terms of what was going to be involved, in the search, it seemed to me, to try to adjust marginal rates relative to average rates.
It is an important thing to do in the right circumstances, but I cannot for the life of me, in all honesty, see that, if you start with the purpose of this being to give greater certainty—this is an important point here—about the financial resources that these bodies will have for their infrastructure, that one then has to create this extraordinary pyramid in order to give tax-raising powers to those people. Can I start with that question? Do you appreciate why I might be rather alarmed by this?
Kate Ogden: Yes, I do. On designing an elaborate, complex system that mitigates all the trade-offs and achieves everything everyone might want from devolution, at IFS we love a complicated, overdesigned system. I agree that then makes it really hard to explain to people.
One challenge in the way that devolution to mayors has certainly worked so far is this deal-based, area-by-area approach, which means it is really hard to work out if you have a mayor where you live. If you do, what are their powers? What is their real ability and capacity to deliver on anything that they might promise? That means you are not getting the local accountability because it is really difficult from the outside to work out what blame lies where. Who should you thank if your tram system comes off? Is it still the Chancellor? Is it the Transport Minister? Is it your local mayor? Who knows?
You talked about an overdesigned system as well. We have lots of complicated systems for how we fund local government and for how business rate retention works and how the Barnett formula works. It is not obvious that everybody needs to know how they work, and I am quite glad that they do not. Most people are quite glad they do not have to understand how the system works.
What really is key in accountability of a new system, though, is making sure that there is something concrete that people can see in the area. This is useful for Government to say, “That thing there happened because of this devolution arrangement, and it would not have happened otherwise”.
Aditi Sriram: We are right to be wary of an overcomplicated tax system. That is a criticism of lots of parts of our tax system. The best thing that we can do in the road map is build off of progress that has already been made in local government reorganisation. That means existing maturity of mayors and integrated settlements. How can we work off of those instead of creating entirely new systems that we have already thought through?
Lord Burns: Can I move on to the question that you raised about borrowing powers? This is really the issue of whether there are any implications in all of this for the UK’s fiscal framework if the powers are to be devolved. Do you envisage that there would be significant increases in borrowing capacity? What would be the mechanism for controlling this? Would individual authorities be required to have their own fiscal plans? How would that fit in with the Government’s? Who would be monitoring it? How would we ensure that this did not become an arrangement that simply, in a sense, made it more difficult for central government to control its own finances?
Aditi Sriram: Obviously, we have been thinking a lot about infrastructure delivery. Borrowing is a key part of that. Borrowing is a key puzzle piece in the fiscal devolution framework. I say that with the recognition that there is not actually that much room for us to borrow currently. The road map has to consider very closely how borrowing from all levels of local government will intersect with fiscal rules.
The first consideration here, or the first question to ask, is around how mayoral borrowing would run up against our current central debt measure of public sector net financial liabilities. Most of the projects that we are thinking about, such as mass transit and housing, would not be counted as financial liabilities because they are too illiquid, which would mean that all these projects that we might have the ambition of mayors to deliver run up against our borrowing abilities. How the fiscal devolution road map can best meet that trade-off is an open question.
To think about the status quo currently, we have two major ways that we can manage borrowing. One is under the prudential borrowing framework, which obviously applies to combined authorities but also to local authorities. That manages the risk and ensures that borrowing has the relevant revenue streams to back it.
Secondly, on combined authorities, there is an additional layer of a capital financing limit. This is something that we hear from mayors as being something that they have to negotiate year on year. It is also burdensome in the Treasury to have to negotiate that cap. Again, we also have to consider how we limit borrowing.
All of this is to say that I do not have an answer, but those are all of the pieces that we would want to think about and address in the road map that I have not heard enough conversation about. We want mayors to borrow, but we have to open up the space for them to do it.
Lord Burns: Presumably this is going to be affected by the degree of devolution. You get very different answers with different degrees of devolution.
Kate Ogden: If you are really trying to expose areas to changes in local economic circumstances, and you are exposing them to national cycles because you are only equalising between areas, then you are moving some revenue risk from central government to local government. If you are taking, though, a block grant adjustment approach, that keeps that national economic cycle risk with central government, which is doing the smoothing. Then you have not moved risk and volatility to local areas in quite the same way.
Which taxes and precisely how determines then also how volatile areas might expect their revenues to be. If the extra risk and volatility is why they might ask for more borrowing powers, then how big those fluctuations are influences the amount of borrowing you might want them to be able to do.
Q89 Baroness Wheatcroft: I can see why you would want mayors to have borrowing powers for capital projects, but what about day-to-day running of services? You have talked a bit about services in answer to Lord Razzall’s question, but the bulk of what we have been talking about is devolution of resources. I am really keen to establish where this basic minimum would be in services, how you establish that, and how far above that you are prepared to see some areas go before there is a risk of discontent.
Certainly, we are already there as far as the health service is concerned. In London, we have fantastic services. In parts of Kent that I know, people go around with cards in their pocket saying, “If taken ill, please do not take to particular hospitals”, because the hospitals in Kent are pretty dreadful. There are already inequalities, as Lord Razzall said. How do you establish where the floor should be?
Kate Ogden: I would expect it to vary by service. Reasonable people could disagree about where to set those floors, even for particular services. I do not have a good answer on where that floor should be, apart from to say that it is going to vary. People will put it in different places.
Baroness Wheatcroft: That may be true, but somebody presumably has to put it somewhere.
Kate Ogden: That is politicians. It is fundamentally a political judgment there about what you are willing to accept in terms of divergence across the country.
On the resource, it is right that we have been talking mostly about devolution of resource spending and funding, and therefore it is right to think not only about capital-borrowing powers but about resource-borrowing powers. You could restrict that. You could cap them in similar ways, as administratively complex as that gets.
If it was about managing year-on-year volatility in revenues from new streams, you could think about a similar system to Scotland and Wales, where they can borrow for these outturn-versus-forecast errors to do the smoothing. Then you would want the forecast to be independent. In the case of Scotland, it is the Scottish Fiscal Commission; for Wales, it is the OBR. You probably do not want areas doing their own forecasts of what they are going to get, then continuously expecting something very optimistic and borrowing to fill that gap. That does not look like a sustainable system.
Aditi Sriram: The one piece that I would add is that there are various levels at which we can standardise. Within the integrated settlements, there is an outcomes framework, and that outlines exactly what needs to be delivered by the established strategic authority to meet specific goals.
In assigning those specific outcomes, there is a level of central control that runs up against what our goal might be in fiscal devolution. Maybe there is a question of where the middle is between this outcomes framework that specifies how much CO2 is sequestered and the outcomes that we actually care about, not only about growth but also around living standards. If we are thinking about mass transit, it is around congestion. Maybe those are the kinds of higher-level macro-indicators that we would like to see standardised across the country.
Again, I also do not have the answer for exactly where we land, but there is a trade-off between how much central control we have if we specify outcomes too closely and we do not allow local leaders to deliver services and infrastructure in a way that meets local needs.
Baroness Wheatcroft: Since you cited living standards, can you just give me some idea of how on earth you move towards equalising living standards between the south-east and Wales?
Aditi Sriram: I do not know that that is something I can answer.
Kate Ogden: Currently, we do that in practice through progressive income taxation and a benefits system. We do a lot of that nationally at the moment. There are good reasons for some of that to stay national because, as discussed, the national Government have the power to equalise between regions. If you move some things down, you can only equalise within regions and not across. In practice, that is how we do some of it.
If you wanted not just living standards to be more equal, but wealth, economic opportunity or income from earnings to be more equalised, you would be looking at a different set of things around skills and transport—the kinds of investments that Aditi talked about that might bring more growth to certain areas. There are living standards and then a separate economic opportunity piece that is a bit distinct.
Baroness Wheatcroft: If we look at what has happened in education, for instance, there have been huge improvements, particularly in London, without extra money, really. What do you put that down to and how do you replicate it?
Kate Ogden: I am not sure that it was totally without extra money. Schools in London used to be worse than the rest of the country, with major pockets of deprivation, so London got more funding per pupil—and still does—than other areas. When we talk about equalising for need, you could think about either what gets the same teacher quality in front of the same number of kids or, “This area is really struggling, so we are going to put more resources in to try to equalise outcomes”. On schools, we have moved a bit. The improvement in London has been vast.
Baroness Wheatcroft: Given what is going on at the moment and the debate around the potentially future Prime Minister, the wording seems to have moved from “equalisation” towards “equivalent”. Can you tell me if there is a difference and, if so, what it is?
Aditi Sriram: I would assume that, with equalisation, there is maybe an idea that all regions might look the same or are all equal, but equivalence might recognise that, in certain areas, there are different needs that need to be delivered. You can have an equivalency without equalising perfectly. That allows what we were mentioning before in terms of allowing local leaders to deliver what they see is best.
Kate Ogden: It is tricky to say what different people mean by different words, especially in some of this debate.
Q90 Lord Carrington of Fulham: If devolution means anything, it means difference, presumably. The people who live in one area can decide to have a different lifestyle to those who live in a different area. If you have that, you are, presumably, trying to ensure that the people who live in that particular area have democratic control over the people who are taking the decision. As I understand it, what you have been talking about is that, essentially, fiscal devolution would be to the regional strategic authorities.
If you take London as an example, which I really rather suspect was the model that the recent Bill was very largely built upon, you have a situation where the residents of London see themselves as living in local boroughs, and see the responsibility for delivering what happens in that borough as being in their local town hall, not in City Hall. If all the money goes into City Hall, they are still going to think that their votes should be controlling what goes on in their borough. How do you overcome that? How do you make sure that the control of the money democratically is where the voters think it is?
We have had a mayor in London now for—I do not know what it is—nearly 25 or 30 years, and it has not changed. Londoners do not think that the mayor runs anything very much. In terms of what Londoners think about the mayor, a bit like people used to say about Boris Johnson, they would pick up the Metro on their way into work and have a good laugh at what the mayor had done overnight, and then pick up the Evening Standard, in the days when there was one, read that and have a good laugh at what the mayor had done on the way home. They did not think that the mayor did anything except provide entertainment. Sadiq Khan probably does not even provide that. Nobody thinks he does anything.
How do you decide which areas should control the money? If it is going to be regional, you are not really achieving anything. If you are giving the money to the local districts, or the boroughs in London, you are giving such little pockets of money that they are not strategically going to be able to change anything.
Kate Ogden: One positive outcome from fiscal devolution, revenue assignment or whatever it ends up being might be that people no longer think that their local mayor is a man with a gold chain who does ceremonial ribbon cutting. If they have some real power, people will pay more attention to them.
On powers, I would distinguish between where and how the money is raised compared to how it is spent. You could have quite a lot of devolution over how money is spent in a local area without necessarily needing or wanting to devolve tax-raising powers.
On London boroughs versus the city, I really care about local government and am very interested in it. I am not sure that I could name a single councillor from my London borough, which is very poor on my part, but speaks to a risk that even people who care quite a bit are not that knowledgeable about local politics. Part of what a mayor does is to centralise some of that into one person.
I agree that there is then an issue if where actual power lies is not where people think it lies. We have that issue in shire county areas now, where districts have power over some things and counties have power over others. If you ask most people, they will not be able to tell you which, and it varies between areas in terms of which has power over which, so I agree that there are confused chains of accountability. There is probably a comms piece there. If devolution eases that in any way, it is that, once a mayor is more important and has more power and more real meat, they will get more attention and scrutiny.
Aditi Sriram: I would say two things. Something that is really important within the road map is to identify very clearly what the core responsibilities of local and strategic authorities are. Just in broad strokes, you would imagine that strategic authorities are good at projects that cross local authority boundaries, such as mass transit or new towns, and local authorities are good at those around social care, libraries and parks. I do think that there is a comms piece there, and that should be featured within the road map because a lot of people still think that council tax is for their bins, mostly. There is not a good awareness of who does what and what level of government is working on which project.
A second piece is to consider, within the road map, how local and strategic authorities can best engage democratically. I will give one example. In the structure of a regional development corporation, you would have this board of directors on which all of the constituent local and strategic authorities could sit and contribute to, say, a new town’s regional development corporation. That is a mechanism through which we can have democratic engagement across local and strategic authorities who are better aware of their roles, so that they can engage and deliver projects that meet the needs of their constituents.
Lord Carrington of Fulham: Can I just move on slightly? It is the same problem, but a slightly different aspect of it, which comes down to retained central government control. If you have devolution, what you want, presumably, is for the devolved powers to be exercised differently to what the centre would necessarily want. If what you have is the centre saying, “You have been very successful, so we are going to take your money away from you and give it to the poorer areas”, the centre is going to be controlling what everybody does, because it is going to be deciding how much they take, from where, and where they give it to.
Perhaps a simpler example is borrowing. If you look at infrastructure projects, particularly for trams, for instance, the money is quite substantial. You could fund it, presumably, from the projected revenues that the tram system would earn over 20 or 30 years, but you have to borrow it up front to do it. Unless the local authorities had their own credit ratings, that borrowing would go straight on to central government borrowing, so central government is going to say, “We are going to control it”. In other words, no matter how much revenue they get in, and no matter how much devolution they have, the Treasury says no. How do you get around that?
Aditi Sriram: It is a difficult question and something that we keep running into. In our central debt measure, that is how we count debt. All of these projects are not classed as financial liabilities, and so they would show up on the balance sheet. There is an open question of what it looks like to change the central debt measure. I could not vouch for that because there are a lot more questions that we would have to consider, but, within the fiscal rules framework that we currently have, it is a really difficult question.
Again, there might be a question of how we can crowd in more private investment, because, if you had even majority ownership from private investment, then mayors or regional leaders would be able to borrow. Then again, it is true that central government would end up being the lender of last resort, even in that case. I am sorry that I have just brought up more considerations, but I do not have a good final answer to that.
Kate Ogden: This hits on the fundamental tension around devolution, which is that, if the centre wants to empower areas and let them have different policies that might not be what the centre would have designed for them, it also needs to trust them, make them accountable, and design the centre of government’s accountability relationship with mayors in a different way. To the extent that central government is still ultimately accountable for borrowing if it all goes wrong, or is ultimately held politically responsible for what happens in particular areas, it is very difficult for central government to let go.
Lord Carrington of Fulham: What you are saying is that, if we are going to have devolution, we have to have a constitutional change to restructure the way that government runs.
Kate Ogden: I am not sure that you need a constitutional change.
Lord Carrington of Fulham: You have to take it out of the Treasury and take the responsibility away from central government for the financial health of the country.
Kate Ogden: At the moment, mayors and local authorities are accountable not only to Treasury but also to a range of departments that give them little pots of money.
Lord Carrington of Fulham: Those departments are, in turn, responsible to the Treasury, so it becomes circular.
Kate Ogden: Yes. You could look at simplifying some of those accountability arrangements and at least making sure that there is not quite so much overlap or duplication. That would give areas some more flexibility, but it is really difficult to see how you really move power out.
Q91 Lord Liddle: I have just one point on local government. Surely, the logic of devolution is to try to make local authorities think not so much, “How do we squeeze more money out of central government departments?” but, “How do we run our services more efficiently?” The question of running services efficiently seems to be lost in this discussion. There is quite a lot of variation in the quality of services. There is also quite a lot of inequality within a particular local authority. I was a member of Cumbria County Council. Life expectancy in a ward in Workington is 20 years lower than that in a rural area near Penrith.
Local government finance is in a terrible mess. Again, we had a two-tier system that we are now trying to make a single-tier system. In the two-tier system, people related much more to the district council, even though the county council, of which I was a member, spent about 20 or 30 times as much as the districts. The fact is that the big issue in local finance is the escalated costs of social care and children’s care and all that, which takes 70% of the budget. There is not much democratic accountability about how well you do that.
Do you see the arguments about fiscal devolution as related to how we have better local government, or do you think that what we are talking about is having strategic authorities that are, basically, focused on economic growth functions, and that local government just gets on with the job as best it can, without much change?
Aditi Sriram: On the point around efficiency of delivery, there is something to be said about some of the research that we did into transit. Transit becomes more costly when we lose the institutional knowledge and the skills to do very specific things, such as tunnel boring. Because we have this stop-start funding, we lose this institutional knowledge. You might see that across all kinds of infrastructure and services delivery. The road map could do well in delivering services efficiently by facilitating this institutional knowledge transfer. We have heard, across local and strategic authorities, an interest in having more secondments and more transfers across the country to share knowledge.
On the second bit, around whether we should be focusing on strategic authorities, that is the angle that we focus on, because we are interested in the infrastructure delivery piece, but we cannot overlook within this road map the unfairness of the local government finance settlement currently. One piece on that might be, as I mentioned earlier, the exact baseline level of service provision that we might want out of local authorities. Maybe that is something that we can specify within this road map, and then we can work towards what the funding is to meet those baseline services so that local authorities are then unlocked to work on the things that we might want them to, over and above those services.
Kate Ogden: To give the Government and many people at MHCLG some credit, the local government finance system is less arbitrary and fairer than it used to be, which is a good start. I would see strategic authorities as the first step. That makes sense. I would not rule out thinking more carefully about local authorities next.
I do not think, though, that fiscal devolution of any kind is going to be the panacea that fixes local government finance or makes the numbers add up. The Local Government Association came up with some new projections last week. I have not managed to look into those in detail, but they are projecting a 5% increase above inflation in spending pressures each year over the next three years.
If that is the scale of the challenge, you need either substantially more tax revenue, be that nationally or locally raised, or to reduce pressures by managing down demand, improving efficiency, particularly in some areas—we think it does vary quite a lot across the country—or reducing the range and quality of services that local authorities are expected and/or intend to provide. I do not think that fiscal devolution is part of the answer. Maybe it helps at the margin.
Q92 Lord Reid of Cardowan: We have had a pretty deep discussion across a range of issues, but one of the central questions that has come up is the incompatibility of passage down to a plethora of organisations—local, regional and so on—with the ability to borrow on revenue-raising powers, and the responsibility lying at the centre, with the fiscal rules and so on.
In response to that, you said at one point—I admire your optimism on this—that, ultimately, you have to trust them. I am all for what Peter Hennessy called the “good chap” theory of government. It was phrased before the days of feminist critique, so we will take “chap” to include “chapess” as well. To be honest, the “good chap” theory of government, if ever it worked, certainly has not worked in recent decades. The inability to accept that everyone will act trustworthily, honourably and sensibly has been met by a whole series of institutions and entities to provide accountability on the one hand, and oversight on the other.
Having set the context, my question is quite simple. Given the supposition that the Government go ahead and pass such powers down, what forms of additional accountability and oversight might be needed of regions or other entities with the enhanced powers that we have been speaking about here, and particularly fiscal powers?
Kate Ogden: Those entities would be local authorities and would still be subject to many of the same legal and professional requirements and standards, and many of the same accountability mechanisms, that local authorities are already subject to. You might think about professional standards that bind accounting officers. In terms of the bigger picture, they are electorally accountable. There is doing what they are meant to and behaving in a “good chap” way, and a legally compliant way, and then there is oversight from the centre or from voters, and most of these authorities do have some electoral accountability.
We probably do need to be realistic about the extent to which voting is ever on local issues or outcomes as opposed to being referenda on national politics. We have seen that, in a few cases, such as in Croydon a few years ago, if there has been very significant poor performance locally, that has bucked the national trend. It can work in extremis, but you want many of the smaller things that could go wrong to be being picked up by other systems that are already there.
Lord Reid of Cardowan: Are you saying that we do not need any additional oversight or accountability formats, even though there might be much greater powers, including fiscal powers, passed down, and that everything that is there at present is sufficient to deal with that and that we just have to trust it?
Kate Ogden: I do not think that we just have to trust it, and that is not what we do now. I would not call for all the guardrails to go off and that you just have to trust them. That was more in relation to how they spend and what policy decisions they make, and where you might want to empower them to make different policy decisions. I would distinguish between that and good financial management, which they should be doing, and there should still be systems that make them manage their finances in a responsible way.
Lord Reid of Cardowan: Should there be those systems at present?
Kate Ogden: At present, there are those systems, and the need for them gets greater as they get more powers, particularly for tax-raising or borrowing. It depends on what powers you are devolving, essentially.
Lord Reid of Cardowan: Let us say that we are devolving revenue-raising powers.
Kate Ogden: I would be less concerned about the accountability of existing strategic authorities, and more concerned about their capacity, because these are new institutions. A local authority has an accounting officer and a finance team, and all sorts of people with lots of experience. Even if you gave it extra powers, it is already used to carrying substantial risk, as opposed to a new strategic authority that does not have many staff yet and is new to some of this, so I would be looking at capacity, not just accountability.
Aditi Sriram: I can build on that. As I mentioned before, it is important for the road map to build on the work that we have already done on devolution. Within that, we have these different levels of institutional maturity. The foundational strategic authority or combined authority formed of two or more local authorities then becomes a mayoral strategic authority when a mayor is elected. Mayoral strategic authorities go through a readiness assessment to become an established mayoral strategic authority, and it is at that point that they are able to access integrated settlements.
In that framework, you already see that we have the mechanisms to build the capacity needed to deliver projects within integrated settlements. There are a few key points within that process that the road map should specify. The overnight visitor levy might be applied at the mayoral strategic authority level. Then there is the question of how you do the institutional knowledge transfer to ensure that those mayoral strategic authorities are able to function. There is an administrative question of how they become tax collection authorities. There is also the question of how they manage those revenues. That involves knowledge transfer from Treasury, but also between mayoral strategic authorities. That is one piece.
There is another piece around the fact that, with the integrated settlements that established mayoral strategic authorities are able to access, there is an outcomes framework. That is a level of oversight about how those integrated settlements are spent. That is a baseline of accountability and oversight that currently exists.
Moving on, over and above that, we would want to see the establishment of improved regional data collection. We would want to see how we can collect regional data around productivity and other measures. We would like to see how they are evolving and how central government can monitor those.
Borrowing and debt management is a very important question. Once mayoralties have the revenue that they are borrowing against, something that we have heard from mayors is that they currently borrow for investing, but have no capacity whatsoever to do the kind of borrowing required to address volatility in tax take. That is an example of a very specific way in which the Treasury can pass on that knowledge and have institutional knowledge transfer. Those are some of the pieces and additional oversight that I would include and address in the road map.
Lord Reid of Cardowan: I am grateful for that, but I am not sure that it answers my question about this incompatibility. It may be that allowing regions or local authorities to borrow does not need any additional oversight. I would have thought that, if you were given the very question that we all struggled with earlier about the incompatibility between central fiscal rules and the power to, essentially, undermine them, there was a need for some further oversight. I am not suggesting that you should have the answer, but, absent that, all sorts of problems potentially arise. Unless we can answer that question, it is going to be a major impediment to the political movement forward on devolution.
The Chair: Lord Newby had a quick follow-up on this point.
Q93 Lord Newby: It is about co-ordination, really. If central government is giving more powers and funding to regions and sub-regions, I wonder whether there needs to be kind of some enhanced institutional mechanism between central government and the regions. At the moment, they are told that they are getting a settlement. If things carry on on that basis, they are just going to be told that they are getting a bigger settlement.
Given that what both central and regional government are trying to do, and that one of the main purposes of devolution is to enhance growth, where at least the aims are common, even though the tactics and local strategies may differ, can you see any benefit in or mechanism whereby the people in central government engage constructively with the mayors to try to ensure that policies are working in the same direction to the maximum possible extent, or do you think that we will carry on as we do now, i.e. muddling through, and some mayors getting on with their relevant national government Minister, and others not?
Kate Ogden: They are not even necessarily being promised a bigger settlement, but just one that is composed of slightly different things. There are two things that you could usefully do here. One would be—and this is something that some mayors have mentioned—instead of them having a relationship with multiple departments, having a bit more co-ordination on the central government side, so that there is one point that they go into rather than many.
In other places as well, there is a more formalised relationship between central government and that regional tier, where they more regularly sit in a room and have these kinds of discussions. You could look at introducing some kind of mechanism in the middle where the layers talk to each other on a more equal footing.
Aditi Sriram: I do not have much to add, other than we would want a mayors’ group, and maybe a northern mayors’ group. Ways of facilitating conversation and co-ordination, and especially this knowledge transfer, are quite important to work out.
Q94 Lord Butler of Brockwell: If somebody said to you that additional accountability and control was the exact contrary of devolution, what would be your answer to that?
Kate Ogden: It would probably be a short affirmative. There are lots of trade-offs here and it is really difficult.
Aditi Sriram: I would agree. They are just trade-offs that need to be managed.
Lord Butler of Brockwell: They are mutually contradictory.
Aditi Sriram: At either end, they are mutually contradictory, but there are lots of ways to manage that trade-off through a lot of mechanisms that already exist and should be renegotiated.
Q95 The Chair: We have kept you a long time. Can I ask you two very quick final follow-up questions, if you do not mind? First, as we touched on at various points, imagine that the new Prime Minister wanted to do a big devolution of economic powers, whether it is assignment of national taxes, as we have discussed, or new local tax-raising powers. How fit a state is local government across England in to be the receiving party for that devolved power, or will there need to be, for all sorts of reasons, reorganisation, consolidation or combination in order to have a network of competent authorities to receive the delegated or devolved powers?
Aditi Sriram: Within the established mayoral strategic authorities, from the conversations that we have had, there is quite significant capacity that has been built up in Greater Manchester and in the West Midlands. There is capacity in some of those that have gotten fiscal powers earlier and have had the ability to build their teams, and those should be the starting point. Again, it is a road map, and so I would err towards the side of incrementalism rather than immediate devolution.
The Chair: Manchester and Liverpool might be first, and Devon and Cornwall will have to wait, but for what?
Aditi Sriram: Right now, the highest level is to access integrated settlements, and so you would imagine maybe this next level, where there is a similar readiness assessment to move from those integrated settlements to where it is full autonomy on tax spend.
Kate Ogden: I would give a similar answer. It depends on how big and how fast, and to all areas or only to some, because capacity is variable.
The Chair: Thank you. I promise that this is the very last question. If you had to recommend one thing that we should be urging a new, devolution-hungry Government to do, what would you suggest? It could be the first in a series of things, or the priority, but what would be the one or two things that you would urge them to take most seriously earlier on in the fiscal devolution journey?
Lord Razzall: It is important for the Chair on the “Today” programme that he gets the right answer.
Kate Ogden: I would say some real clarity on what they mean by fiscal devolution and by other terms, what the objectives are, and what the theory of change is.
Aditi Sriram: I would say that it is the question of borrowing. The trade-offs have to be made in terms of how much we are willing to let mayors borrow, and then we can get into all kinds of interesting questions of the mechanisms behind how they borrow and how we devolve out power, but that very specific political question has to be answered of how much we are willing to borrow to meet the ambitions of mayors.
The Chair: If there are no other questions, thank you so much to both of you, Kate and Aditi. We are really grateful for your expertise and for diving deep into some of the techie questions that we had for you. We really appreciate it. With that, I can say that the meeting is now closed.
