Opinion

Fifty Shades of Fiscal Freedom

Richard Threlfall KPMG

Devolution is getting many in infrastructure very excited. But will we be left disappointed asks KPMG partner Richard Thelfall.

The closer we get to the General Election the more our politicians tell us how keen they are on devolution. It stands to reason – the electorate is spread all over the country and the suggestion of more money to spend locally is bound to be a vote winner. But so far I have seen nothing that looks remotely like a concrete commitment. Until we get that, the devolution debate is just hot air. 

There is a very real problem. Over the last decade the economic centre of gravity of the country has moved relentlessly south. According to the Office of National Statistics, in 1999 31.9% of UK output came from London and the South East. By 2011 it was 36.6%. These are substantial shifts in a very short timeframe, and there seems little prospect of them reversing soon. 

"There seems little prospect of the Treasury adopting spending policies that would deliberately drive economic growth in our regions, so the only solution is substantive devolution of funding to pass more buying power into local hands."

In part this is the story of the success of London where total employment has risen so fast that it is already at the level that the 2010 London Plan forecast would be reached in 2024. But it also reflects long-term underinvestment in the UK’s second tier cities. The Institute for Public Policy Research noted last year that the country was spending on infrastructure 10 times as much per person in London than in Yorkshire.

There seems little prospect of the Treasury adopting spending policies that would deliberately drive economic growth in our regions, so the only solution is substantive devolution of funding to pass more buying power into local hands. That ask is not radical by international standards – UK local authorities currently control less than 2% of GDP in local taxes, compared to an OECD average of around 10%. 

But which taxes to devolve? The London Financing Commission proposed devolution of property taxes. The City Growth Commission suggested all Council Tax and Business Rates. The Government has suggested that a proportion of a shale gas levy might be retained locally (very conveniently skirting the need to actually divert any existing tax income from the Treasury). And more recently Nick Clegg declared himself personally in favour of devolution of stamp duty. 

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I have no reason to doubt Nick’s sincerity on that, but it was interesting it was pitched as a personal rather than party position.

And it makes me sceptical as to whether, when we get to the other side of the election, fiscal devolution will actually happen.

I fear that we, the electorate, are being teased on devolution. We are being played with. Everyone is getting very excited, but I suspect the morning after (the election) we will feel the pain.

It won’t be Fifty Shades of Devolution. It will be Fifty Shades of Disappointment. 

Richard Threlfall is a partner and UK Head, Infrastructure, Building and Construction at KPMG