Yesterday’s Queen’s Speech aimed to finally put some meat on the bones of the Government’s flagship ‘Levelling Up’ agenda by handing more power to local communities. This is to be achieved through new ‘County Deals’ – essentially, a new form of combined authority. Other measures include giving greater powers to bring vacant properties back into use, and letting local residents have more of a voice on planning decisions.
These measures seem nowhere near transformational or distinctive enough to create a meaningful legacy. Of course, decentralisation has a role to play in levelling up. But it has been tried multiple times by multiple governments already. Previous incarnations of this approach include metro mayors, Local Economic Partnerships and combined authorities, to name a few.
Ultimately, what seems to be missing from the new bill is a plan to move money and investment to those areas that need it. Of course, one approach would be more direct investment in areas outside of London and the south-east. But given the immense pressure on the public finances, the Government may be reluctant to go on a spending spree.
Another way of rebalancing the economy is through the tax system. At present, several elements of the tax system exacerbate regional economic inequalities and actively work against levelling up. Making reforms to ensure that that tax system works with, and not against, levelling up should be a priority for the Government, as Bright Blue has argued.
First, there needs to be substantial reform of Council Tax. Because the tax has not been revalued for more than 30 years, it has become plainly regressive. On average someone living in a £100,000 house pays about 0.7% of that value in Council Tax each year, while someone in a property worth £500,000 pays 0.35% on average. Unsurprisingly, this translates to lower-income households, on average, paying more as a share of their income in Council Tax than higher-income households.
The tax is regressive on a regional level, too. Since 1991, the rate of increase in house prices has varied sharply by region: in a number of London boroughs, the median price of a detached house increased more than eightfold between 1995 and 2020. But in towns in the north-west, such as Burnley or Blackpool, the comparable increase was around 2.7 times.
Ultimately, the main beneficiary of static Council Tax valuations has been London and the south-east. As an illustration, in 1995 the median price of a detached house in Camden already exceeded the Council Tax Band H cut-off of £320,000; though that house is now worth around £4.2 million, for the purposes of Council Tax it remains in the same band.
At the very least, Council Tax should be revalued to bring it back into line with reality. But if the Government wanted to be more radical, it could move towards a ‘Proportional Property Tax’ that would tax homes on a set proportion of their value. This could be supported by annual revaluation done using statistical techniques to estimate current prices, as is done in a number of other countries.
Business bias
Businesses are also affected by the tax system’s regional bias. One result of infrequent Business Rates revaluations is that firms in areas with rising property prices can be caught out by sudden and substantial increases in their Business Rates liabilities. Conversely, businesses in areas with falling property prices can pay over the odds in Business Rates for years until the next revaluation.
As with Council Tax, there is a strong case for more frequent revaluations. Indeed, the Government has proposed shortening the revaluation cycle, as Bright Blue has recommended, in the Queen’s Speech. The revaluation cycle will be reduced from five years to three years from 2023.
Ideally, revaluations would be as frequent as possible; a period of three years is still likely to lag behind economic cycles. One approach for yet more frequent revaluations would be to replace Business Rates with a Business Land Tax, based on unimproved land values and levied on commercial landowners. Besides modernising our valuation system for businesses, this would also reduce bureaucracy for businesses by shifting the legal responsibility for paying the tax onto commercial landlords.
Reforming Corporation Tax
Finally, reforming Corporation Tax offers a chance to boost productivity and kickstart growth in those areas that need it most. Despite Rishi Sunak’s ‘super-deduction’, which offers businesses a 130% capital allowance against their Corporation Tax liabilities, the UK still has one of the least generous systems of capital allowances in the OECD. And the super-deduction is set to end in 2023, while Corporation Tax will rise from 19% to 25% for companies with profits over £250,000.
Going beyond the super deduction, and ensuring business are able to write off capital expenses in full immediately rather than over a number of years (‘full expensing’) would help to encourage investment across the UK and boost our meagre levels of growth. Manufacturing businesses, which tend to be highly capital-intensive relative to service businesses, would stand to gain the most from this. Such businesses also tend to be based in areas outside of London and the south-east, particularly contributing to jobs and output in the Midlands and the north. Besides being pro-business in general, reforming Corporation Tax to back investment would further aid the levelling up agenda.
Ultimately, if the Government is serious about its plans to reshape Britain’s economic geography, it will need to do far more than just reshuffle local government structures. Creative reforms to the tax system are one way to truly level up our economy.
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