22 February 2019

Yet another tax is no way to ‘level the playing field’ for the high street

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A new report from the lengthily titled Housing, Communities and Local Government Committee has made for some exciting headlines this morning. Beware, Britain could be about to turn into a nation of “ghost towns” unless we take urgent action to tackle the decline of the high street.

The report is more wide-ranging and substantial, and much less doom-mongering, than that might suggest. And their vision, though written in purest bureaucratese, seems reasonable enough.

Rather than just places to go shopping, our town centres should be:

“…activity-based community gathering places where retail is a smaller part of a wider range of uses and activities and where green space, leisure, arts and culture and health and social care services combine with housing to create a space based on social and community interactions”.

So, fewer shops, more other stuff. That seems both a reasonable aim and a fair assessment of the way things are heading.

The committee makes a number of recommendations for promoting vibrant, welcoming town centres, much of it couched in that same New Labourish language of stakeholders, “future-proofing” and “cross-sector collaboration”.

There are two, however, which strike me as misguided.

‘Level the playing field’

The first is the familiar refrain that the government should seek to “level the playing field” between online and high street retailers by bringing in a new online sales tax. Philip Hammond has already dipped his toes in this area, with a new Digital Services Tax taking effect from April. But the idea that consumers getting cheap stuff from online retailers is something that needs to be clamped down on seems perverse.

While it’s true that not paying business rates is an advantage for the likes of Amazon, the reason online retailers are doing well is not because of the tax system, but because their overheads are comparatively low. And while it might feel as though people are buying more and more stuff online, digital sales still only accounted for 18 per cent of overall retail sales in the UK last year. More than four in every five pounds spent in the UK is spent in physical shops, not on the internet.

Where the MPs are absolutely right is in their insistence that the business rates system be dramatically changed. Their biggest sin, as so often in the thorny world of tax reform, is an abundance of caution. While the report quotes businesspeople exasperated at the iniquity of the system, it then suggests rather meekly that in the future “there may be a need for the Government to undertake a wider review of business rates and business taxation”.

But, as Ben Ramanauskas has argued, rather than trying to tinker with an already complicated system, it might be altogether simpler to scrap business rates and come up with a different, fairer means of raising revenue.

One possible solution is to wrap business rates into a higher rate of VAT. This seems a decent idea, in that it would simplify business taxes, while also appealing to people’s demand for equality between different types of retailers. It might also prompt government to finally consider evening out the various absurd exemptions in the VAT system — something we’ll have a totally free hand over after Brexit, incidentally.

The funding fix

The second issue with the report is the idea that councils should be bidding for money for high street renewal from the centre. This sort of dynamic once more casts councils as the Oliver Twist to Whitehall’s master. That extra cash, the argument goes, can be used to local authorities to come up with local plans for how their areas develop, which is fine as far as it goes but looks like reheating familiar arguments about politicians — be they local or national — picking winners or favouring pet projects.

The real elephant in the room is that local authorities lack the power to raise the funds for themselves, rather than proferring the begging bowl to central government. As the OECD has noted, the UK is among the most over-centralised developed economies when it comes to tax.

It’s understandable that MPs want to work within the existing system — far simpler to bolt things on than to rip out the foundations and start again — but the real answer lies surely in not ever greater sums for central government, but in letting local areas raise serious amounts of their own money.

As we have pointed out before, this has already happened with great success in countries such as Sweden, where some 35 per cent of tax revenue is raised locally, and services are among the best in the world. A proper devolution of power would also keep local councils on their toes as they will be responsible for their own spending and accountable to their voters – no more posters blaming everything on central government cuts.

Of course, tax is not the only way enterprising local authorities can try to improve their patch and as the committee notes, leveraging private capital is a crucial part of the mix. At the same time it would be unfair to expect businesses to foot the bill for civil infrastructure from which they will gain at best tangential benefit.

The members of the Housing, Communities and Local Government Committee have clearly put a good deal of work into this report and spoken to a great many people from business, local government and various other organisations. It’s just a pity that their recommendations fall back on the familiar politicians’ fixes of new taxes and more centralisation, rather than getting to grips with the systemic issues that are really behind the high street’s problems.

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John Ashmore is Deputy Editor of CapX