Want to help UK cities thrive? Give them their share of corporation tax

You know it makes sense, George. Image: Getty.

Chancellor George Osborne’s announcement that he will reduce corporation tax rate to below 15 per cent was designed to encourage business investment to continue, despite Brexit. But a new NLGN report argues that control over a third of the proceeds of this tax should be given to cities to help them address the country’s underperformance on productivity.

With post-Brexit fall-out consuming energy in SW1, there is a risk that devolution will fall down the political agenda – but the issues laid bare by the vote show that we can no longer leave structural imbalances in our national economy unchecked. Local economies built on cheap labour and low skilled industry are not making people richer or happier: too many communities feel left behind from globalisation.

The key to spreading prosperity around the country is productivity: sustainably increasing the value of output per hour worked will raise living standards over time. But the UK is an international laggard, and much of the problem lies in the regions, where de-industrialisation has left a long-term legacy of economic underperformance.

It is increasingly clear that cities have a major role to play in solving the regional productivity puzzle. They have increasing power to build human capital, deliver housing and infrastructure and promote innovation. But local government currently has no financial incentive to improve productivity. In fact, plans for business rate localisation could drive the creation of even more low skilled jobs.

The solution is to give cities control over a third of the Corporation Tax generated in their areas. This would create a stronger incentive for local government to invest in measures which support productive growth and business creation.

Plans for Business Rates localisation by 2020 are an important first step towards fiscal devolution – but alone they are not a sufficient basis from which to plan future growth strategies. The business rate is levied on the estimated rental value of a premises; so localising this revenue stream alone will give councils an incentive to bring in companies which occupy a lot of space. This could lead to an over-dominance of businesses that are relatively low value and low productivity: large out of town retail developments or warehouses, for example, employing staff on or near the minimum wage.

But to be sustainable, local economies also need to also support denser, intensive clusters of innovative SMEs that employ highly skilled individuals with huge growth potential. We need to address how the right sort of growth can be incentivised, providing a better balance with more high value growth in knowledge-driven industries. Profits are a much better indicator of productivity than is the size of a company’s office – so corporation tax is the best tool to incentive councils to increase local prosperity.

Giving cities control over a third of the revenue stream based on business profits will give them a stronger stake in driving collaboration for productivity between businesses, higher education and other stakeholders. This should be matched with new devolved responsibility over public services, including the skills system; this would result in stronger local networks of support for in-work upskilling, targeted sector-specific business scale-up advice, and more focussed investment in innovation to develop comparative advantage.

Some may argue that devolving corporation tax could be deemed too difficult: property-based taxes are certainly easier to identify, as they are literally fixed to the ground. But our research shows that local models of business taxation in our closest, and more productive, international peers – France, Germany and the US – all contain a direct link between local governance and productive business outputs in their local fiscal frameworks. In the UK, by contrast, all revenue linked to productive output goes straight to the Exchequer. There is a missing link in our towns and cities.

For fiscal devolution to create a different set of incentives to drive growth that raises living standards overall, we need to start from first principles. By devolving a share of the revenue stream linked to business profitability, we can help turn local economies into healthier environments for business to prosper – and help residents to benefit from rising living standards.

Jessica Studdert is deputy director of NLGN and the author of “Smarter, Not Harder: How devolution can make places more productive”.


CityMetric is now City Monitor! Come see us at our new home

City Monitor is now live in beta at citymonitor.ai.

CityMetric is now City Monitor, a name that reflects both a ramping up of our ambitions as well as our membership in a network of like-minded publications from New Statesman Media Group. Our new site is now live in beta, so please visit us there going forward. Here’s what CityMetric readers should know about this exciting transition.  

Regular CityMetric readers may have already noticed a few changes around here since the spring. CityMetric’s beloved founding editor, Jonn Elledge, has moved on to some new adventures, and a new team has formed to take the site into the future. It’s led by yours truly – I’m Sommer Mathis, the editor-in-chief of City Monitor. Hello!

My background includes having served as the founding editor of CityLab, editor-in-chief of Atlas Obscura, and editor-in-chief of DCist, a local news publication in the District of Columbia. I’ve been reporting on and writing about cities in one way or another for the past 15 years. To me, there is no more important story in the world right now than how cities are changing and adapting to an increasingly challenging global landscape. The majority of the world’s population lives in cities, and if we’re ever going to be able to tackle the most pressing issues currently facing our planet – the climate emergency, rising inequality, the Covid-19 pandemic ­­­– cities are going to have to lead the way.

That’s why City Monitor is now a global publication dedicated to the future of cities everywhere – not just in the UK (nor for that matter just in the US, where I live). Our mission is to help our readers, many of whom are in leadership positions around the globe, navigate how cities are changing and discover what’s next in the world of urban policy. We’ll do that through original reporting, expert opinion and most crucially, a data-driven approach that emphasises evidence and rigorous analysis. We want to arm local decision-makers and those they work in concert with – whether that’s elected officials, bureaucratic leaders, policy advocates, neighbourhood activists, academics and researchers, entrepreneurs, or plain-old engaged citizens – with real insights and potential answers to tough problems. Subjects we cover include transportation, infrastructure, housing, urban design, public safety, the environment, the economy, and much more.

The City Monitor team is made up of some of the most experienced urban policy journalists in the world. Our managing editor is Adam Sneed, also a CityLab alum where he served as a senior associate editor. Before that he was a technology reporter at Politico. Allison Arieff is City Monitor’s senior editor. She was previously editorial director of the urban planning and policy think tank SPUR, as well as a contributing columnist for The New York Times. Staff writer Jake Blumgart most recently covered development, housing and politics for WHYY, the local public radio station in Philadelphia. And our data reporter is Alexandra Kanik, whose previous roles include data reporting for Louisville Public Media in Kentucky and PublicSource in Pittsburgh, Pennsylvania.

Our team will continue to grow in the coming weeks, and we’ll also be collaborating closely with our editorial colleagues across New Statesman Media Group. In fact, we’re launching a whole network of new publications, covering topics such as the clean energy transition, foreign direct investment, technology, banks and more. Many of these sectors will frequently overlap with our cities coverage, and a key part of our plan is make the most of the expertise that all of these newsrooms combined will bring to bear on our journalism.

Please visit citymonitor.ai going forward, where you can also sign up for our free email newsletter.

As for CityMetric, some of its archives have already been moved over to the new website, and the rest will follow not long after. If you’re looking for a favourite piece from CityMetric’s past, for a time you’ll still be able to find it here, but before long the whole archive will move over to City Monitor.

On behalf of the City Monitor team, I’m thrilled to invite you to come along for the ride at our new digs. You can follow City Monitor on LinkedIn and on Twitter. If you’re interested in learning more about the potential for a commercial partnership with City Monitor, please get in touch with our director of partnerships, Joe Maughan.

I want to thank and congratulate Jonn Elledge on a brilliant run. Everything we do from here on out will be building on the legacy of his work, and the community that he built here at CityMetric. Cheers, Jonn!

To our readers, on behalf of the City Monitor team, thank you from all of us for being such loyal CityMetric fans. We couldn’t have done any of this without you.

Sommer Mathis is editor-in-chief of City Monitor.