Report urges reform of council tax in London to boost economy

Council Tax bands should revaluated

Allowing London boroughs to set council tax free of "paternalistic" government interference is one of the key recommendations of an independent report commissioned by the mayor Boris Johnson.

The London Finance Commission report, called Raising The Capital, also calls for a council tax revaluation and the introduction of more bands to reflect high property values in the capital.

The measure is among proposals to devolve tax-raising powers to the boroughs and the mayor to increase economic growth and improve the capital's public infrastructure.

Control of all the money raised by business rates - at the moment half is re-distributed by central government - and the proceeds from stamp duty raised in the capital would also be passed from Whitehall to local authorities and they would be given more freedom to borrow for investment.

Greater devolution

Mr Johnson said the way London currently received funding from central government was "simply not fit for purpose".

"Furthermore, Londoners will increasingly question why London government cannot enjoy similar fiscal freedoms as those afforded to the devolved governments in Scotland and Wales," he said.

"London's key bodies are agreed that the capital's financial future lies in greater devolution. We will now be taking this case to government."

The mayor did not endorse calls for a council tax revaluation, saying he "wasn't there yet' but he said councils should be free to set it without the threat of government capping.

The commission says it would not deprive other regions of the UK of funding because it would not mean more money for the capital "at the outset" and the revenue would be offset by a corresponding cut in government grants.

But it says the capital would be able to keep any extra tax revenue generated from future growth in the capital's business and housing sectors to put back into the economy.

In the introduction to the 90-page report, commission chairman Tony Travers, from the London School of Economics, says London "can't afford to stand still".

The continuing dependence of the mayor and boroughs on priorities determined by central government was "not a good situation for a developed democracy," he says.

'Virtuous circle'

The report argues that there is little reason why London and other British cities should not be given the same kind of decentralised power as Scotland and Wales, whose combined economies were half the size of the capital's.

More autonomy would mean more accountability to Londoners, and a more predictable and stable income would allow more borrowing, creating a "virtuous circle" of investment.

"Our overarching recommendation is that funding arrangements in London should allow London government to make additional self-determined investments in its own infrastructure both to cater for the growth already forecast for its population and economy, and to promote additional economic growth," the report says.

"Relaxing restrictions on borrowing for capital investment while retaining prudential rules and simultaneously devolving the full suite of property tax revenue streams will afford London government greater autonomy to invest in the capital.

Population rise

"Such reforms would also increase London government's accountability to residents and businesses.

"Change would be achieved without affecting the financial settlements of other parts of the country."

The report finds that the current pace of investment would be insufficient to meet the needs of a population likely to rise from 8.4 million now to 9 million in 2020, and 10 million in 2030.

Council tax has remained unreformed for more than two decades, with bands based on a 1991 property valuations, although the range in price has widened considerably.

Someone in a property worth £25m pays just three times more than the owner of a home worth £250,000.

The commission says London's government should take full control of the tax, determining the number and range of bands, and each authority setting its rate, free of government constraint.

Authorities wanting to increase council tax by more than a certain percentage must currently seek approval through a local referendum, and freedom is restricted by the government's "paternalistic" offer of a grant to freeze council tax, the commission says.

The report also recommends the "ceiling" be removed from City Hall and Transport for London borrowing, and boroughs should have restrictions lifted on what they can raise to build affordable housing.

The Treasury said it would comment in due course.