Postcode economies: Will tax decentralisation drive growth or entrench disadvantage?
As part of its decentralisation and growth agenda, the Government is legislating to give local authorities more tax-raising powers. The Local Government Finance Bill will allow councils to keep the proceeds from tax raised on businesses. It will also give councils the power to introduce tax increment financing (TIF), which will enable local authorities to borrow against future tax revenue collected as a result of investment. Along with flexibilities to vary business rates, the aim is to incentivise local areas to compete for business growth and to invest in infrastructure. However, key questions remain:
- How far will these reforms serve to stimulate growth overall? Or will they simply redistribute growth and tax income from less economically buoyant regions to areas with stronger prospects?
- Will the changes encourage lower and lower business rates, leading to a race to the bottom and ever greater polarisation between deprived and better-off areas?
- Is such tax competition legitimate?
- Will borrowing against future prosperity offer a route to stimulate growth in a sustainable way?
- Is further fiscal decentralisation desirable and likely?