‘Levelling up’ is a surprising slogan for a Conservative government. Aren’t Conservatives meant to dislike government levelling activity of any kind?
But whatever its relation to conservative principles, this did not stop Boris Johnson campaigning on the slogan and in a way which seems to have paid off. His impressive electoral victory last year was built on winning ‘left behind’ working class constituencies that had long voted Labour.
Nor should Londoners begrudge the Johnson Government its ambition to ‘level up the country’. The UK’s regional disparities have long been growing, are the largest of any OECD country and put huge strains on the capital, as well as other ‘poorer’ areas. Narrowing our yawning regional chasms won’t be easy – governments have been trying it since at least the Second World War. London has a unique character built up over centuries. It’s not just the national capital but a global centre of infrastructure, culture and human capital. Many nations would gladly own such an asset. But London has increasingly struggled to manage the pressures that its success has brought, as ever escalating house prices and congestion testify. Building a ‘Northern Powerhouse’ alongside the Southern one is an eminently sensible long–term aim.
In a new report, the conservative think tank Onward – an organisation close to many of the new conservative Northern ‘Red Wall’ MPs – suggest it’s time to look at taxation through a regional lens. If some parts of country are left behind, could it be because they are paying more than their fair share of taxes? Might there be scope to raise tax take from more prosperous regions and cut taxes levied in poorer ones?
Levelling up the Tax System shows that, in fact, the picture is a highly complex. The government collects a large number of taxes. In some cases, richer areas pay a disproportionately large share of taxes and in other cases a relatively small share, in a way that broadly makes sense. So people in the South East have on average higher earnings and pay the lion’s share of income tax and national insurance. They are also wealthier and have more expensive homes, meaning they pay more in death duties and Stamp Duty. But people in Northern regions drive more, and smoke and drink more, so they pay proportionately more Fuel Duty and alcohol and tobacco taxes. Though not all the variation is as easy to explain as these. London, the report points out, pays relatively less Council Tax despite having the most expensive houses – mainly because the Council Tax regime has not been updated since it was introduced 40 years ago.
It can be helpful to look at the tax system in this way, and while Onward claim that their report is the first to have done so, it would be nice to think that a basic understanding of the regional impacts of different tax policies does inform policy. I have always assumed that the reason the government put goods before services in its Brexit negotiations was from a sense that this would do the least damage to the poorest regions.
But there are also some real limits to approaching tax revenues through a regional lens and they are exposed by Onward’s analysis. I limit myself to four points.
First, if an area pays lots of a certain type of taxes and another area does not, that does not make it unfair. Would it make sense to increase Fuel Duty or tobacco tax in London and lower it in the North East, so that every area was paying the same amount? Obviously not. Just as it would be wrong to charge drivers from the North East a higher Congestion Charge when they come to London on the grounds that Londoners currently pay the most towards the Charge – the aim of these taxes is not simply or mainly to generate tax revenue but to disincentivise behaviours.
Yet the gist of Onward’s report is to suggest that there is something inherently wrong about differences, at least when they don’t favour the poorer areas. Its executive summary highlights the taxes which hit the North hardest or the South East least, rather than the other way round.
Second, distributional considerations will and should often be secondary to aggregate ones. It’s easy to develop scenarios where shifting further taxes to wealthy areas undermines the economy in a way which hurts poorer areas as well as richer ones. London has long made a large tax surplus, distributed to the rest of the country. But the capital is in a vulnerable position at the moment. Are we sure that taxing the capital more won’t diminish rather than increase overall tax yield?
Third, limiting the analysis to the regional level will inevitably miss what is going on within regions. Any characterisation of London as the UK’s ‘most prosperous’ region is, in important ways, misleading. Yes, London generates a lot of wealth, though the picture looks a bit different when you take into account commuting patterns – many high earners who work in London live beyond its borders. But it is of course a very expensive and unequal city with exceptionally high levels of poverty – particularly once housing costs are taken into account. It is also worth noting that the Onward analysis does not include public transport fares in their calculations, though they do include the duties paid by drivers. This is a pretty arbitrary distinction and one that characteristically disfavours London.
Finally, a focus on national tax take from different regions risks playing into the hands of our centralised government. Onward have rightly been critical of the way so much power in concentrated in the Whitehall-Westminster complex and see devolution as integral to ‘levelling-up’. But their vantage point here is classic Whitehall mandarin.
Take Council Tax. We can all agree that this tax needs reforming and a strong case, as Onward imply, for ensuring that the wealthiest pay more. It’s crazy that the owners of mansions and penthouses worth tens of millions of pounds in the ritziest parts of London (and other regions) are paying a little more than £1,000 a year in property taxes.
But the smart move would be to devolve these taxes to the big cities, regions and counties and let them come up with reforms that work best for their particular circumstances. Would that mean more Council Tax going to London? Yes. But then the government could withdraw grants it currently spends in the capital, thereby saving money that could be spent elsewhere. The Mayor and boroughs would have more responsibility and the London electorate would be able to hold them to account at the polls, with London politicians less able to point the finger at national government whenever things go wrong.
I don’t believe it’s a coincidence that the UK is a particularly centralised country and a particularly regionally unequal one. Redistributing tax burdens across the regions won’t do much to address this.