London Finance Commission puts the investment cat amongst the austerity pigeons

Mayor Boris Johnson is good at making a loud noise and bad at delivering anything of any value to Londoners. Yesterday there was a big splash from the final report of his London Finance Commission chaired by Professor Tony Travers. The report, Raising the capital, is full of good analysis and challenging conclusions. But like Boris’s last big idea – London keeping its share of stamp duty – the big question is ‘will anything happen as a result’?

The Commission’s central conclusion is that the financial arrangements for London are a major restriction on growth. It says London needs an integrated capital investment plan, fewer borrowing constraints for infrastructure, and more devolved tax powers – although the first of these points makes you wonder what Boris has been doing for the last 5 years and the second and third will put Johnson on a collision course with George Osborne.

The report unashamedly backs greater prudential public borrowing for capital spending as the principle way to solve London’s many problems, targets existing borrowing controls for removal (borough housing caps and the caps applied to the GLA group are main targets) and identifies new ways of funding these borrowings (eg tax incremental financing). A strong case is made for the early devolution of property taxation to London’s control although I do not think they have considered sufficiently the problem that devolving a range of taxes to London (starting with stamp duty but there are many other proposals) would create for the national Treasury by reducing central Government tax take – creating a hole that would have to filled by something else.

The report is strong on the need (as well as demand) for housing and the vital importance of providing sufficient homes that are accessible and affordable for those on lower and moderate incomes. It could be argued that current policies are the very opposite of this: instead of providing homes for poorer people, policy is shifting poorer people out. To meet population growth, London has to provide around 40,000 additional homes a year, around twice the historic trend.

For the short term the Commission recommends the lifting of the cap on borrowing within the new regime for council housing finance, a move that has many supporters. They are also in favour of finding a way to switch public subsidy from benefits to investment – over 10 years, London has received £17 billion of capital investment in public housing compared to £50 billion for housing benefit. Despite calling for further assessment of IPPR’s proposal to combine and devolve all housing budgets, they accept that it is seriously problematic to do so, especially with the coming of Universal Credit. I think they are right to say that the key challenge ‘in any attempt to shift away from revenue to capital subsidy through control of benefit are the transitional consequences for low income households in receipt of benefit that continue to pay high rents while funds flow out of benefits and into home building. Additional funding would be required to mitigate these transitional costs.’ Exactly.

In my view the most important housing-related conclusion is that ‘the relaxation of borrowing controls is the only obvious solution to enable the delivery of greater supply’ which would, ‘over time, allow reduced dependence on high-cost privately rented housing for low-income households.

Boris Johnson will see the main benefit of this report as enabling him to make the case for London whilst actually doing nothing because he knows Osborne will not concede the central points it makes. I see the main benefit of the report as providing a framework for radical new economic policies for Labour – investment-led growth, public sector leadership where needed, and a major increase in infrastructure generally and housebuilding in particular.

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