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Funding infrastructure

London has an infrastructure funding gap of £1.3 trillion. New mechanisms need to be developed, and existing mechanisms improved. 

The London Infrastructure Plan 2050 sets out London's infrastructure needs to 2050. It also identifies a £1.3 trillion funding gap. New funding mechanisms need to be developed to meet this gap, and existing mechanisms could also be improved. 

This page provides details of our ongoing work to secure devolution of funding mechanisms and support boroughs to maximise the existing mechanisms. 

Business rates pooling

All local authorities have the powers to voluntarily pool business rates, following application to government. Barking & Dagenham and Havering LBCs are pooling business rates with Thurrock Council and Basildon Borough Council through the East London South Essex Pool (ELSEP) to support further regeneration as part of the Thames Gateway.

Business rates pooling as a mechanism has otherwise had more limited take-up in London, primarily because the dynamics of the system mean that there would be little financial benefit in doing so, but also because there has to be a geographical boundary between pooling authorities. 

Most authorities in London are top-up authorities, which are not required to pay an additional levy on growth. The main financial benefit to pooling occurs when large tariff authorities, who would usually be required to pay an additional levy on growth, pool with one or more top-up authorities, and (importantly) the pool is anticipating growth. As long as the pool grows overall the tariff authority benefits by paying less in levy. The main advantage for top-up authorities is through sharing risk (if they anticipate negative growth) but also by agreeing some financial benefit from any levy saving with the tariff authority/authorities.

The incentive to grow business rates is limited as only half of business rates growth is retained in London, with the other 50 per cent being paid to government. Of the half retained locally, this is split 60 per cent to boroughs and 40 per cent to the GLA. Additionally, local authorities must bear the risk of business rates appeals which have a particularly big impact on London boroughs (both tariff and top-up authorities). The limited anticipated growth, and relative mix of tariffs and top-ups, means pooling has not happened widely in London. London Councils backs the London Finance Commission in calling for retention of 100 per cent of business rates growth and full control over business rates by London’s local authorities.  

Contributions from outside London

London boroughs are keen to see contributions from the wider south east to infrastructure that is intended to extend the benefits beyond London. Examples include Crossrail 2. 

Development density

Development close to new infrastructure such as stations could contribute to funding it. Where areas are already well-developed, increasing the density through new developments would enable CIL or Section 106 payments to be captured and used as a funding source. If stamp duty could be devolved to London, proximity to new infrastructure which captures the increase in value of property would also generate a funding source.

Devolution of property taxes

The London Finance Commission's final report recommended the devolution of five property taxes to London - council tax, business rates, stamp duty land tax, annual tax on enveloped buildings and capital gains property disposal tax. These have immobile bases, are suited to local control, and due to the high yield from property taxes in London, devolution would make London government even more accountable to residents and businesses for their activities funded from these taxes. 

The Commission also recommends that London government should have devolved the responsibility for setting the tax rates and revaluation, banding and discounts. Such powers would support the local funding of infrastructure, as increases in value that result from new infrastructure would be captured in the following ways: 

  • Businesses, through changes to rateable value. 
  • Homes, through changes to council tax banding. 
  • Property, through the increase in stamp duty, capital gains tax or enveloped dwellings tax from when a property is purchased and then next sold.

London Councils supports the Mayor of London in seeking devolution of the five property taxes recommended by the London Finance Commission. 

 

Housing borrowing cap

During the passage of the Growth and Infrastructure Bill through Parliament in 2013, London Councils called for the housing borrowing cap to be removed.The housing borrowing cap limits the level of local authority housing debt this reduces local financial innovation and flexibility.

This cap is over and above the Treasury’s normal ‘prudential borrowing’ rules that apply to most local authority borrowing. This artificial cap effectively halves the potential cash available for councils in London to invest in new homes. Aligning the housing borrowing cap with ‘prudential borrowing’ rules could allow local authorities to build an additional 54,000 extra affordable homes for Londoners.

Read our briefings here:

Tax Increment Financing (TIF)

Tax increment financing (TIF) is where a local authority borrows against anticipated increases in tax yields. It is most commonly associated with business rates increases (pooled or from one authority) but could also use stamp duty uplift if this could be attributed locally and devolved to local authorities.

The requirement for a TIF scheme is establishing a tax baseline that would exist if the development did not go ahead, to enable the ‘additional’ tax yield to be captured and used as a funding mechanism.

TIF is being used as a funding mechanism for the Northern line extension from Kennington to Nine Elms and Battersea. It will also be used as a funding mechanism for a new station at Brent Cross in Barnet, which will capture business rates growth from the expanded shopping centre. 

London Councils wants the government to commit to work with business and local government to develop a detailed protocol for the wider use of TIF, particularly how risk is managed between local and central government and securing a business mandate for spending priorities. This would make TIF a far more widely available and locally-driven tool to leverage additional investment.