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Cities across the UK must be given control over a third of corporation tax to help them fix the country’s underperformance on productivity, a new report by think tank NLGN argues.

It is well-established that Britain suffers from poor productivity growth compared to its international rivals, and this problem may worsen post-Brexit as high growth companies consider relocating their operations.

The Chancellor has stated that to counter this, he plans to cut the Corporation Tax rate from 20% to less than 15% to stimulate business investment. But NLGN’s report, Smarter, Not Harder: How devolution can make places more productive, shows that there is an underappreciated regional and local aspect to the productivity puzzle, with cities and towns holding the key to improving human capital, creating places that attract high value firms and driving up the formation of innovative new businesses.

Despite their critical role in driving up GVA, councils have no financial stake in improving the productivity of their local economies. In fact, plans to localise the business rate in 2020 could incentivise councils to create large numbers of low productivity jobs in out-of-town industrial and retail parks.Giving city and county regions control of a share of the revenue stream generated by business profits would drive investment in measures that support productive growth in local economies dominated by low wage, low skilled industry.

By creating a stronger stake for local governance in the revenue generated from business profits, this form of fiscal devolution would encourage a greater focus on measures to support business start-up and scale up. It would put local government in a stronger position to encourage the clustering and density of economic activity identified as good for productivity growth and put in place measures to support in-work upskilling and sector-specific business support.

Profitability is the closest proxy in the tax system to productivity. More profitable companies are more likely to invest in the capital and labour that makes them more productive in the future. Devolving a share of the revenue would not change the Chancellor’s ability to alter the rate. But it would mean that income would be spent where and how it is most able to stimulate productive growth.

The measure would bring the UK in line with key international peers, who all have some link between local governments and productive business output in their local fiscal systems. It would be part of a wider strategy to enhance the ability of local government to drive productivity. The report also calls for:

• The proposed ‘infrastructure premium’ of two per cent on business rates available to directly elected mayors should be replaced with a ‘productivity premium’ with flexibility to invest the additional revenue where the productivity benefit would be greatest, which might be in skills provision.
• Devolved accountability over the entire skills and employment system to create single accountability in a place over the 16-18 further education system, the apprenticeship levy and local Jobcentre Plus employment advice services. This would create stronger vocational skills pipelines linked to the local labour market and better placed to overcome skills mismatches that weaken productivity.
• A place-based approach to innovation policy nationally that supports local sector strengths and aligns existing national investment into single city and county region innovation funds. This would mean local areas can better develop capacity and infrastructure such as supply chain initiatives to maximise the impact of investment in sector strengths.

Report author and Deputy Director of NLGN, Jessica Studdert said:

“The economic uncertainty created by the vote to leave the EU only makes it more urgent that we take action to turn around those local economies held back by the dominance of low skill, low wage industries. For our cities and towns to prosper, local leaders need to be given the financial powers and incentives to support high value growth locally, which their residents can benefit from.

“So the next step for fiscal devolution should be to give city and county regions control over a third share of corporation tax generated in their area. This would create sharper incentives for local government to drive the high value, high skilled productive growth on which local economies should be built if in the future if they are to be resilient and sustainable”.

John Fozzard, Kier Strategic Development Director, said:

“As a strategic partner to many local authorities across the country, we see up close the challenges local authorities face. The changing local authority landscape, devolution and an increased focus on regional growth also present many opportunities for councils across the country. This thought provoking NLGN report provides valuable insights and recommendations, exploring how additional powers and funding could be channelled to better support local authorities improve regional growth and productivity.”

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