The Treasury should engage in joint Tif projects with councils, writes an economist working in infrastructure advisory.
The recent opening of London Underground’s Northern Line extension to Battersea in has brought discussions surrounding tax increment financing (Tif) again into the limelight.
Economist Aniket Sangwan
Tif is a funding mechanism that enables public spending backed by future growth in tax revenues. As a form of land value capture, it utilises tax increments on property tax/business rates that could be used to pay for the public investments that have localised benefits. In public finances, this would appear to be a more equitable, just and prudent policy as those who benefit from the infrastructure pay a premium towards it.
In the case of the Northern Line extension, Tif has allowed a neglected part of the city to be regenerated without burdening the taxpayer. Further, looking outside of traditional financing the Greater London Authority was able to secure financing from the European Investment Bank at cheap rates, lowering the debt cost.
Beyond providing transport services to residents, the extension has attracted many businesses and firms to Battersea. The area is now home to the US Embassy, the UK’s only sky pool and a slew of high-end real estate development. The project also continues to enable jobs and affordable housing, creating a vibrant mixed-use community for all.
Although Tif can be a cheap way to finance urban infrastructure, it is not a silver bullet. It should be used only in limited cases where taxes from new development can support its cost. It is most likely to succeed in buoyant property markets in leading city centres, especially those expecting new commercial and residential development with investments such as HS2, Northern Power Rail or local transport networks.
Within these cities, Tif can provide capital for regeneration projects, further boosting the competitiveness of city centres. For instance, Glasgow’s £80mn Tif for the Buchanan Quarter is expected to unlock £310m in private investment and create 1,500 jobs.
Similarly, councils expecting significant new development through investments should explore Tif to support enabling infrastructure that can make these places more attractive to businesses and developers. This would help the government’s agenda of levelling up by boosting employment in core city regions outside of London.
On its part, the Treasury should engage in joint Tif projects with councils. It should set out clearly defined borrowing rules within which Tif schemes can operate. By being tied to a future revenue stream, Tif schemes are inherently less risky than general municipal borrowing.
The Treasury should also set out minimum requirements, carefully examining cases that meet strict economic and business propositions. It could take the lead from Scottish Futures Trust, which is currently leading four TIF projects totalling £187m across Scotland. Further, it should also consider including other property-based taxes such as stamp duty to fund Tif schemes that can appropriately capture the benefits of targeted investments.
Britain’s foray into tax increment financing could bring a windfall of benefits. In a time of austerity, it could create fiscal space for projects supported by the market in leading cities, freeing up capital to invest in towns and rural communities, and projects like net zero.
Secondly, it would enable meaningful devolution of fiscal and governance powers. Half-hearted devolution where the central government continues to control the purse strings of local authorities is a short-term bandage for a chronic problem. Britain is the most centralised country in the Organisation for Economic Co-operation and Development.
Central government points to a lack of capacity at a local level and worries about the broader impact on state finances from fallout in project finances. While these concerns are legitimate, Tif can help break the self-perpetuating cycle of lack of devolution and local capacity to deliver when implemented within well-defined prudential borrowing rules. In the absence of devolution, councils have no incentive to invest in such capacity.
As a less risky form of urban finance, Tif can be a starting point to break this cycle. It can be a gateway to fiscal devolution, helping build local government capacity in managing their own finances.
Aniket Sangwan, economist working in infrastructure advisory
