Is the future of the economy threatening local taxation?

This is the second of our guest blogs expanding on some of the wider tax policy questions that couldn’t all be fully explored within the parameters of our Welsh tax base research last year.  Here, Hugo Bessis of the Centre for Cities considers the impact of the rise of automation and high street retail closures on income tax and business rates revenues respectively, highlighting the need to promote jobs for which there is likely to be growing demand in the future and the need to support city centres to evolve.

Fiscal devolution brings great opportunities to reinforce local autonomy and improve economic growth and the appetite for devolution is strong across government: while Westminster is working on further devolving business rates to local authorities, Wales will have partial control over income tax from April of this year.

But the rise of automation and the decline of the retail sector both raise questions about the sustainability of devolving those two tax streams, including concerns that devolution will end up weakening rather than supporting local finances. Fortunately, an understanding of the underlying economic trends at play suggests that these changes won’t result in a decline in tax revenues, providing that the right growth policies are put in place.


The end of work?

This is not the first time in history that technological change has affected that nature of work. Many jobs commonly found a century ago – such as servants, messengers and laundry workers – have almost disappeared nowadays as a result of automation, and yet the total number of jobs have kept increasing over the century.

Instead, what has changed and is likely to change in the future is the type of labour that we perform. Automation has made a number of lower skilled jobs redundant, but it has also reinforced and increased the need for analytical, creative and inter-relational skills. This means that far from squeezing the number of jobs available (and subsequently income tax revenues), automation changes the type of work we do, by moving workers upwards on the production chain.

Focusing on providing the right conditions to create and attract those new jobs is obviously key to sustaining and increasing revenues from income tax. We know that jobs that are currently the most resilient to automation (and in all likelihood new jobs in the future) are high-skilled. This means that appropriate education and training programmes must be put in place to improve the skillsets of the local workforce (see the WCPP reports on the Future of Work and Job Progression). This will contribute to creating the right conditions for attracting new jobs and generating new tax revenue.


The end of city centres?

But this is not just a story about skills. These high-skilled, knowledge-intensive activities are more productive in city centres, where they benefit from the proximity to other similar industries which in turn spurs them to innovate. And the preference for a city centre location amongst these businesses has strengthened in recent years. So to attract those new jobs, city centres must provide the appropriate “ecosystem” these firms are looking for. This includes having access to a skilled workforce of course, but also developing a dense urban layout, good transport links and a high quality office base.

Crucially, doing so will also support high street local services. Research from the Centre for Cities shows that only 9 per cent of retail, food and leisure premises were vacant in economically successful city centres – those that are able to attract high-skilled workers. In contrast, vacancy rates averaged 16 per cent in the economically weakest city centres. This is because office jobs generate greater footfall – which is essential for high streets to survive. And because high-skilled workers tend to have higher salaries, demand for local services is strengthened further.

This does not mean there won’t be changes in the high street. As shops face rising costs and competition from online shopping, the face of the high street is likely to evolve in the future. These changes can already be seen in successful city centres, with a greater share of floor space dedicated to food and leisure activities, such as restaurants and bars (to which physical presence, good location and quality premises still matter a lot) compared to their weaker counterparts.

This suggests city centres are evolving – they are becoming less focused on retail but more knowledge and leisure oriented. The decline of retail might be inevitable, but it does not mark the end of city centres as places to work, meet and socialise, nor their ability to generate significant tax revenues. Cities that manage to reinvent their city centre economy will still be able to generate business rates: premises will still be occupied, but occupier’s activity might change along the way.


Raising taxes in the future economy

Overall, there is no reason to think that automation and the decline of retail are threatening tax revenues. What’s changing is that revenues will come from different sources – different jobs in the case of income tax, and different types of businesses for business rates. That said, the changing nature of the economy increases the need for reform of the current system, particularly business rates, and this is something that policy makers will need to reflect on.

But as a priority, policies in Wales must encourage and support the economic changes that are being seen across the country. In particular, interventions should be both people-based (teaching the skills that businesses will need) and place-based (focusing on improving the city centres of Wales’ largest cities so they can provide the appropriate built environment to these firms). Achieving this will ensure Wales can secure a solid tax base and grow an even stronger economy in the future.


Image: William Murphy (CC BY-SA 2.0)