Reeves vs Khan: who controls London's taxes?

The standoff over a tourist levy exposes the limits of local power in Britain

Sadiq Khan and Rachel Reeves (screenshot from Reeves’s YouTube page)

Shane Warne, the great Australian spin bowler, famously observed of Monty Panesar, that he “hasn’t played 33 tests, he has played one test, 33 times.” What he meant was that the England spinner had failed to learn or develop as a cricketer. And like many of Warne’s deliveries, this one landed, gripped and hit its target.

Yet I have some sympathy for Panesar. First, because cricket is a tough sport, where bowlers with limited batting talent have to face 90mph balls aimed at their throat. And second, because as a former leader writer for a London-based newspaper, I am all too aware of having written the same column two or three hundred times.

Monty Panesar bowling in the 2006-07 Ashes (Flickr / mugley)

In my defence, there are only so many subjects in the world and if a leader article never covered anything twice, I would have quickly been out of a job¹. Given that the leader was the view of the newspaper and not my own, I am further grateful that I was not compelled to write anything with which I vehemently disagreed. Think a glowing review of cigarette companies or the joys of human trafficking.

The closest I probably came was one of the many leaders I wrote, about — of all things — a policy dubbed the ‘tourist tax’. Back in 2020, then chancellor Rishi Sunak abolished tax-free shopping for tourists, a perk which previously allowed foreign (and often mega wealthy) visitors from outside of the European Union to reclaim VAT on goods purchased in the UK.

Harrods, London (Michael Caven)

The argument the newspaper, amongst others, made was that, by placing London at a disadvantage compared with cities such as Paris and Barcelona, this decision had ended up costing more in lost economic activity than it gained in revenues². This is not even what today’s newsletter was supposed to be about so I’ll be brief:

Without going the full Arthur Laffer, there is a relationship between tax rates and revenue. Theory suggests that a tax rate of 0% will raise nothing, as will a rate of 100%, as there is no incentive for anyone to work. In other words, there is a rate that maximises revenues. Yet, as a former Treasury official, I remain preternaturally sceptical of anyone who confidently asserts that cutting taxes will raise more revenue. Sure, it might. But who will end up picking up the tab if you are wrong?

Laffer Curve (Wikimedia Commons)

There is another kind of tourist tax that has been floated recently, one which reveals the strange place that London finds itself in both the UK’s political debate and devolution settlement. In April, the Centre for London think tank joined the chorus of those calling for such a tax on overnight stays in the city, which it said could help drive investment in arts and culture in the capital.

Sadiq Khan, who has previously added his support for a tourist levy, is currently locked in a battle with the chancellor ahead of the Spending Review. The Mayor wants the capital to enjoy the much-quoted £113bn in capital spending for projects such as the Bakerloo line and DLR extension, and is also seeking permission to impose a tourist tax. Briefing suggests that Rachel Reeves is not minded to agree.

Never mind the fact that that chancellors of all parties love to bash London, or the fact that Khan made great hay during his re-election campaign about how much good a Labour mayor working with a Labour government could do for the capital — the really crazy part is just how weak a position London finds itself in.

Sadiq Khan (Centre for London)

Khan’s struggle isn’t just political posturing — it reflects a deeper structural issue: the extreme centralisation of the British state. Consider taxation. A report from the Fabian Society finds that only 4.9% of taxes are raised at a sub-national level. Compare that with 13.2% in France and 30.9% in Germany. As the report’s author, Luke Raikes points out, those nations have double the rate of local investment and that is no coincidence.

That the mayor of one of the largest cities in Europe, with a GDP of more than £600bn, cannot introduce a tourist tax — a tax levied in literally dozens of destinations around the world — without first begging to the finance minister, is both mad and maddening. It leaves Khan, like Boris Johnson before him and whoever comes next, as little more than a Police and Crime Commissioner with a transportation system attached.

If you give the Mayor of London tax-raising powers, you are not only increasing the scope for regional economic development, you are also devolving some of the potential political pain. Although, in the case of a tourist tax (which would be a few pounds per night or a small percentage of a hotel stay) the cost would fall on tourists, that is, people who do not vote in local or national elections in this country.

Politicians and business groups outside of the capital have long complained that the Treasury’s Green Book has a London bias. Reeves no doubt has political as well as economic considerations when allocating capital spending. But London is also a rare net-contributor to the Exchequer. If the chancellor, facing genuine fiscal constraints, is determined to direct investment elsewhere, the least she could do is give Khan the power to do what mayors of far smaller cities take for granted: levy a tourist tax.

1. Check out the inimitable Melanie McDonagh on the life of a leader writer

2. Indeed, the Centre for Economics and Business Research, a consultancy, suggested that additional revenues generated by restoring the scheme would outweigh losses associated with VAT refunds by £2.3 billion in 2023