Devolution is a good thing. Delivering services locally or regionally can make them more responsive to the needs and circumstances of places and communities, as well as enabling innovation and experiment. It can support integration and prevention, so that people do not fall through the cracks between services, and so that early action can tackle problems before they turn into crises. And bringing services closer to local people (“subsidiarity”, to use the European Union jargon) should aid accountability.
Fiscal devolution adds to the possibilities. It allows local councils and regional Mayors, such as Sir Sadiq Khan, to raise more taxes from their areas or to keep more of the taxes that would otherwise go to national government. Done well, this type of arrangement can create a virtuous circle: if the local economy grows, taxes grow, supporting services for local communities and enabling investment in transport and other infrastructure that will support continuing growth. This benefit has already been illustrated in London by the way the city and its businesses paid for the Elizabeth line and the Northern line underground extension to Battersea Power Station.
Speaking in Manchester this week, Andy Burnham had quite a lot to say about the first aspect of devolution, but rather less about the second. There were harsh words for the “adversarial culture” of Whitehall “departmental silos battling each other and battling the Treasury rather than getting things done”. Even the capital, the PM Presumptive assured us, needed more “powers…over education and housing, so that London can do more for itself and remain the world’s greatest capital city.”
On funding, his language was more opaque. “Power and resources” will be redistributed across the UK, and government departments will be expected to “support strategic and local authorities with funding and resources”. What exactly did that mean? The devolved powers needed in order to raise or retain taxes locally? Or just a new round of grant-funding from the centre?
Such vagueness is understandable: devolving taxes is complicated and campaigns for reform have struggled to make headway for decades. But the tide seems to be turning. In her Mais Lecture in March, Chancellor of the Exchequer Rachel Reeves pointed out the awkward asymmetry of accountability and reward: “While local leaders are asked to plan for the long term, to be accountable for regional outcomes, the fiscal reward for local economic success flows straight to the Exchequer”. Since then, meetings have been taking place to plot the “roadmap for future fiscal devolution” that she promised.
People involved in these discussions suggest the Treasury is receptive to the idea of using tax revenues to create incentives and conditions for growth locally. But other parts of Whitehall still regard the idea with horror. Departments have become used to managing local expenditure through a fiendishly complex set of formulas and grants that top up Council Tax (raised and spent locally) and redistribute Business Rates (raised locally but mainly distributed nationally). This charade of local tax-raising masks one of the most centralised tax regimes in the developed world. In the words of the LSE’s Professor Tony Travers, this “infantilises” local government, by making councils supplicants for centrally-allocated grants.
Tricky issues persist. As well as being highly centralised, the UK has high regional inequality (which may or may not be related to centralisation). Could allowing some taxes to be retained actually exacerbate the problem? If retaining taxes results in areas that are already doing well doing better still, will it also lead to others losing out?
A recent Centre for Cities report set out one approach to squaring this circle. Regional authorities, including the Greater London Authority (GLA) and the 15 mayoral strategic authorities (MSAs) across the country, could receive a share of Income Tax and Corporation Tax equivalent to their current grants from central government. This would amount to between two and six per cent of the local tax take. If the tax take grew, MSAs would keep some or all of the gains, but above a certain level these would start being clawed back to support areas that were not doing so well. But the hope would be that most areas could benefit. Growth should not be a zero-sum game.
The Mayor of London already uses retained local Business Rates to fund services, as do other MSAs, so this type of model has been tried and tested. The Centre for Cities research suggests that retaining two per cent of income tax raised in London would cover the GLA costs currently funded by government grants (reflecting both the scale of services funded by the GLA and the size of the tax base in the city).
But there are still other difficult questions. One is how much tax growth London should retain if revenues rise. London’s share of UK Income Tax and Corporation Tax has been growing quite sharply in recent years, so there might be an argument for the capital to retain a smaller proportion of growth than other cities, not least as some Corporation Tax raised in London relates to profits generated across the country by corporations whose head office is in the capital.
London (and other cities) would also need to be on guard against periodic attempts by central government to “reset” the proportions of taxes that can be retained as a way of redistributing the proceeds of economic growth. Such “levelling up” (and down) resets might be thought fairer to other parts of the country, but they create uncertainty and make it riskier for organisations such as the GLA or Transport for London to borrow money against future tax revenues – and riskier means more expensive. Better, surely, to allow long-term certainty on tax retention, and to use other revenues to support places with smaller tax bases.
Fiscal devolution could go a lot further, as proposed by the London Finance Commission: Mayors could set additional Income Tax rates (as happens in Scotland) or new Council Tax bands (as has happened in Wales). Retained taxes could also be shared with local authorities, and Andy Burnham’s reported interest in land value taxes could lead to a more wholesale process of reform. But, as discussed at a Centre for Cities briefing event, the risk of arguing that fiscal devolution can only be taken forward part of a radical restructuring of the tax system is that nothing continues to happen.
Andy Burnham in his speech spoke of a “10-year mission”, but he also expressed a sense of urgency and frustration with how Whitehall has worked to frustrate the transfer of power to the UK’s cities and regions. This sense of urgency suggests that this could be a moment of change, an opportunity for Mayor Khan and the other Mayors to push for faster and fuller devolution of services and taxes, if they are really going to be able to do things differently and deliver for their communities.
Richard Brown 