Guest blog: Fiscal devolution is possible: here’s how

The British economy is stuck. Living standards have stagnated, the public finances are under pressure, regional inequality is severe, and growth is too low. If devolution matters and is worth doing, then it can and should be about improving not just our local governance but also our national economic performance. 

The solution to this is to rewire local government finance, devolving tax powers, to allow areas to keep and reinvest more of the proceeds from growth. Our latest report sets out how this could be done, proposing a ‘triple deal’ for London, Greater Manchester and the West Midlands. 

Fiscal devolution to the mayors will help unlock national growth 

Fiscal devolution is at the core of the triple deal. The current problem with the design of the local funding system is that there are no incentives for growth – most of it is based on grant funding irrespective of economic performance.  

The report proposes a new revenue-neutral fiscal settlement. It reduces the amount of grant local government receives. In return it allows mayors to: fully retain business rates; gain extra flexibility over council tax; and – to offset the gap in funding this would create – to keep a share of income tax receipts they raise (with Greater Manchester and the West Midlands keeping more). By reconnecting local resource to growth in the local tax base and rewarding cities for pursuing growth, the triple deal would increase both local and national economic growth. 

By 2038, fiscal devolution would mean that higher growth would translate into higher income tax revenues every year for the big cities. Depending on how much they improve their economic performance, this could range between£49 million and £230 million for Greater Manchester, and £40 million and £187 million for the West Midlands every year by 2038. Crucially, as the big cities are so important to the national economy, higher local growth would mean HM Treasury would also see higher income tax revenues of between £161 million and £505 million a year. 

Importantly, the triple deal wouldn’t exacerbate inequality. By being revenue-neutral, no city would be left worse off.  And fiscal devolution would see shift from national to local redistribution, as mayors would have to agree a funding settlement with their boroughs. More flexibility over council tax would not just provide better incentives for growth, but would also make its tax base broader and fairer, with 74 per cent of households, including a majority in every borough, potentially seeing a tax cut of on average £637. 

The triple deal would change the mayors’ powers and governance too 

The triple deal isn’t just about money—it’s also about empowering mayors with the tools and structures to reshape their cities’ economies. This includes planning reforms, to merge local plans and local transport plans at the mayoral election, control of commuter railways and major roads, and smaller changes such as licensing in city centres. 

But governance would need to change in the triple deal too. With their additional responsibilities and tax powers, mayors would take on a more prominent role as leaders of their cities’ economies. Replacing the local authority boards with assemblies and more proportional elections would make it easier for central government and, much more importantly, local voters to hold them to account for the performance of the city. 

The triple deal would make future devolution easier 

One possible response to the triple deal would be to call for devolution across all of England and not just the big cities. But this ‘big bang’ approach would be challenging and entail tricky reforms to reorganise local government, even if it was the end-state we eventually want to get to. The risk is that this complication means we get nowhere. The triple deal would serve as a stepping stone towards further devolution and benefit the country as a whole – there’s no world in which the UK does better unless Manchester, Birmingham and London (which has stuttered since the global financial crisis) do better too. 

While it’s a big challenge, fiscal devolution is key to the next phase of reform. Economic growth should be at the core of local government reform, and the triple deal is a proposal to both deliver it and begin the debate on what devolution across England should really look like.

This blog was originally published by Centre for Cities.

The views expressed in guest blogs are those of the writer and are not necessarily shared by CIOT.