Report

Taxing for take-off: a new plan for fiscal devolution

This report from UK think tank Re:State sets out a practical but ambitious blueprint for devolving fiscal power in England.

Just 5.8 per cent of national taxes are collected at the subnational level in the UK – the lowest share in the G7, and a fraction of France (20.4 per cent), Japan (36 per cent), and the US (45.7 per cent).

England’s devolution agenda is being held back by tax centralisation. Mayoral Strategic Authorities are now tasked with driving regional economic development, alongside an expanded range of competences formalised in the English Devolution and Community Empowerment Act. Yet without revenue retention, they share none of the fruits of their success. Fiscal devolution rewards good local decision-making: where local choices grow the tax base, a share of the resulting revenue stays in the area. The comparative international evidence suggests that fiscal decentralisation can drive higher productivity and economic growth. A direct link between revenue and spending also gives devolved institutions skin in the game – sharpening trade-offs, driving efficiency, and strengthening accountability to the local electorate. There is growing recognition in Government of these benefits, with the Treasury currently working on a fiscal devolution “roadmap” announced by the Chancellor in March.

This paper sets out a practical but ambitious blueprint for devolving fiscal power in England. Key recommendations:

• Replace Integrated Settlements as the primary funding mechanism for Established Mayoral Strategic Authorities with retained revenue equivalent to 2.5p in the pound of the basic rate of income tax paid by those whose primary residence is in the area (in every case estimated to be worth more than the existing Integrated Settlement)

• Let all Mayoral Strategic Authorities retain 100 per cent of business rates growth • Accompany fiscal devolution with an equalisation mechanism that rewards strong performance while ensuring fairness for areas starting with smaller tax bases and lower growth potential

• Strengthen local accountability and replace Integrated Settlement outcomes frameworks with a new model and a more direct relationship with the Treasury

• Use these reforms as the first phase of a longer-term move towards a more expansive, autonomous model of fiscal devolution.