Comment Blog 10 April, 2024

Can fiscal devolution help to stabilise local government finances?

Giorgia Vittorino
Research Assistant

Fiscal devolution as a solution to the local government financial crisis has thus far received insufficient attention.

The Government has dedicated £600 million of the local government finance settlement to bolstering council budgets, the majority of which is specifically targeted at funding adult social care. Such immediate cash injections can support councils in the short-term but they are not a viable long-term solution. Instead, we need to consider innovative approaches that allow councils greater tax autonomy to deliver long-term budget sustainability.

Funding for local government has been characterised by short-term, single-funding settlements with a ‘begging bowl culture’ of competitive bid-in processes. Cash raising power is limited because sources of local revenue — council tax and business rates retention — are regressive and based on outdated valuations. Some immediate suggestions emerge, including revaluating council tax and business retention, introducing multi-year settlements and consolidating single-pot funding to streamline revenue.

However, there is a case for going further to address the propensity for fiscal centralisation in England by granting councils greater tax autonomy and revenue raising powers, steps which have already been taken by Japan and Denmark.

England’s level of fiscal centralisation makes it an outlier. In 2021, only 5 per cent of tax was raised by local government, compared to an average of 11 per cent amongst non-federal OECD countries.

Fiscal devolution provides an opportunity to boost local government revenue by broadening local tax bases and devolving more shares of national tax to local government. Greater tax autonomy could allow local government to engage with communities to identify the best funding mechanisms for local public services. Local authorities could better plan with less need to be continuously liaising with Whitehall. Fiscal autonomy could encourage a more tailored approach to local needs, with long-term funding plans for local economic growth, productivity, and public services, as opposed to Whitehall funding prescriptions.

Fiscal devolution has been partially introduced in places, for example the ‘trailblazer deals’ to the WMCA and GMCA introduced 100 per cent business rate retention and Manchester has been the first to introduce a 'tourist tax', which raised £2.8 million in its first year. Calls for further devolution have come from the Northern Powerhouse Partnership, which has suggested devolving 1p of employer’s NI contributions, and Andy Street, who has pushed for the ability to retain a percentage of VAT and corporation tax raised in the WMCA.

Whilst opponents of fiscal devolution suggest that greater local tax autonomy could result in local authorities in poorer areas paying more tax, the current centralised system does little to redistribute revenue between regions and council tax is notoriously regressive. As exemplified by Denmark, where municipalities receive most of their income from local taxes —  with an annual review providing top-ups to municipalities with deficits — equalisation can work alongside devolution.