Is fiscal devolution the answer to the funding begging bowl?
In this blog, Arlen Pettitt - our Head of Policy and Campaigns - looks at the growing momentum behind an alternative approach to regional funding.
I predict that we’ll be hearing a lot more about fiscal devolution over the next few years.
I know what you’re thinking - a thrilling phrase, and a thrilling subject - but let me explain.
What we’re talking about is regions keeping more of the money earned in their area, and having greater autonomy over how it’s spent.
As things stand, the vast majority of tax revenue is funneled directly to the Treasury - that includes corporation tax, income tax and VAT, increases in which are tightly linked to economic success.
Now, local government plays a huge role in establishing the business environment on their patch, but at the moment it feels none (or very little) of the benefit of their work.
Instead, the money is drawn in by the gravitational pull of Westminster and Whitehall, with everyone following swiftly after it asking how much of it we can have back.
There’s been much written about the mechanisms by which funding - especially those pots tightly linked to the levelling up project - is distributed.
For example, a group of academics at the University of Manchester indexed the regions of the UK by economic resilience and then mapped that against allocations from the Community Renewal Fund, finding the North was short-changed by £21m - £13.4m of which was in the North East.
Take also Parliament’s Levelling Up, Housing and Communities Committee, which in a recent report concluded “DLUHC does not know which pots of money across Government contribute towards levelling up, nor does DLUHC appear to have oversight of how these objectives can be delivered strategically”, going on to say the “current approach is characterised by one-off short-term initiatives, and this will be insufficient if the geographic, economic, social and health inequalities are to be reduced and ultimately, overcome.”
That’s fairly damning stuff, so it makes sense alternative models are gaining some traction - even if just in the broader policy debate.
The New Local think tank recently published a report on fiscal devolution which made three recommendations:
A local tax guarantee, which allowed areas to retain a portion of income tax and VAT generated in their area
A solidarity system which helped balance inequalities between areas
Wider constitutional and legal protection for local government and communities
The Northern Powerhouse Partnership (NPP) has written along similar lines, including looking to Europe for examples of city-regions which funnel locally-retained taxes into transport spending.
NPP also make the connection to the recent trailblazer devolution deals agreed with Greater Manchester and the West Midlands, which (among other measures) allow them to retain 100% of business rates in their areas.
Those trailblazer deals are hard-earned, with both areas demonstrating their trustworthiness with years of steady governance conducted at a local level.
With that hard-earned trust, comes greater autonomy - not so much a loosening of the purse-strings as a handing over of the purse.
Other regions will be looking on enviously for now, but maybe not for long…fiscal devolution is definitely the way things are heading.
Featured Image by Nick Fewings on Unsplash