Fiscal Devolution: why we need it and how to make it work

Fiscal devolution is coming out of the policy wilderness.

Despite localised revenue-raising powers being the norm in many countries, it has long been viewed as far too radical in the UK. But now, policymakers are beginning to recognise the value of letting local areas grow their own economies, rather than take a begging bowl to Westminster.

But the term needs demystifying, and the various ways to do it need a thorough examination. In the latest in our New Thinking series, Jessica Studdert explains what fiscal devolution is, busts myths that it will lead to higher taxes, explores different ways to do it, and recommends how to make it happen.

Overview and Recommendations

Fiscal devolution is emerging from the policy wilderness. Despite a range of localised revenue-raising powers being the norm in many of our peer countries, it has long been viewed as far too radical here.

English public policy traditionally approaches local government finance separately to economic growth, but it has repeatedly failed to shift outcomes – particularly our persistent regional inequality despite nearly ten years of devolution policy.

The once niche issue of fiscal devolution is fast becoming more mainstream: it is increasingly advocated for by a range of policy groups and mooted without squeamishness by politicians.

But the term ‘fiscal devolution’ needs some demystifying. It covers a wide range of measures – some fall short of real devolved revenue powers, some are incredibly risky, while others really do hold the potential to shift the ability of local areas to drive growth. This New Thinking paper explores the different options and weighs up some of the potential merits and risks of each. If our centrally managed system of public finances is to become more decentralised, it will be important to navigate new territory with care.

As a rather technocratic and complex issue, while there is increasing interest within policy and devolved communities, the potential of fiscal devolution is yet to capture the public’s imagination and progress to date has been fragile. With that in mind, the paper makes three core recommendations which focus on developing and
embedding the principles:

• A ‘local tax guarantee’ should be the priority for fiscal devolution.
  Letting areas retain a share of income tax and VAT generated locally would bring important economic and democratic benefits to local areas. This should be articulated in a more tangible way than the often prohibitively technical manner fiscal devolution can be presented. The idea of more strongly linking community contribution and community benefit has strong potential political appeal.
• A ‘solidarity system’ of equalisation between areas should underpin the local tax guarantee.
  The different economic starting points between places will require a robust system of equalisation. This would identify different spending requirements and resource bases to calculate fiscal transfers from areas with a surplus to those with a deficit. This needs to be a regularly revised to account for adjustments in revenue bases which would be expected over time. National government has an important role to support widespread public understanding and buy-in, actively reinforcing our shared collective stake in growing national prosperity and ensuring no places are left behind.
• Fiscal devolution should be undertaken in the context of wider constitutional and legal protection for local governments and communities.
  If fiscal devolution is only ever viewed as an isolated policy initiative it will be vulnerable to the whims of different national administrations. It needs to be hardwired into our governance landscape, in which an increasing element of devolved power and initiative is here to stay. This should be backed up with a legally binding guarantee on behalf of national government to stable and sufficient resourcing for local areas, which is a common feature of other countries with mature fiscal devolution frameworks in place.

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