A fiscal devolution revolution
Research Assistant
Many in local and regional government will welcome yesterday’s news, announced just before the Chancellor delivers her Budget today, that local government will be given powers to levy tourist taxes – enabling elected Mayors another revenue-raising power to fund new projects in their area. But as welcome as this new power is, it does not go far enough if it is to serve as a stepping stone to true fiscal devolution.
Because while devolving a tourist tax hands local government in some areas responsibility for raising a new revenue stream, true fiscal devolution would transfer wider powers over how taxes are designed, raised, and spent, giving local leaders genuine control over their overall fiscal framework.
Local government is currently unable to push effectively for local development and economic growth, largely due to their dependence on central government and a lack of either the incentives or resources to break the mould. An effective strategy for local growth would go beyond devolving taxes and instead give local government broader fiscal powers, giving local leaders authority and control over meaningful fiscal decisions and opening a revenue pot that can enable effective local governance. At the same time, it would effectively devolve accountability for using those powers locally – putting Mayors on the hook for taxes they raise and how they spend them.
Calls for fiscal devolution are grounded in the right idea – done properly, it has potential to transform both local and national economies. Local fiscal powers could drive local investment, close the alignment gap between incentives for growth and reward, and foster accountability.
In England, though, Treasury caution has repeatedly prevailed over practical reform – and we have continued to have one of the most centralised fiscal policies of any large economy. And caution is not unfounded – fiscal devolution comes with risks. It could lead to increasing inequality or regional disparities if redistribution mechanisms are not considered. Equally, if there’s too much redistribution, the incentives for local government to act generated by fiscal devolution disappear – mirroring the status quo we already have, with more decisions taken locally but no change because the incentives for local government are no different.
The real wicked problem preventing devolution is political: can central government relinquish enough meaningful power to realise the potential fiscal devolution offers, while standing ready to manage the risks which come with it, and address (or tolerate) the unintended consequences?
Every part of the country is desperate to foster economic growth. What has never been tried is a radical decentralisation of the revenue-raising powers of the State – a change that would empower local government to invest, innovate, and respond to the realities of their own economies. However risky that change might be, the status quo does not work. The risks of inaction are greater than the risks of devolution. We may welcome the tourist tax – but we must not be satisfied by it.