Ministers are contemplating a significant overhaul of the English tax system, which could see billions generated from business rates transferred to regional mayors. This initiative, championed by Local Government Secretary Steve Reed, aims to enhance local governance and address the persistent issue of regional inequality across England.
Devolution of Business Rates
The proposal to devolve business rates aligns with broader efforts to grant local authorities greater control over taxation. Reed acknowledged that recent protests from the hospitality sector have intensified discussions around the current tax framework. As the Chancellor, Rachel Reeves, prepares to unveil these plans in the upcoming budget, there is speculation about how they may reshape the financial landscape for local leaders.
While the exact details are yet to be finalised, Reed indicated that the initiative seeks to create a more equitable approach to business rates. He emphasised that any new system would need to incorporate an equalisation mechanism to prevent economically disadvantaged areas from suffering further. “You cannot allow areas that are poorer to just sink because they can’t generate additional revenue from their starting point,” he noted.
Regional Leaders and the Shift in Power
The plans for devolving tax revenues are part of a larger strategy by Reeves to empower regional leaders across crucial sectors, including justice, health, and education. This move is designed to rectify the centralisation of power in Westminster, which has contributed to some of the most severe regional disparities in the developed world.
In her recent Mais Lecture, Reeves highlighted her commitment to transferring a portion of national tax revenues to local authorities, a change that could fundamentally alter the relationship between central and local government. Reed suggested that all options are on the table, stating, “The sky’s the limit … nothing is off limits.”
The Potential Impact of a Tourist Tax
In addition to the proposals surrounding business rates, the Chancellor is also exploring the implementation of a tourist tax. This would involve levying an additional charge on visitors staying in hotels, holiday rentals, and bed and breakfasts, although it remains undecided whether this would be a flat rate or a percentage of the accommodation cost.
As discussions progress, it is clear that the government is keen to ensure that mayors do not have unilateral control over setting these rates. The tourist tax initiative is expected to generate additional revenue for local authorities, further supporting the financial autonomy of regional leaders.
A New Era for Local Governance
Business rates have become a contentious topic since the last budget, particularly after many small businesses faced increased taxable amounts following a revaluation triggered by the Covid pandemic. Last year alone, business rates generated £26.4 billion, and while full devolution of these funds to mayors is unlikely, even a modest allocation could significantly enhance mayoral budgets.
JP Spencer, director of devolution policy at think tank ThinkLabour, remarked, “Devolving the revenue from income tax or business rates to local areas would be a huge change in how our tax system and country works. It would give places the longer-term certainty to invest, plan, and deliver better services for their residents.”
Why it Matters
The proposed changes to devolve business rates and enhance local governance represent a pivotal moment for regional authorities in England. By reallocating tax revenues, the government aims not only to empower mayors but also to foster economic growth and tackle entrenched inequalities. If implemented effectively, these reforms could lead to a more balanced and responsive local government system, ultimately benefiting communities across the country.
