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Ministers are exploring a transformative initiative that could see billions of pounds from business rates decentralised to regional mayors, significantly altering the landscape of local governance in England. This proposal is part of a broader strategy to enhance local powers, particularly in areas such as justice, health, and education, and is set to be introduced by Chancellor Rachel Reeves during the upcoming budget announcement.
Devolution of Business Rates: A New Era for Local Governance
Local Government Secretary Steve Reed has confirmed that the UK government is actively considering plans to devolve business rates to regional leaders. This move comes in the wake of mounting pressure from hospitality sectors that have expressed concerns over recent tax hikes. The proposed adjustments are aimed at empowering local authorities to better manage their finances while simultaneously addressing issues of regional inequality.
Reed remarked, “The chancellor pointed to devolving aspects of income tax, as we discussed, but certainly we look at business rates, too – or elements of business rates.” He stressed that any new system would not merely allow regions to retain all generated revenue, as this could worsen disparities between wealthier and poorer areas. Instead, an equalisation mechanism would be necessary to ensure that underperforming regions are not left behind.
The concept of fiscal devolution is currently in its preliminary stages, but Reed highlighted its potential for reshaping England’s tax framework. “There will always have to be an equalisation mechanism,” he noted, emphasising the need for a system that incentivises economic growth while ensuring fairness across the board.
A Shift Towards Localised Tax Control
The Chancellor’s proposals are part of a wider movement to grant regional authorities greater control over the taxation system, a shift that has been long overdue, according to experts. In her recent Mais Lecture, Reeves indicated her commitment to reallocating certain national taxes that have traditionally been managed by central government. Officials are examining multiple avenues for this devolution, including business rates and components of income tax.
This initiative aims to provide local leaders with more autonomy to address their unique challenges and opportunities. As Reed stated, “The sky’s the limit … nothing is off limits,” indicating a willingness to explore various tax reform options.
Furthermore, the Chancellor is also considering the introduction of a tourist tax, which would impose additional levies on visitors staying in hotels and similar accommodations. This supplementary tax could be structured as either a flat fee or a percentage of the accommodation cost, although mayors will not have the authority to set these rates independently.
The Political Context and Implications
The discussion surrounding the devolution of tax powers is particularly salient given the recent political climate, with many small businesses feeling the effects of increased rates following the post-pandemic revaluation. In the last fiscal year, business rates generated £26.4 billion, a substantial sum that could significantly enhance the budgets of regional mayors if even a fraction were allocated to them.
Currently, London Mayor Sadiq Khan manages the largest budget of any mayor, exceeding £22 billion. The potential for regional mayors across England to gain a more substantial financial footing could lead to improved public services and local development initiatives.
JP Spencer, director of devolution policy at the think tank ThinkLabour, commented on the transformative nature of this proposal, stating, “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 potential devolution of business rates and aspects of income tax represents a pivotal moment in the UK’s approach to regional governance. By empowering local leaders with greater financial autonomy, the government could not only address chronic regional inequalities but also foster a more responsive and tailored approach to local needs. This initiative could redefine how public services are funded and delivered, ensuring that communities have the resources required to thrive in an increasingly competitive economic landscape.
