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In a significant move to reshape the English tax landscape, government ministers are contemplating the devolution of billions raised from business rates to regional mayors. This initiative, which is part of a broader strategy aimed at empowering local authorities, may soon see a formal announcement from Chancellor Rachel Reeves during the upcoming budget. The proposal has gained traction amid ongoing discussions surrounding fiscal devolution, particularly as Manchester Mayor Andy Burnham positions himself as a key advocate for regional governance should he ascend to the premiership.
Devolving Power: A Shift Towards Local Governance
The Secretary of State for Local Government, Steve Reed, confirmed that the government is actively exploring options for transferring control over business rates to local leaders. Business rates, which have recently faced scrutiny from various sectors, particularly hospitality, are seen as a means to enhance regional financial autonomy. The government’s intention is to ensure that local areas can benefit from the economic growth they facilitate, while also establishing a mechanism to prevent exacerbating regional disparities.
Reed stated, “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.” This indicates a clear recognition of the need for a more equitable tax distribution system that rewards regions for their economic contributions.
Addressing Regional Inequality
One of the driving factors behind this proposal is the pressing issue of regional inequality across the UK. Experts have long argued that the centralisation of power and fiscal resources in Westminster has contributed to stark disparities between different areas. By allowing local authorities to retain a portion of the business rates they generate, the government aims to incentivise economic growth in those regions while safeguarding against the risk of poorer areas falling further behind.
Reed elaborated, “There will always have to be an equalisation mechanism, because you cannot allow areas that are poorer to just sink because they can’t generate the additional revenue from their starting point.” This highlights the need for a balanced approach that encourages local growth without compromising the welfare of disadvantaged communities.
Broader Tax Reforms on the Agenda
In addition to the potential devolution of business rates, the Chancellor is reportedly considering a range of tax reforms, including the introduction of a tourist tax. This would involve levying an additional fee on accommodation services in specific regions, a measure aimed at generating additional revenue for local authorities. However, it remains unclear whether regional mayors will have the autonomy to set their own rates, a topic that continues to be under review.
Last year, business rates generated approximately £26.4 billion, making them a crucial source of income for local budgets. While the government is not expected to devolve the entirety of this revenue, even a fractional allocation could significantly enhance the financial capabilities of regional mayors, like Sadiq Khan of London, who currently oversees the UK’s largest mayoral budget exceeding £22 billion.
The Path Forward
As discussions progress, the proposal is still in its early stages and has yet to be formalised into a comprehensive policy. Nevertheless, the concept of fiscal devolution is gaining momentum, with Reed asserting, “The sky’s the limit … nothing is off limits.” This sentiment reflects an openness to transformative changes in the governance structure, which could redefine how local areas manage their finances.
JP Spencer, Director of Devolution Policy at the 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 potential devolution of business rates to regional authorities represents a pivotal shift in the governance of England’s tax system. By empowering local leaders, the government aims to foster economic growth, enhance public services, and address the pressing issue of regional inequality. This initiative could redefine the relationship between central and local government, offering a more responsive and equitable framework for managing resources and driving development across the country. As the proposals gain traction, the implications for local governance and community investment could be profound, setting a new precedent for fiscal responsibility and regional autonomy.
