Cities should keep a slice of income tax to fund growth, says Centre for Cities

New research from Centre for Cities and Resolution Foundation for the Economy 2030 Inquiry called 'In place of centralisation: Devolution for London, Greater Manchester, and the West Midlands' proposes a triple devolution deal for England’s three biggest city-regions with fiscal devolution at its core.

Press release published on 8 November 2023

A triple devolution deal for England’s three biggest city-regions is needed to unpick government centralisation and achieve higher national economic growth in the 2030s, Centre for Cities says in a new report published on Wednesday 8th November.

In place of centralisation: Devolution for London, Greater Manchester, and the West Midlandscommissioned for The Economy 2030 Enquiry, funded by the Nuffield Foundation – identifies fiscal devolution as the key to unlocking dynamism in the biggest urban economies that has been missing from devolution deals so far, including the “Trailblazer” agreements struck with the West Midlands and Greater Manchester earlier this year.

By giving city-region authorities the ability to keep a proportion of income tax – similar to Scotland’s powers over income tax – and delivering further tax-raising powers and reforms, city-regions will enjoy greater autonomy from central Government decision-making and will be able to re-invest their own resources into their local economy and services. This, Centre for Cities says, will encourage city-region economies to grow at a faster rate by the mid-2030s, leading to higher economic growth nationally.

The report proposes giving the Mayor of London and the West Midlands and Greater Manchester Mayoral Combined Authorities new powers over taxation, primarily the power to collect a proportion of income taxes locally, with Greater Manchester and the West Midlands keeping larger shares. Centre for Cities estimates that Greater Manchester and the West Midlands could raise £152 million and £121 million respectively solely in income taxes by 2038 in a medium growth scenario, with the Treasury also increasing its overall revenues.

The agreement would entail a reduction in central government grants in return for greater autonomy over spending, and full retention of business rates. It would replace the existing local government grant system comprising grants and competitive pots which are controlled by Whitehall. It enshrines the principle that city-regions keep more of the proceeds of local economic growth while neither city-regions nor Treasury risk losing out on revenues in current tight fiscal environment.

Centre for Cities says Mayoral Combined Authorities can only take full advantage of increased control over spending if they are provided with additional powers to shape a long-term regional economic policy strategy, such as:

  • Planning reforms that deliver a flexible zoning system at the city-region level and merge local plans with local transport plans – providing new homes and new infrastructure simultaneously.
  • Control over commuter railway lines and stations in each city, including powers over transport fares and subsidies.
  • Control of public services and regulations, such as waste management and licensing of the hospitality and night economy in city centres.

These major new powers can only be delivered with the strengthening of institutions responsible for devolved government in city-regions. This would be bolstered with the creation of new metropolitan assemblies and electoral reform, reversing the abolition of the Supplementary Voting system.

The centralisation of the UK state poses obstacles to reform in other areas of tax policy that can be reformed once progress has been made towards greater devolution, for example council tax.

Devolving the design of council tax to Mayors would allow them to fix problems with the regressive and outdated council tax. They should have the power to add new council tax bands and alter the effective tax rate on different-sized properties. If they chose, this would mean that Mayors could charge the most expensive homes the highest rates and reduce the tax burden on poorer households. This could lead to an estimated average tax cut of £637 per year in nearly three quarters (74 per cent) of households, reducing council tax bills by over half for the poorest in deprived places like Bolton.

Anthony Breach, Senior Analyst at Centre for Cities and co-author of In Place of Centralisation, said:

“We would like to see serious new plans for devolution put forward in the next parliament. The challenges of bringing big cities’ powers in line with cities of a similar size in Europe are considerable but not insurmountable.

“Once we have shown how devolution at this scale can work for our biggest city-regions, other cities should be able to benefit from it as well. The idea is to establish the next phase of devolution across England.”

Andrew Carter, Chief Executive of Centre for Cities, said:

“Decades of centralisation have weakened the connections between improvements to local economies and the resources available to invest in those places. In the short term, along with restrictions on spending and tax rises placed on it by Whitehall, it has also brought local government to the brink of insolvency. But these are problems that can’t be fixed just by increasing the value of central Government grants. Obstacles to growth in the UK’s biggest cities cannot be removed with the stroke of a pen in Whitehall.

“Devolution at this scale will naturally benefit some parts of these economies while burdening others. We think this is worth it given the long-term growth benefits this unlocks well into the 2030s.”

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