Why is fiscal devolution good for the UK economy?\u00a0<\/p>\n
The UK government\u2019s devolution agenda has focused primarily on powers and control over policy making. The number of Mayoral Strategic Authorities (MSAs) has grown to 14 and their powers have been expanded with the Levelling Up and Regeneration Act 2023 and the English Devolution and Community Empowerment Act 2026.\u00a0<\/p>\n
At the city region level, where 35 million people live, there remains a missing component: the devolution of tax revenue. Without this, the decentralisation of power in the UK remains incomplete.\u00a0<\/p>\n
There are positive signs however that central government will look to devolve some fiscal powers in order to improve economic growth.\u00a0\u00a0<\/p>\n
In her 2026 Mais Lecture, the Chancellor said that the Treasury is now actively considering how Mayoral Strategic Authorities might retain some of the tax revenue generated in their areas. The likely next Prime Minister, Andy Burham spoke forcefully about empowering the UK\u2019s cities through the devolution of fiscal powers, making it central to his pitch to his party and the United Kingdom. This matters because it will link Mayoral Strategic Authorities\u2019 funding to their local economy, giving them strong fiscal incentives to pursue growth.\u00a0\u00a0<\/p>\n
It is also vital for the UK more broadly. It will be difficult to grow the economy without improving the prospects of the UK\u2019s cities.\u00a0\u00a0 How does the UK compare internationally?\u00a0<\/p>\n The UK is the most fiscally centralised country in the G7. More than 95 per cent of UK tax revenue goes to central government.<\/p>\n Figure 1: the UK is the most fiscally centralised country in the G7\u00a0<\/p>\n The UK is also unusual in how local government is funded. Just 19 per cent of revenue comes from taxes, the lowest in the G7, while 62 per cent comes from central government grants, the highest in the G7.\u00a0<\/p>\n In the case of the MSAs that cover England\u2019s largest cities outside of London, almost all of their funding comes in the form of grants from central government \u2013 in particular, the Integrated Settlement \u2013 with a small share of some MSAs\u2019 funding coming from mayoral tax precepts.<\/p>\n Figure 2: Mayors and local authorities uniquely rely on grants from the centre<\/p>\n How can fiscal devolution increase economic growth?\u00a0<\/p>\n International evidence suggests that when paired with policy that supports regional development and strengthens local state capacity, countries with higher levels of fiscal devolution tend to have higher levels of GDP per capita<\/a>. Analysis of EU countries provides further evidence of this relationship<\/a>. The chart below visualises this by plotting OEDC country\u2019s level of fiscal devolution against their average wage.\u00a0<\/p>\n There are four main ways fiscal devolution supports local economies.\u00a0\u00a0<\/p>\n It creates growth incentives for mayors\u00a0<\/p>\n The status quo means there are few incentives for local government to pursue policies that would grow local economies. This is because most local government funding comes from grants made by central government. \u00a0<\/p>\n Fiscal devolution fixes the disconnect between local government and the local economy. If taxes are devolved, then MSAs that pursue policies that growth their economies are fiscally rewarded. They have more resource to deliver on local priorities.\u00a0<\/p>\n It lets local government use local growth to finance investment\u00a0<\/p>\n When local government invests in urban infrastructure \u2013 by building new railways, expanding utilities, or regenerating city centres \u2013 it increases land values and encourages new development. Higher prices and more development raise tax revenue. Under fiscal devolution, local authorities can borrow against the future increase in tax revenue to fund the initial building costs. This is called tax increment financing (TIF) and is common in other parts of the world.\u00a0<\/p>\n In the UK, TIF has been used to help fund projects like the Northern Line Extension, but the lack of fiscal devolution and the presence of funding resets in the system \u2013 where uplifts in tax revenue get equalised away by reductions in grants \u2013 makes it much harder.\u00a0<\/p>\n It helps Mayoral Strategic Authorities manage the costs of growth\u00a0<\/p>\n When local government funding is supported by local taxes, revenue grows when the local economy grows. This would increase MSAs\u2019 ability to use the proceeds of growth to improve the lives of their residents through improved services or lower taxes.\u00a0\u00a0<\/p>\n For example, under a fiscally devolved system, when new homes are built, incomes rise, or new residents move in, a local authority\u2019s funding increases. This lets local policymakers invest in social housing to accommodate affordability pressures on existing residents\u2019 and expand public transport networks to accommodate new commuters.\u00a0<\/p>\n It supports local accountability and autonomy\u00a0<\/p>\n Under a more fiscally devolved system, local policymakers have more accountability for their decision making. Under the UK\u2019s current system of centralisation and grant dependent funding, local government is heavily constrained by the annual funding commitments of central government. This reduces local policymakers\u2019 agency and makes accountability unclear for constituents.\u00a0 It can be done without raising taxes or reducing spending\u00a0<\/p>\n The Chancellor, in the Mais Lecture, made it clear that devolution would be \u201cfiscally neutral\u201d. It would represent a major change in how and where taxes are collected, but not a change in the overall level of taxes raised or cash spent.\u00a0<\/p>\n Some, including Centre for Cities, propose that MSAs collect a share of their local income taxes that are currently collected by central government. The reduction in central government income tax revenue would be offset by less central government spending on MSA grants.\u00a0<\/p>\n Only a very small share of income tax is needed to cover the entire value of these settlements across the eight Established MSAs (or soon to be Established MSAs). Deducting that from central government\u2019s revenues still leaves 99 per cent of all income tax revenue intact, and enables MSAs to raise their funding from their local economies rather than a grant from central government. MSAs would retain a stake in the growth of their local economies and maintain the level of funding they currently have.\u00a0<\/p>\n
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