Good afternoon from New Economy Brief.
English devolution got a new lease of life when Andy Burnham became Prime Minister with ambitions to “rewire the state” to deliver “growth in every postcode”. A roadmap to fiscal devolution and accompanying White Paper will be announced alongside the Budget at the end of October. But what powers do local and regional governments need to reduce regional inequality?
This week’s New Economy Brief looks at the history of fiscal devolution in England, the reforms now on the table, and what a genuinely decentralised state could mean for the UK’s economic development.
The state of play on fiscal devolution.
The UK remains one of the most centralised economies in the developed world. Just 5% of total revenues are collected at local level, vs 13.5% for France and more than 32% for Germany. That matters because there is also exceptional inequality between our regions.
There is a £10,000 disposable-income gap between the richest and poorest fifth of areas in the UK, and an 18-year gap in healthy life expectancy. GDP per head of £54,700 in London compares to the UK average of £32,000, while the North accounts for 30% of the population but only 20% of national wealth.
There is a strong economic case for giving places the resources and incentives to shape their own futures. Local government’s advantage over Whitehall is that it understands local labour markets, infrastructure bottlenecks and the strengths and weaknesses of particular economies. The Fairness Foundation cites OECD evidence suggesting that, when properly designed, decentralisation can raise growth. For instance, doubling the share of total tax revenue controlled by local and regional governments goes along with a 3% increase in GDP per capita.
There is also a political case for allowing local government to ‘take back control’. The Fairness Foundation also cites research suggesting regional inequalities and a lack of local agency heightens risks of political polarisation, voter disillusionment and civil unrest.
A brief history of recent English devolution. The first city-region deals followed the 2011 Localism Act, but they had an uncertain start, with limited resources and devolved powers. Brexit accelerated this through the 2022 Levelling Up White Paper and the Levelling Up Fund; a widely criticised central pot of money from which local areas were encouraged to competitively bid for grants. Labour’s 2024 government then legislated for a new English ‘devolution architecture’, expanded mayoral powers and set up the Pride in Place programme to invest up to £5bn in almost 250 areas across the country.
But fiscal powers remained the missing piece.
What’s currently on the table?
Burnham’s government has now moved beyond rhetoric. The Cabinet Office’s “Rewiring the State” paper promises to shift “power, funding and accountability from Whitehall to local leaders”. This will give them greater control over skills, employment, transport, housing, planning, energy and economic development.
Recent announcements put some flesh on those bones. Regional Strategic Authorities will cover the whole of England by the end of 2028. Mayors will retain a share of income tax receipts from April 2028, linked to local economic growth, while councils and Strategic Authorities will begin to keep more business rates a year earlier. Mayors will also gain greater control over 16–19 education and employment support, while regional and local authorities will benefit from investment via Good Growth Funds.
The creation of No.10 North is important too. The government says it will provide a stronger strategic centre while bringing national and regional government closer together. John Healey has described the proposed National Economic Council as a “joint enterprise between central and regional government”, designed to drive growth through “a greater degree of public control and leadership”.
Evaluating progress so far. This is a significant departure from the competitive funding model of the past. But, as the Local Government Information Unit (LGIU)’s Jack Shaw and Jonathan Carr-West put it, recent announcements on fiscal devolution are “largely a Mayor’s settlement on income tax”, although there are wider implications for councils through business rates and Strategic Authorities.
LGIU’s scorecard evaluates the government’s progress as real but partial. Multi-year settlements and the Fair Funding Review have moved forward, as have assigning national income tax revenues to local government and visitor levies. But its longer-term recommendations – including a reformed House of Lords containing local leaders – remain outstanding.
This means the Autumn White Paper matters enormously. It needs to answer not just how much money mayors control, but what powers councils retain, how responsibilities are divided, and whether every part of England has a credible route to greater autonomy.
Challenge: making sure some places don’t lose out
The Centre for Cities has warned that fiscal devolution “done poorly could worsen inequality”. If areas with stronger tax bases can raise more revenue while poorer places face greater service demands, decentralisation could drive divergence rather than convergence.
This makes equalisation fundamental – the process by which areas with greater resources transfer to areas with greater needs. Fiscal autonomy and redistribution are not alternatives: successful decentralisation requires both.
LGIU’s comparative international research argues that “without equalisation, autonomy only benefits those locations with buoyant income streams and relatively low demands upon service.” It recommends modelling equalisation before devolving new fiscal powers, using a transparent, rules-based formula reflecting both tax capacity and spending need. This matters particularly if income tax retention is linked to locally generated growth.
There are also political risks. Conservative and Reform mayors are already considering whether devolved funding could be used for local tax rebates. If different regions pursue radically different fiscal policies, voters could see devolution as creating a postcode lottery rather than empowering communities.
And there is a more immediate problem: local government is already under enormous financial pressure. As LGIU’s Jonathan Carr-West argues, “the success of devolution is still tied to the growing crisis of demand outstripping resources in children’s and adult social care”. Councils need “clarity, coherence, a long-term plan and a ‘new covenant’”.
The lesson is that fiscal devolution cannot simply transfer responsibility. It must redistribute resources and capacity.
The prize: regional investment and regeneration
Public financial institutions – like the National Wealth Fund or British Business Bank – can help regional authorities turn economic strategies into investable projects. The Productivity Institute has recommended locally based investment funds, capitalised by national public financial institutions but managed at arm’s length locally.
This matters because the UK’s investment problem is not simply a shortage of money. The NWF has struggled to identify investable projects outside London and the South East. Whitehall institutions can struggle to find projects that make sense in particular places, while local authorities often lack the capacity to develop them.
The National Wealth Fund is now moving to rectify this. Chancellor John Healey has announced that South Yorkshire, Liverpool City Region, North-East England and Cardiff Capital Region will become Strategic Partners of the NWF, helping them “build their own investment pipelines”.
Greater Manchester is already developing a £1bn Good Growth Fund, combining devolved national funding with local borrowing and pension fund investment. Similar models could give other regions the capacity to finance housing, regeneration, transport, energy and industrial projects over the long term. IPPR North argues that an “ambitious approach to fiscal devolution” would also give regional authorities borrowing powers to unlock further public investment.
The prize is a virtuous circle: fiscal devolution gives regions more control over their resources; devolved skills, housing and transport powers give them greater influence over their economies; and public financial institutions provide the capital and expertise needed to turn local priorities into investable projects. The real test of Burnham’s devolution agenda is whether it can “rewire” the state to make it both more decentralised and more redistributive.
The fiscal costs of monetary policy. Economists from the New Economics Foundation and Positive Money have published a briefing explaining five ways to deal with the government’s “stealth subsidies to banks”. They propose that the Treasury reduce the costs of monetary policy by: slowing quantitative tightening; allow the Bank of England to absorb its own losses from bond sales; reducing losses directly through tiered reserves; reforming debt management; and reclaiming losses through a windfall tax on commercial banks.
Data centre jobs. Analysis from Verdant finds that the UK’s data centres will create around a quarter of the jobs the industry claims. And these jobs will be highly energy-intensive, with data centres consuming a megawatt of power to employ just 8.6 people. A new car plant creates more than 400 jobs for the same amount of energy, and for a new hospital that figure rises to 3,600.
Taxing extreme wealth. Patriotic Millionaires UK, Oxfam GB and 38 Degrees delivered the first petition to No10 North calling on Andy Burnham to tax extreme wealth. This included new polling showing 64% think the super rich aren’t paying their fair share and should pay more, while 51% feel the tax system treats them less fairly than the wealthiest in Britain. They proposed 10 tax reforms they say could help fund the Burnham government's priorities as well as moving us towards a society that's less grossly unfair.
