UK devolution plan tests growth case for mayoral tax powers

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UK devolution plan and mayoral taxes

Highlights

Chancellor John Healey's upcoming Budget will grant mayors a greater share of business rates and introduce local income tax revenue assignments to incentivize regional growth.
Think-tanks such as the Institute for Fiscal Studies warn that without funding rebalancing mechanisms, richer areas like London could widen disparities under devolved tax powers.
Economic benefits of devolution, as seen in Greater Manchester, may depend on pre-existing conditions, with national GDP effects expected to be gradual and unevenly distributed.

Tax devolution plan and growth incentives

As reported by Financial Times, next week’s Budget is due to set out plans from chancellor John Healey to give mayors a greater share of business rates and a new share of income tax revenues collected in their areas. The changes are paired with wider powers over post-16 education, housing and innovation, as ministers seek to make local leaders more responsible for shaping growth in their economies.

Economists see the move as bringing the UK closer to international norms after years in which revenue control has remained heavily concentrated in central government. A 2019 OECD study found a positive correlation between decentralisation and GDP per capita, with revenue devolution more closely associated with income gains and narrower regional disparities, although it did not establish direct causation.

Supporters argue that devolved tax revenues can give mayors both stronger incentives and more stable funding to back local investment. Retention of business rates, already agreed for 10 years in Greater Manchester and the West Midlands and now extending elsewhere, is seen as encouraging faster planning decisions while providing a long-term income stream against which authorities can borrow. Income tax assignment offers a broader and steadier base, while still rewarding efforts to raise employment and wages.

Regional capacity and uneven outcomes

Analysts also warn that devolution does not guarantee balanced growth across England. Think-tanks including the Institute for Fiscal Studies say any new system will need mechanisms to rebalance funding between richer and poorer areas, both at the outset and through periodic resets, so that London and stronger regional cities do not pull further ahead because of deeper tax bases.

There is also concern that some mayoral authorities may lack the staff, data and institutional capability to use broad new powers effectively. The government wants every area in England to have a strategic authority in place by the end of 2028, but economists and business groups question whether all of them will be equally prepared to design policy, recruit specialist talent and act quickly enough to convert new freedoms into growth.

Greater Manchester is often presented as evidence that devolution can support economic revival, but analysts note that its progress reflects conditions that predate the current mayoral model, including long-running political co-operation, a clearer economic geography and an ability to attract private capital. Economists therefore say devolution may deliver its strongest benefits through better political legitimacy and public service delivery over time, while any effect on national GDP is likely to be slower and less evenly distributed.

In our earlier article, we covered Chancellor John Healey’s commitment to sticking with deficit-reduction plans ahead of his October 28 Budget, even as he argued the government can pursue fiscal discipline and growth support in parallel. We also highlighted the latest UK GDP reading showing modest resilience, alongside the mounting political pressure over how the Budget should balance consolidation with measures to ease cost pressures and address structural barriers to growth.

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