Devomaxxing 👓

Over the past decade, metro mayors have taken control of transport, housing, skills, and regeneration across some of England’s largest urban economies. Yet more regional powers may be on the way.

Prime Minister Andy Burnham wants to wrest more power from Whitehall, with the biggest economic powers sitting at the city region level. But without the ability to tax ‘n’ spend, mayors will remain wedded to Westminster. New fiscal devolution powers could give mayors a share of local income tax, more control over business rates, powers to levy charges, and greater freedom to borrow, with more control over their citizens’ economic destiny. 

C.R.E.A.M.

Centre for Cities estimates 95% of UK tax revenue goes to central government, with just 5% going to metro mayors and local councils. Britain is an outlier in this regard. In Germany, local and state governments collect 40% of tax revenues. Sweden’s regional taxation makes up more than 30% of receipts. In Canada, provincial governments control nearly 50% of the tax base and control their equivalent of VAT, as well as the delivery of healthcare and education.

Income tax, National Insurance, VAT, and Corporation Tax, the big dogs of public revenue, all flow into the Treasury in London (and Darlington). The UK is the most centralised G7 country, more than twice as much as Italy, next in the ranking.

Brum deal

In the 1870s, Mayor Joseph Chamberlain transformed Birmingham through Gas and Water Socialism. The city bought the local gas companies in 1875, and took control of the waterworks the following year for £1.35 million. Gas would generate a surplus for the council, making £34,000 profit in its first year. Water was seen as a public health project. At a time when many still depended on contaminated wells, clean, reliable water was social infrastructure as much as a commercial utility.

Chamberlain used the council’s expanding balance sheet and borrowing powers to remake the city centre. The corporation cleared overcrowded streets, created the new Corporation Street and supported parks, libraries, schools, swimming baths, and sanitation. The programme became known as Birmingham’s ‘civic gospel’.

Shopping centre socialism

That model of muscular municipal government weakened over the following century. Councils became dependent on central grants, while Whitehall took control over local taxation. By the late 20th century, power had shifted decisively towards Westminster.

In 1990, domestic rates were replaced by the community charge, better known as the poll tax. Business rates were nationalised. The poll tax was replaced by council tax in 1993, but local government never regained the same control over its tax base. When the post-2010 austerity program slashed central government funding grants to local councils by nearly 30% in real terms, many authorities turned to commercial property and other investments to plug the gap.

Between 2016 and 2019, UK councils poured billions into commercial property, 14.4 times the amount in the preceding three years, thanks to the Treasury-backed Public Works Loan Board (PWLB). Woking Borough Council borrowed £1.8bn to build the Victoria Place megaproject. The council had £1.9bn of borrowing against core spending power of about £14m.

Woking up broke

In June 2023, Woking issued a Section 114 notice, the closest thing an English council has to declaring bankruptcy. With roughly £1.9bn of borrowing for a population of 100,000, Woking’s debt was quite something even by the standards of England’s many, many council failures.

Thurrock Council borrowed £1.5bn, much of it from nearly 150 other public authorities, and funnelled more than £650 million into unrated solar farm bonds. Thurrock lost more than £188 million on bad investments, driving it into a £470 million budget crisis. The list goes on. Croydon, Slough, and Nottingham all issued Section 114 notices.

Band aid

Council tax and business rates are councils’ largest source of income, but central government retains significant control over both. Council tax is based on the value of a home as of 1 April 1991. There are eight bands in England and the system has never undergone serious revaluation. But property prices have shot up since 1991, especially in London and parts of southern England. A home worth several million may sit a few bands above a modest property worth a fraction of that amount. Lower income households tend to spend a larger proportion of their earnings on council tax. This makes it highly regressive.

Ideas for reform have included a national revaluation, extra bands for the most expensive homes, or replacing council tax with a proportional property or land value tax. The Institute for Fiscal Studies estimates making the tax proportional to up-to-date values would cut average bills by more than 20% across much of the North and Midlands, while raising them in London and nearby high-value areas. Good luck with that.

Pooling power

Mayors could receive much greater control over business rates. Burnham has already supported lower business rates for smaller hospitality and high-street businesses, potentially funded through higher charges on large warehouses.

More adventurous powers could include visitor levies, wider workplace parking charges, and munis for infrastructure projects. A regional Total Place budget could combine money controlled by Whitehall departments, including health, education, welfare, and policing, pooling or coordinating public spending across departmental silos, rather than simply giving mayors another grant. That sort of joined up thinking could produce both better services and better returns. 

Civic duty

Municipal bonds, or munis, allow a council or regional body to borrow from investors, promising interest payments and the return of their capital at maturity. Munis are a substantial asset class in the US, financing things like schools and sewers and hospitals. And, of course, sports venues.

Interest on many munis is exempt from federal income tax, which helps cities borrow more cheaply and makes the bonds popular with wealthier investors. Britain currently has no equivalent. Some councils have experimented with munis, sometimes marketed as local climate bonds. Residents can lend small sums, with the proceeds used for things like solar panels and tree planting.

Local taxes for local people

The sort of fiscal devolution Burnham has in mind would need guardrails, combining local revenue capture with borrowing limits, independent scrutiny, stronger disclosure, and a mechanism to stop richer regions pulling further ahead.

For retail investors, a deeper muni market could open up fixed income. Savers could buy bonds linked to a tram extension or housing programme, perhaps through a Local ISA or an investment platform. Some bonds could be backed by a mayoral authority’s wider tax revenues. Others might depend on fares, rents, or levies. Investors could earn income while financing projects on their doorstep, rather than sending capital to distant firms and global markets.

Burnham has spent years arguing Whitehall hoards too much power. Now he runs Whitehall. The real test of devolution will be how much he is willing to give away.