Fiscal Devolution: Is Whitehall Ready to Trust Local Government?
By Alexa Ngini, Senior Consultant
As England debates the next phase of devolution, questions about fiscal autonomy are at the forefront. Strategic Authorities continue to expand, Local Government Reorganisation continues, and politicians like Andy Burnham argue meaningful change requires a fundamental shift in who holds financial power.
The case is compelling: In England around 95 per cent of tax revenue is collected centrally. Councils are responsible for delivering complex public services, but have relatively little control over the resources available to fund them. (By comparison, local government in Spain raises approximately 24 per cent of tax revenue. It’s 32 per cent in Germany.) That same system means that when councils invest in regeneration and jobs, the resulting tax revenue goes to the Treasury, potentially weakening local incentives for growth. The argument goes that in losing local decision-making, we lose local prosperity.
These issues are not new. The Total Place initiative challenged the traditional view of public spending fifteen years ago by asking: what if public money were organised around places rather than institutions? While the programme itself was relatively short-lived, its core philosophy - that local leaders are best placed to understand the needs of their communities – still underpins the devolution agenda. Today it begs a further question: is Whitehall finally prepared to tolerate the risks that come with genuine decentralisation?
History suggests the answer is not straightforward. Successive governments have promised greater flexibility and local freedom, only to reclaim devolved powers when risks emerge. Prudential borrowing gave councils greater freedom to determine their own capital investment decisions, but after a couple of high profile failures, central government introduced tighter controls and revised guidance. Business rates retention was intended to strengthen the link between local growth and local revenue, yet numerous policy adjustments have limited genuine fiscal autonomy. Even council tax, often regarded as the quintessential local tax, remains heavily shaped by decisions made in Whitehall. A case in point: the recently-announced High Value Council Tax Surcharge will contribute towards local government funding, but councils have no discretion over whether to introduce it, where the thresholds should sit or how much should be charged. Devolution has rarely been a one-way transfer of power; instead, it has been an ongoing negotiation between local autonomy and national accountability.
There are understandable reasons for this caution. Central government remains accountable to Parliament for the stewardship of public money and inevitably faces pressure to intervene when individual authorities experience financial distress or governance failures. Local variation may be an inevitable consequence of devolution, but politically, inconsistency can be difficult to tolerate.
Yet excessive central control carries risks of its own. Many of the most significant challenges facing local government today, including homelessness, adult social care demand, children's services pressures and economic inactivity, are fundamentally place-based issues. They do not fit neatly within departmental boundaries and cannot always be solved through nationally designed policies. Local leaders are often better placed to understand the complex interaction between housing, health, employment, education and communities within their areas. Genuine fiscal devolution would allow financial incentives to align more closely with these local realities.
At the heart of the matter is a question of trust and whether local and central government can shift mindset. The challenge for central government is deciding how much variation it is prepared to accept in exchange for greater local responsiveness, stronger local accountability and more sustainable economic growth. Different places will make different decisions, pursue different priorities and achieve different outcomes. Some innovations will succeed; others will fail. Local government meanwhile must step up responsibility and accountability. Fiscal devolution cannot simply be a transfer of powers. Greater autonomy must be matched by stronger governance, effective scrutiny, sound financial stewardship and the ability to deliver tangible improvements for residents.
This is where the current programme of Local Government Reorganisation and the creation of Strategic Authorities become particularly significant. These reforms are not simply about creating larger councils or redrawing boundaries. They represent an opportunity to build institutions with the scale, strategic capacity and financial resilience needed to exercise greater devolved powers. If successful, they could provide Whitehall with greater confidence that local government has the capability to manage increased fiscal responsibility.
England has spent decades debating how much power should be devolved from the centre. The next chapter should not simply be about which taxes are retained locally or how grants are distributed. It should be about whether central and local government are prepared to build a relationship founded on mutual trust, shared accountability and a common commitment to improving outcomes for places.