Government's fiscal devolution plans could widen regional inequalities, IFS says

Nayors will start retaining business rates and a small proportion of income tax over the coming years.

The Government’s plans to hand mayors a share of income tax and business rates could widen regional inequalities between London and the North, a leading think tank has warned.

The Institute for Fiscal Studies’ analysis ahead of this month’s Budget found that “without careful design” richer areas could see their funding pull “significantly ahead”.

The report was investigating Andy Burnham’s policy of fiscal devolution, with an announcement that mayors will start retaining business rates and a small proportion of income tax over the coming years.

The idea is that this funding will replace the so-called “begging bowl culture” of grants from Whitehall, and give local leaders more flexibility to spend on their priorities.

If this mirrored current budgets, it would see 2 per cent of income tax retained in West Yorkshire and 3 per cent in South Yorkshire. It has the support of all of the region’s mayors.

The Government has said it will initially be financially neutral - meaning that it will match the grants mayors receive for transport, skills and other devolved areas - however over time this will change as regions’ economies grow at different rates.

The IFS says that rather than “narrow regional inequalities, as government intends, this could widen them”.

David Phillips, head of devolved and local government finance at the IFS, said: “The design of the new revenue-sharing arrangements for England’s regional mayors will be one of the most consequential decisions taken at this year’s Budget.

“While there might be no effects on funding on day one, over time some parts of the country will gain financially and others lose.

“That effect is part of the point of the reform: with more skin in the game of economic growth, mayors will be more incentivised and empowered to support growth through local policies and investments.

“But careful design will be needed to prevent richer areas’ funding unfairly pulling ahead.

“The government must also decide how big a gap in funding it is willing to see between ‘winners’ and ‘losers’ in the years ahead.”

Mark Franks, director of welfare at the Nuffield Foundation, said: “Regional inequalities in England are already wider than is easy to reconcile with either fairness or economic efficiency.

“Tax-sharing with England’s mayors has the potential to help, but the design of the new funding system will be critical in determining whether reform improves opportunities for people in poorer areas and strengthens the economy as a whole or allows existing gaps to widen further.”

Mr Burnham previously said that the policy would allow for more central government funding to be directed towards areas with a lower tax take.

“If you free up the places that are more successful to do more for themselves and keep more of what they earn, what that does is allow you to concentrate more of national investment in the areas that really need that foundational investment in infrastructure and industry,” he said on a visit to Sheffield.

This appears to support plans for one of the IFS’ recommendations of equalisation payments to offset large initial differences.

In particular, it highlights that the Tees Valley could lose out when it comes to income tax revenue as it is around a quarter of London’s per person.

It says that the equalisation payments should increase each year in line with income tax growth to prevent regional inequalities.