Ideas on fiscal devolution clash as economic progress stalls

Gordon Brown’s constitutional commission calls for greater fiscal devolution, going much further than the government’s gradual rollout of levelling-up devolution deals.

There appears to be a growing belief among policymakers across the political spectrum that regional and local authorities need greater financial powers if economic outcomes are to be improved across the UK. However, while there appears to be some consensus around extending the fiscal powers of the devolved administrations in Wales, Scotland and Northern Ireland, there is much less agreement on how far to go in devolving financial powers for the 84% of the UK’s population that live in England.

Levelling-up ‘devolution deals’ cover almost half of England

The government has adopted a gradualist approach to fiscal devolution that has principally revolved around ‘devolution deals’, part of its wider Levelling Up agenda to spread prosperity across England outside London and the South East. These deals generally provide an agreed stream of investment funding over several decades, greater control over the adult education and transport budgets, and some additional powers (eg, over second homes in Cornwall), in exchange for agreeing to direct elections for combined authority mayors or county leaders.

Regional devolution deals were announced in 2022 for the North EastYork and North Yorkshire, and the East Midlands, together with county devolution deals for SuffolkNorfolk and Cornwall. The government is also working on ‘trailblazer’ devolution deals along similar lines with existing city-regions, starting with Greater Manchester and the West Midlands combined authorities.

The devolution deals do not provide any additional tax-raising powers for regional combined authorities or local authorities, and the majority of local government funding in England continues to be determined by central government. It is also unclear whether the government will attempt to extend the coverage of devolution deals across the rest of England beyond the existing areas covered and the Devon and East Yorkshire deals that are still being negotiated.

Gordon Brown constitutional commission

The Labour Party has also been thinking about devolution as part of a wider debate on the UK constitution, with a review led by former Prime Minister Gordon Brown into the UK’s constitution. While many of the headlines about the review focused on reform of the House of Lords, most of the report focused on devolution and intergovernmental cooperation, including the role played by English regions. This included recommending greater long-term financial certainty and new fiscal powers for local government in England, in addition to deepening the devolution settlements in Scotland, Wales and Northern Ireland.

Several of the Gordon Brown commission’s proposals align with recommendations made by ICAEW to HM Treasury at the time of the last Spending Review. ICAEW called for stable funding for local authorities, rationalisation of funding streams, investment in fiscal resilience and strengthening financial management.

At the same time as advocating for greater fiscal flexibility for local government, the review stresses the need for scrutiny and accountability to ensure money is spent wisely. One option might be for the proposed Office for Value for Money to expand to cover local government, further developing the ideas put forward in a Fabian Society report, Prizing the Public Pound, produced in collaboration with ICAEW. Other ideas include the piloting of local public accounts committees.

Although clear in the reforms to the UK’s constitutional arrangements that the review would like to see, the report lacks detail on how it intends to achieve its proposals – for example in identifying individual taxes that could be devolved to regional and local authorities. 

The report is ambitious in aiming to implement reforms within just one parliamentary term, meaning there will be a lot of work and consultation required to design the new arrangements, establish public support and then develop and pass the necessary legislation.

Fabian Society-ICAEW round table 

A joint Fabian Society-ICAEW round table last year explored some of the practical challenges involved in devolving fiscal powers to regional and local government in England. The group, which included members and contributors to the Gordon Brown commission, looked at the proposed trailblazer deals being negotiated by Greater Manchester and the West Midlands combined authorities, as well as existing ideas that have been put forward for devolved taxes, such as on tourism.

The participants discussed how existing disparities in tax bases between different parts of the country meant some form of redistribution or central government funding was still likely to be needed, as illustrated by the cities of Westminster and Hull that each serve populations of around 250,000 or so, but which have very different levels of prosperity and hence local tax capacity. 

The approach adopted in Germany of shared national taxes was also discussed, a key element in how regional governments (Länder) are funded. This is further explored in a separate Fabian Society report: Levelling Up? Lessons from Germany.

While there were a variety of views around the funding mechanisms that could be used to pay for local public services, there was general agreement on the need to rationalise funding streams, for long-term funding certainty to enable local authorities to plan ahead, and an end to the process of submitting multiple bids to central government for incremental funding.

Martin Wheatcroft FCA, external adviser on public finances to ICAEW, commented: “While there appears to be an emerging political consensus on the need to devolve much greater fiscal powers to regional and local tiers of government in England, the proposals so far have been relatively limited in their ambition.

“This may be because national politicians find it difficult to let go of the purse strings, but it is also the case that delivering fiscal devolution is not that easy in practice. Economic disparities between different places mean that needs are often greater in areas with less in the way of tax-generating ability, while redistributive mechanisms are challenging to design in a way that all parties deem to be fair. This is not helped by a patchwork quilt of differing regional and local government structures that would make it difficult to implement a single standardised model for funding local public services across England.”

This article was originally published by ICAEW.

ICAEW chart of the week: UK government major projects portfolio

Our chart this week is based on the Institute for Government’s recently published Whitehall Monitor 2022, illustrating how the government has already started on many of the major projects that form part of the Levelling Up White Paper.

Column chart showing numbers of major projects together with the whole-life cost of those projects

2014: 158 existing projects + 44 new projects (£399bn)
2015: 150 existing + 38 new (£489bn)
2016: 112 existing + 21 new (£436bn)
2017: 107 existing + 36 new (£455bn)
2018: 115 existing + 18 new (£423bn)
2019: 114 existing + 19 new (£442bn)
2020: 108 existing + 17 new (£448bn)
2021: 87 existing + 97 new (£542bn)

On 31 January 2022, the Institute for Government (IfG) published its latest annual Whitehall Monitor, an authoritative compendium of analysis about the functions and effectiveness of central government that makes for compelling reading and contains some great charts to bring to life what would otherwise be pretty dry content.

Our chart this week draws on a couple of the IfG’s charts from pages 60 and 61 in the 2022 edition that take a look at the activities of the Infrastructure and Projects Authority (IPA). One of the IPA’s key roles is to support central government departments with their most expensive and complex projects. As the chart highlights, there was a sizeable jump in 2021 with 97 new projects added to the 87 existing projects brought forward from previous years, bringing the estimated whole-life cost of the projects being supported by the IPA to £542bn, up from £448bn in 2020.

According to the IfG, the major projects portfolio includes infrastructure developments such as the creation of a Midlands Rail Hub, large-scale programmes to improve public services such as the recruitment of 20,000 police officers by 2023, and military projects such as building a new medium-lift helicopter. This is the largest number of new items added to the portfolio in a single year since the publication of the IPA’s first annual report in 2013, with many of the projects now branded as part of the Levelling Up agenda. For comparison, fewer than 20 projects were added to the portfolio each year between 2018 and 2020. The government is currently managing 184 major projects – about 1.5 times as many as it did the year before and the portfolio is now at its largest size since 2015.

From a conventional perspective it may seem strange that the government started many of the projects in its just published Levelling Up White Paper as much as a year before setting out the plan that they form part of, but in practice the main components, such as new investment in transport infrastructure outside London and the South East, have been known for some time – as has the additional capital expenditure funding that has been provided to departmental budgets. What is new is the insight into the metrics that the government intends to use to assess the effectiveness of its levelling up plans by 2030, with 12 key objectives to be achieved.

However, as discussed in ICAEW’s Autumn Budget and Spring Budget coverage last year, much tighter budget settlements for day-to-day spending mean that departments could struggle to deliver major projects successfully given all the other pressures they are under as well as rapidly rising input costs, with the IfG commenting that: “Ministers should be careful to maintain enough administrative resources in their departments to help officials undertake these projects well, on time and to budget.”

The chart illustrates how following the IPA’s inception in 2013, there were 155 existing projects carried forward into 2014 and 44 new projects that year, a total of 199 with a whole-life cost of £399bn. This was followed by 188 projects in 2015 (150 existing and 38 new) of £489bn, 143 in 2016 (112 + 31) of £436bn, 143 in 2017 (107 + 36) of £455bn, 133 in 2018 (115 + 18) of £423bn, 133 in 2019 (114 + 19) of £442bn, 125 in 2022 (108 + 17) of £448bn and 184 projects in 2021 (87 existing + 97 new) with a whole-life cost of £542bn.

The IfG says: “Major reform is needed for government to respond to crises like the pandemic while simultaneously delivering long-term policy goals. Whitehall Monitor 2022 reveals how the government has been handling the Covid crisis while at the same time trying to make progress on priorities such as levelling up and hitting net zero. New employment support schemes and the vaccination programme were delivered rapidly, but progress on pre-pandemic priorities was limited.”

The report also warns that without fundamental reform – such as clarifying ministerial and civil service accountability, better data, improving transparency and ensuring a targeted workforce plan underpins its goal of up to 55,000 civil service job cuts by 2025 – government will continue being knocked off course when faced with shocks to the system. The IfG concludes that whatever happens as a result of the prime minister’s current troubles, with a looming cost-of-living crisis, ongoing COVID-19 challenges, and crunch Brexit deadlines and decisions ahead, 2022 will bring further strain.

The Levelling Up White Paper sets out some big aspirations, but the jury is still out as to whether they can be delivered.

This chart was originally published by ICAEW.