Devolution in England: the case for local government - Communities and Local Government Committee Contents

1  Introduction

1. The argument that local authorities should have greater powers to raise, retain and spend money locally—fiscal devolution—has gathered momentum over the past 12 months.[1] Indeed, the Prime Minister said on 9 June there was "political consensus" across the main parties that "devolving power and money from Whitehall to the cities [...] is the future. The debate now is about how far and fast it can go".[2] Fiscal devolution builds on the transfer of powers to the devolved nations of the UK over the past 15 years and on measures introduced by the Coalition Government to decentralise powers over spending and public services in England. Community Budgets, piloted from 2011, which superseded Total Place, allow local providers of public services to share their financial resources.[3] City Deals, established in 2012, have given England's large urban authorities new opportunities to stimulate economic growth and decide how public money is spent locally.[4] More recently, Growth Deals, first announced in March 2013, allow Local Enterprise Partnerships to bid for money from the Government's Single Local Growth Fund.[5]

2. This report examines how fiscal devolution to local authorities—building on the current arrangements—could go a stage further, allowing them to control more of their own taxes and enhancing their ability to borrow.

3. Over the past century the trend has been in the direction of increased centralisation with more of local authorities' resources raised and distributed by central Government. Since the 1930s locally raised income has been in decline, irrespective of the party in central Government.[6] In his 2012 report to Government, No Stone Unturned in Pursuit of Growth, Lord Heseltine, reflecting on the Victorian age when people looked to their city, as well to Whitehall, for solutions, considered:

    Those days are gone. Industrialisation demanded migration and urbanisation. […] It fell to local government to respond to the needs and demands of the ever growing electorate. The cost of providing the necessary infrastructure and basic social support could not, however, be borne by many of the cities themselves. Wealth had to be redistributed by central government. And with that redistribution came central controls […] With central government reserving for itself the power to make the vast majority of economic decisions—creating itself as a functional monopoly—local authorities have been relegated to service providers.[7]

Impetus for change

4. During our inquiry we identified two factors driving change. First, central Government has put localism back on the political agenda and has devolved some spending powers to local government. Second, devolution to Scotland and Wales has brought into question how England is governed and also accentuated how out of step England is with other nations. The referendum on Scottish independence will take place in September 2014. If Scottish voters decide to stay part of the United Kingdom, Scotland is due to acquire further tax and borrowing powers.[8] The UK Government's response to proposals in the Commission on Devolution in Wales—the Silk Commission—also means the Welsh Assembly Government's fiscal powers will be enhanced.[9] This then raises the "English question": should England also have fiscal devolution and, given that neither an English Parliament nor regional government is a likely prospect, how might it be achieved?


5. By international standards the UK has a highly centralised system of taxation and expenditure. As of 2011 the proportion of tax set at a sub-national—local or regional—level was at most 2.5% of GDP.[10] This compared with 15.9% in Sweden; 15.3% in Canada; 10.9% in Germany; and 5.8% in France—often seen as a highly centralised state.[11] France presents an instructive case. Since the 1980s it has been steadily decentralising. As part of this inquiry we visited Lyon, which has been at the forefront of these changes. By contrast English local authorities have, in reality, power over only one, out-of-date, declining and centrally controlled tax, the council tax: its only and most recent valuation was in 1991; in recent years central Government has offered a grant to local authorities prepared to freeze the level, so less tax has been raised locally; local authorities needing more than the Government has offered, and wishing to increase the tax above a centrally specified level, are required to hold a referendum; this is the only UK tax where an increase can require a referendum; and the referendum threshold is set by the Secretary of State at a low level, which he notifies to local authorities only shortly before the start of the financial year.[12]


Fiscal devolution

6. We define fiscal devolution as encompassing the following elements: handing to local authorities the power to raise money through a range of existing and new taxes and charges; some responsibility for setting those taxes; and the facility to borrow. It would follow that the consequence of fiscal devolution must be greater local decision-making on how the money raised locally is spent.


7. While relaxation of central Government's control over spending programmes can be a component of fiscal devolution, on its own it is not fiscal devolution. The Government cited a number of initiatives as examples of a "very significant shift in fiscal and functional responsibilities"[13] and the Department for Communities and Local Government pointed out that it had devolved significant functions and funding to the Greater London Authority; established and supported Local Enterprise Partnerships (LEPs); worked with major conurbations to negotiate bespoke City Deals; given greater control over resources by removing ring-fences on local authority funding; and rewarded places that deliver growth through the New Homes Bonus and local business rate retention. These were seen as part of a "clear and broad commitment to decentralisation".[14] We welcome the general direction of these developments but, with the limited exception of certain City Deals, which we examine in this chapter,[15] we would not categorise greater control over local spending on its own as constituting fiscal devolution.[16] In our view, fiscal devolution and spending decentralisation are not synonymous. Fiscal devolution has to include significant tax-raising and retaining powers.


8. The Core Cities, the Greater Manchester Combined Authority and the Key Cities Group told us that greater control over the spending of resources and more "place-based budgeting" than is currently provided by Government was necessary to decentralise and reform services such as skills and health and social care.[17] This wider decentralisation would not only empower local authorities to decide how money is spent locally, but give them responsibility for shaping local infrastructure and public services. We consider this issue in more detail at paragraph 90.


9. As a starting point for our deliberations we examine the proposals set out in the 2013 report of the London Finance Commission (LFC), which recommended a package of fiscal devolution for London.[18] The LFC concluded that most of its recommendations could and should operate well in England's other big cities.[19] England's eight largest cities (after London)—the self-defined Core Cities—endorsed the LFC recommendations and suggested that property taxes such as business rates, stamp duty and council tax, might be devolved to them.[20]

Models currently operating in England

10. Under our definition there are only a very few limited examples of fiscal devolution in England. The model that best marries spending decentralisation with, in some cases, a degree of fiscal devolution is the City Deal. It decentralises spending powers through economic investment funds, localised skills funding and youth contracts and local transport funding. Its fiscal measures include the Earn Back arrangement in Greater Manchester and Gain Share in Cambridge. In both cases, some of the receipts generated through local investment are kept by the local authorities instead of going back to the Treasury.[21] In Manchester's case the initial investment was generated in part by borrowing.

11. More broadly, covering all local government in England there are programmes and arrangements with some limited fiscal devolution. The Business Rates Retention Scheme (BRRS) splits locally collected business rates between central and local government on an equal basis. Subject to a system of national redistribution, it allows local areas to retain the local share of the income generated by the growth in companies locating to or expanding in their area.[22] Conversely, albeit with the protection of a safety net, local areas bear the consequence of a decline in local business rates. The New Homes Bonus is aimed at encouraging local authorities to stimulate the building of new houses in return for additional revenue.[23] Enterprise Zones allow particular business areas to retain 100% of their business rates, which can be reinvested in the local economy.[24]


12. By far the most significant use of enhanced tax and borrowing powers has been by the Greater London Authority (GLA). The GLA became the first UK local authority for 17 years to issue bonds when, in 2011, it raised £600 million to help fund Crossrail, the east-west railway line due to start running under the capital in 2018. The GLA has also borrowed £3.5 billion against a Crossrail business rate supplement.[25] London's Northern Line Underground extension was also financed in part through the Treasury providing a guarantee to enable the GLA to borrow £1 billion from the Public Works Loan Board.[26] These few examples show how little genuine fiscal devolution to local authorities is currently in place.

Our inquiry

13. We received 38 submissions from organisations, groups and individuals. Significantly, no one was against fiscal devolution in principle, though, as we have noted, some defined it as little more than the enhanced decentralisation of spending powers. We held seven oral evidence sessions, including one in Manchester as part of our visit to the Greater Manchester Combined Authority. We also visited Lyon in France. We are grateful to all those who gave evidence and to those who hosted our visits. We appointed Professor Alan Harding of the Heseltine Institute, University of Liverpool, and Sean Nolan, a consultant on local government finance, as specialist advisers to this inquiry. We are grateful to them for their advice and guidance during our deliberations.[27]

14. When we launched our inquiry in November 2013, our focus was on cities and city-regions, where up to then most interest had been focused.[28] But from the written evidence we received it became clear that other areas of England beyond London and its largest cities were anxious to share in the benefits of similar devolution.[29] Indeed, during the period of our inquiry, think tanks, commissions, groups of local authorities and political parties produced their own reflections on the issue.[30] This report therefore looks not only at fiscal devolution to large cities and city-regions, but beyond them to counties and smaller cities. Its conclusions and recommendations address local and central Government and we hope that they may assist political parties drafting their manifestos for the 2015 general election. Implementation will be for the next Parliament. The report examines:

  • the case for fiscal devolution in England (chapter 2);
  • the principles and key criteria that should be part of any system of fiscal devolution (chapter 3);
  • the process by which fiscal devolution could be agreed (chapter 4); and
  • some of the taxes, charges and borrowing powers that might be devolved as part of fiscal devolution (chapter 5).

15. The power to raise, retain and spend money locally—fiscal devolution—is back on the political agenda. Local government wants more of it. The UK Government, in promoting devolution, localism and spending decentralisation, has shown that we may have passed the high water mark of Whitehall control. But increased and increasing fiscal devolution to Scotland, Wales and Northern Ireland—and foreign comparisons—highlight how much England is still firmly in the fiscal grip of central Government. There is unlikely to be an English Parliament or regional assemblies, so devolution based on existing structures or groups of authorities is the only way forward. With a UK general election less than 10 months away, policy makers must listen to calls for fiscal devolution to local authorities in England and consider their response.

1   See, for example, Core Cities, Competitive Cities, Prosperous People (November 2013); The London Finance Commission, Raising the Capital: the report of the London Finance Commission (May 2013); "London and England's largest cities join to call for greater devolution to drive economic growth", Greater London Authority press release, 30 September 2013; "The City Growth Commission", City Growth Commission press release, 28 October 2013. Back

2   "Cameron sees devolution to England's cities as 'the future'", Financial Times, 9 June 2014 Back

3   Gov.UK, "Giving local authorities more control over how they spend public money in their area", accessed 1 May 2014. Sixteen first-phase Community Budgets for families with multiple problems were launched in April 2011. A further four 'Whole Place' Community Budgets, centred on Greater Manchester, Cheshire West and Chester, Essex County Council and the West London Tri-borough area, were launched in December that year; see the Communities and Local Government Committee, Third Report of Session 2013-14, Community Budgets, HC 163, paras 3-4. Back

4   Gov.UK, "Giving more power back to cities through city deals", accessed 1 May 2014. Deals were concluded with England's eight largest cities in 2012. A second wave of deals has been entered into with 20 cities. Fifteen have been agreed with the Government; see Local Government Information Unit, Cities economic growth and devolution update (April 2014). Back

5   Gov.UK, "Government publishes response to Heseltine report", accessed 1 May 2014 Back

6   Tony Travers and Lorena Esposito, The Decline and Fall of Local Democracy, Policy Exchange / NEF, (2003), p 10 Back

7   Rt Hon The Lord Heseltine of Thenford CH, No Stone Unturned in Pursuit of Growth, (October 2012), paras 2.1-2.4 Back

8   IPPR North (FDC0020) p 2 Back

9   IPPR North (FDC0020) p 2 Back

10   See para 16 for more detail. Back

11   Newcastle University Centre for Urban and Regional Development Studies (CURDS) (FDC0009) para 2.1; see Q67 [Professor Pike] and Q247 for views on France's centralisation.  Back

12   For 2014-15 the threshold is 2%. Back

13   Department for Communities and Local Government (FDC0014) para 4 Back

14   Department for Communities and Local Government (FDC0014) para 2 Back

15   See para 10. Back

16   See Department for Communities and Local Government (FDC0014) para 12, and Q320 [Cllr Nick Forbes]. Back

17   Core Cities (FDC0008) para 3.4; Greater Manchester Combined Authority (FDC0006) paras 5.1, 6.1; Key Cities (FDC0015) paras 15-17 Back

18   Raising the Capital: the report of the London Finance Commission (May 2013). The Mayor of London established the London Finance Commission in July 2012. It was chaired by Professor Tony Travers of the London School of Economics, who in a personal capacity gave evidence to the inquiry twice.  Back

19   Raising the Capital: the report of the London Finance Commission, (May 2013), p 9 Back

20   "London and England's largest cities join to call for greater devolution to drive economic growth", Greater London Authority press release, 30 September 2013; Core Cities (FDC0008) para 3.10; the Core Cities are Birmingham, Manchester, Nottingham, Bristol, Sheffield, Newcastle, Leeds and Liverpool. Back

21   See Department for Communities and Local Government (FDC0014) para 12. The Greater Manchester Combined Authority said its Earn Back model "allows us to capture a proportion of the growth generated as a result of our local investment in transport infrastructure for reinvestment. This is based on a formula linked to changes in rateable values over time at the Greater Manchester level, which provides a revenue stream over 30 years, provided that additional GVA is created relative to the agreed baseline. This therefore provides an additional incentive for Greater Manchester to prioritise local government spending to maximise economic growth." See (FDC0006) para 3.2. Back

22   DCLG (FDC0014) para 16 Back

23   The New Homes Bonus Scheme, Standard Note SN/SP/5724, House of Commons Library, January 2014  Back

24   See Department for Communities and Local Government (FDC0014) para 20 Back

25   Newcastle University Centre for Urban and Regional Development Studies (CURDS) (FDC0009) para 10.2 Back

26   Newcastle University Centre for Urban and Regional Development Studies (CURDS) (FDC0009) para 9.5 Back

27   Professor Harding made the following declaration of interest: Centrally involved in raising funding for pure and applied social scientific research and consultancy studies and supporting human and physical capacity. Led three major projects for UK Economic and Social Research Council. Other clients include European Commission, UK Government Departments, charitable trusts, regional agencies, local authorities, other local government organisations, private sector bodies, individual businesses. Sean Nolan made the following declaration of interest: Director of consultancy company SJ Nolan Ltd, permanent employee of the Kent Police Commissioners Office. Spouse is a school bursar. On Finance Committee of Crowborough Beacon Golf Club. Back

28   See footnote 1.  Back

29   See, for example, County Councils Network (FDC0013); Key Cities Group (FDC0015); Oxfordshire County Council (FDC0017); and City of York Council (FDC0010). Back

30   See, for example, Centre for Cities, Breaking boundaries: empowering city growth through cross-border collaboration, March 2014; City Growth Commission, Metro Growth: the UK's economic opportunity, February 2014; "LGA commission launched for counties' growth", Local Government Chronicle, 7 April 2014; Policy Network, Competing in a race to the top: Results from the employer survey for the Adonis Growth review, April 2014.  Back

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Prepared 9 July 2014