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

Conclusions and recommendations

Our inquiry

1.  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. (Paragraph 15)

The case for fiscal devolution

2.  English local authorities, when compared with their counterparts in other developed nations, have limited control over local taxation and, as a consequence, rely, by comparison, disproportionately on central Government funding. Given the level of UK central Government control over local spending and over local taxation in England compared to other developed countries, it is entirely reasonable for local areas in England to aspire to greater local control over the money raised from their areas and spent locally. The key question is what to do about this aspiration: specifically, whether England should put in place a programme of fiscal devolution to local authorities and, if so, how it should go about the task. (Paragraph 18)

Devolution to Scotland and Wales

3.  The UK Government is in the process of granting substantial fiscal devolution to Scotland and Wales. Ministers have therefore accepted the principle of fiscal devolution from Whitehall. This prompts the question, if such powers are considered justified and workable in Scotland and Wales, why not in England? Greater Manchester and Greater Birmingham each have a larger GVA [Gross Value Added] than Wales. London has a larger GVA than Scotland, Wales and Northern Ireland combined. When the changes for Scotland and Wales take place, England's local authorities will be left in an increasingly anomalous position, with a little more responsibility for spending than they have now but much less control over taxation than the Scottish Parliament and the Welsh Assembly. (Paragraph 21)

Spending decentralisation and fiscal devolution

4.  The process of devolution, if it is to be meaningful and effective, must include more than decentralised funding streams spent in local authority areas. Fiscal devolution provides enhanced local autonomy. Without it, local authorities will be agencies of central Government, focused in large measure on the requirements set by the funder, central Government, and acting within spending constraints set by Whitehall. That said, fiscal devolution and decentralisation, through place-based funding, are mutually reinforcing policies. Taken together they would give local areas greater control over spending and allow policies on growth and public service reform to complement each other. (Paragraph 25)

Fiscal devolution and economic growth

5.  We conclude that there is evidence of at least an indirect connection between fiscal devolution and growth. There is also evidence that fiscal devolution—as part of a package of wider decentralisation—would encourage greater economic growth across England. The Government has, through its own business rates retention scheme, accepted the logic behind this. Putting a wider range of tax and borrowing powers into the hands of local politicians simply extends this logic. London, already in the vanguard of UK growth, would not be pressing for devolution if it was not to its advantage. Placing power in the hands of other areas, too, would provide an opportunity to contribute to a more balanced economy. Cities and their wider regions have the most potential to drive growth. (Paragraph 28)

Enhancing democracy

6.  Fiscal devolution presents an opportunity to improve accountability, to hold local politicians to account for their successes and failures and, therefore, to improve democracy. By giving politicians outside Westminster the responsibility for raising, as well as spending, money locally, fiscal devolution would bring decisions on how that money is generated and spent much closer to local people—and make those who make such decisions much more visible. This would enhance the standing of local democracy and, by extension, democracy throughout the country. Enhanced local democracy offers the best possibility of a step towards addressing the challenges of the wider democratic deficit caused by the over centralisation of England. (Paragraph 30)

Committing to the principle of fiscal devolution

7.  The point has been reached for the Government (and policy makers in other political parties) to make it clear whether they are committed in principle to larger-scale and more comprehensive fiscal devolution in England. We are, and we believe they should be too. (Paragraph 32)

8.  With a clear national commitment to the principle of fiscal devolution local authorities working with central government would be able to produce more detail on how such devolution might work in their areas. The Government is rightly concerned about deficit reduction and whether fiscal devolution will have a detrimental effect on the rest of the UK. However, the Government must plan beyond the next few years and the present financial constraints. A common agreement to the principle, combined with a measured approach arranged between local and central Government, including initial devolution to a small number of areas, should allay those concerns. (Paragraph 33)

Equalisation and redistribution

9.  The new system of local government finance introduced in 2013-14 appears to have broad, but not universal, acceptance among local authorities. It was an improvement on previous arrangements but its operation still causes some concern. Significantly, it recognises the equalisation of needs and resources at the outset but thereafter incentivises local growth and provides some autonomy, albeit with limits on "excessive" gain and untoward loss in any one area. We refer later in this Report to these limits, the precise nature of which should be agreed between central and local government. (Paragraph 40)

10.  Through the Business Rates Retention Scheme, England has a system which balances equalisation and incentives for local growth. It provides a useful signpost for further fiscal devolution. First, it was set up on the basis of an assessment of need and resources. Second, there is a period of stability without further equalisation and redistribution, to provide an incentive to local authorities to increase and retain revenue, and, third, it is predicated on periodic re-assessments of needs and resources—the first will be in 2020. For further fiscal devolution local and central Government will need to take the model and develop it to establish an agreed approach. We therefore consider that similar arrangements, incorporating equalisation, should feature in any process of significant fiscal devolution, which we expect a limited number of local authorities to pursue initially. This will ensure a degree of fairness to begin with, balancing needs and resources with incentives to improve the local economy. If fiscal devolution does not include these principles, it could become a system in which the winner takes all. (Paragraph 45)

11.  We do not consider that a putative general uplift in taxes such as income tax and corporation tax would provide a satisfactory redistributive arrangement under fiscal devolution to areas outside London. First, it is likely to be difficult to identify and quantify. Second, the use of the yield from these taxes will be subject to the Government's competing priorities, including deficit reduction. Third, under current Treasury rules, it would count against the Total Managed Expenditure limit, the control on gross UK spending, and so either the Government would have to raise the limit or offset it with a reduction elsewhere. We conclude that such an approach, on which we received no detailed costings or calculations, is unlikely to command support (Paragraph 47)

12.  London's stamp duty yield increased by 85% between 2009-10 and 2012-13—dramatically more than any other area, including the Core Cities. By any objective measure, London's relative spending requirements could not have increased by 85% over the same period. Its yield per head of population was also considerably more than elsewhere. If a similar increase in stamp duty yield, or indeed in business rate yield, occurred in future, the question whether a local area was solely responsible for it, or the beneficiary of a windfall due to national economic circumstances, would need to be addressed. In our view there has to be a levy on disproportionate tax yield growth. (Paragraph 49)

13.  We conclude that for a system of fiscal devolution to balance equalisation and incentives it has to: start with an assessment of need and resources; have a mechanism for reallocating disproportionate tax yield growth; and include periodic reassessments. The operation of the arrangements will be for agreement between local and central government but we recommend that before fiscal devolution take place in an area:

a)  the negotiations for the package are carried out on the basis of a current assessment of need—either the 2013-14 assessment or a subsequent reassessment;

b)  negotiations take place on the basis of an up-to-date assessment of projected income from the taxes to be devolved up to the next reassessment;

c)  the arrangement would operate by offsetting grants and support paid by central Government for local authority control of taxes;

d)  the parties agree an excessive rate of increase in the yield of the devolved taxes above which a levy will apply; and

e)  the parties acknowledge and agree that a reassessment of need and resources will take place after specified periods. (Paragraph 56)

14.  We make no detailed recommendation on the levy beyond that, although it should be part of the arrangements for fiscal devolution, it should only come into operation in exceptional circumstances. It should not be set so low as to stifle dynamic local authorities' attempts to stimulate economic development but should aim to capture windfall taxes. (Paragraph 57)

15.  The levy will be derived from taxes devolved to local government. We recommend the levy from disproportionate growth in yield be held in an account by the Government. This should be ring-fenced and, by law, protected for use as a fund to provide a safety net for an area facing a significant and uncontrolled revenue shortfall, but explicitly exclude under-performing authorities. It should also be available to be redistributed to all local authorities. As is the case now, we would expect provision from other funds met from general taxation and disbursed to local authorities also to be available. In addition, specific grants should be targeted at low-growth areas, and local authorities should control how that money is spent. (Paragraph 58)

16.  If more powers were devolved, associated funds would have to be transferred from central Government. In the case, for example of the Work programme, which will inevitably operate in areas of high need, such transfers will enable further redistribution and achieve a strong match of resources to need. (Paragraph 59)

17.  On the reassessment, we recommend that the Government legislate for such an assessment to take place every 10 years. This would ensure the process actually takes place, and local authorities should be clear from the outset that it is an integral part of the process of fiscal devolution. On the reassessment process, we recommend that it be informed by the advice of an independent body, with responsibility for the assessment of needs and resources and the determination of apportionment between local authorities, but with the Government determining the national totals of resources for England, and with precepts for major capital projects in devolved areas excluded. This would ensure the process was not only fair but seen to be fair. We recommend that the Chair of the independent body be subject to a confirmation hearing with this Committee. (Paragraph 60)

18.  The reassessment should allow local authorities to keep a substantial proportion of the improvement since the previous assessment. It should not reward those areas that have made no effort to grow. We consider that a system incorporating the arrangements we have outlined would be fair and make it sustainable in the medium and long-term. It would prevent any area being automatically advantaged—or disadvantaged—at the outset and instil confidence in those areas that might not be in the first wave of fiscal devolution. (Paragraph 61)

Definition of areas for fiscal devolution

19.  The first test for areas seeking to assume more control over local property taxes and enhanced borrowing powers is that they are able to demonstrate how their particular unit functions as an economic entity. They may cut across administrative boundaries and are likely to be geographically large in scale. We see merit in starting with an existing model. Combined authorities provide one potential example. But such areas could include and, in some cases already do include, large cities, smaller cities and counties. In that sense fiscal devolution would not be restricted to any one type of area, capital city, Core City, Key City or county or combination. It is potentially appropriate for a range of areas that contributed evidence to this inquiry. (Paragraph 67)

20.  In any consideration of functional economic area, and of those that might "go first" in any process of fiscal devolution, local and central Government should bear in mind the influence of London on the economic performance of those closest to it. Balanced economic growth may not require devolution to multiple areas. Smaller areas with good links to larger devolved areas, for example, might benefit from fiscal devolution without needing similar powers themselves but this should not stop smaller areas acquiring fiscal devolution if it is appropriate and they can satisfy the necessary conditions. (Paragraph 69)

Criteria for securing fiscal devolution

21.  We conclude that an authority or group of local authorities seeking fiscal devolution must be able to demonstrate: fiscal competence, which would include the prudent management of borrowing; a capacity for strategic planning and decision-making leading to economic growth; clear plans as to what they would do with their enhanced powers, including how they would cope with an unplanned and significant change in forecast revenue; and, importantly, an appetite to make them work. Given the Government would test whether any further transfer of powers supported deficit reduction, local authorities will need firm, costed proposals. (Paragraph 71)

Governance and accountability

22.  We wish to ensure fiscal devolution does not stall due to ongoing discussions about governance. But we are clear that there must be a requirement on local authorities seeking fiscal devolution to demonstrate a commitment and an ability to deliver on the principles of openness, public accountability and scrutiny, which should underpin all decentralised governance arrangements. No single model of governance had a monopoly on these attributes, however. In the combined authority model, members are drawn from the same tier of governance and have an equal stake in it. Any decision on governance should ideally be made locally. If the Government legislates to enable combined authorities to introduce directly elected mayors, local authorities must consult local people on such a change in a referendum. (Paragraph 77)

Redistribution within devolved areas

23.  We consider that local authorities putting forward proposals for fiscal devolution should be able to show equitable and fair arrangements for the disbursement of tax yields within the devolved area and, similarly, for the sharing of the proceeds of growth generated by fiscal devolution. In addition, any area seeking devolution will have to have in place transparent governance procedures for redistributing revenues within its boundaries. (Paragraph 79)

Local referendums

24.  We see no compelling reason for a referendum on fiscal devolution. (Paragraph 81)

The speed and spread of fiscal devolution

25.  We conclude that in the short-term at least fiscal devolution encompassing a range of taxes and enhanced borrowing powers is likely to be implemented successfully by a small group of local authorities, particularly those that have already secured decentralisation packages or shown a strong interest in fiscal devolution, such as London and some Core Cities. This would be nothing new: local government in England has for a long time been structured asymmetrically and developed at different speeds. An incremental approach has more chance of gaining acceptance from the Treasury, which has a tendency to be cautious on fiscal matters. It would also allow those who want to make progress to move forward faster. (Paragraph 84)

A framework for devolution

26.  While we are clear that the decision whether or not to seek fiscal devolution must rest with local authorities, the Government has a crucial role in facilitating the development of the arrangements, not least in respect of the redistribution considerations discussed earlier. Ministers should, through negotiation with local authorities, expand the range of powers available to all levels of local government as part of a framework that ultimately includes fiscal devolution. As part of a commitment to create balanced opportunities for growth, the Government should in this framework spell out the range of powers that would be available to different levels of local government. For large and small cities and counties a framework would provide an incentive to make plans for enhanced collaboration and, if they wished, to pursue more meaningful, fiscal devolution in the future. The framework should set out what powers could be available to local authorities over the next 10 years. (Paragraph 88)

27.  We envisage that the framework as well as setting out a range of devolutionary powers would contain terms and conditions that the local authorities seeking substantial fiscal powers would have to meet. These include an agreed approach to equalisation and redistribution, and being able to demonstrate that the devolved area functions as an economic entity, has a strategic approach to planning and delivery and includes good governance. (Paragraph 89)

Enhanced powers for individual authorities

28.  For all local authorities, the framework should make provision for local control over spending on a wider range of services and for them to expand or change the range of services decentralised over time. This arrangement would reassure those areas not wishing to proceed with substantial fiscal devolution that tailored powers—in particular, over how money was spent locally—would be available. Decentralised powers, such as the Work programme, should be accompanied by an appropriate amount of decentralised spending to fund such initiatives. (Paragraph 91)

29.  Any process of decentralisation that links to budgets allocated to places rather than policies will require further changes in the attitude and organisation of central Government. Its structures need to mirror more readily those being developed in local government, so that budgets can be developed based on the spending priorities of local people, not national Departments. The framework needs to be able to assist individual local authorities which are primarily seeking decentralisation of spending programmes such as the Work programme with, if necessary, an option for limited fiscal devolution allowing the authority to raise low-yield local taxes, such as on landfill or tourism. (Paragraph 93)

Enhancing the role of collaborating authorities

30.  We recommend that, as part of any framework for devolution of further powers to all local authorities, including fiscal devolution initially to a limited number, the Government enhance the powers available to combined authorities. This would align their powers more closely with those available to the Greater London Authority, give them a greater strategic role and enable them to prepare, if they wish, for more significant fiscal devolution in the future. These enhancements would include: control over place-based budgets; powers to borrow for non-transport purposes, to become precepting authorities and to finance investment based upon the proceeds of GVA growth; and strategic housing and planning responsibilities, including the power to oversee local authorities' duty to co-operate. (Paragraph 97)

31.  We recommend that the Government bring forward as soon as possible its planned legislative reform order, to allow authorities that do not have contiguous boundaries to join combined authorities. Similarly, Government should bring forward legislation, to allow a district or groups of districts that form part of a locally agreed functional economic area to have full voting rights. The full powers of the combined authority should then extend to cover such districts. (Paragraph 99)

Fiscal agreements

32.  Local and central Government should devise a means of enabling those authorities covering functional economic areas that wish to assume significant fiscal devolution to enter into negotiations with the Government. The London Enterprise Panel has made such a proposal within the existing mechanism of the Government's Growth Deals. If the Growth Deal route is feasible, those local authorities that wish to should take the initiative and, subject to an agreed equalisation and redistribution mechanism, make their own proposals within the framework arrangement we urge the Government to develop and adopt. (Paragraph 102)

33.  In responding to our report we ask the Government to confirm whether the Growth Deal route with, if necessary, the exercise of provisions in the Localism Act 2011 to transfer powers is a vehicle for comprehensive fiscal devolution. If this is the case, we would expect that by this route similar powers should be made available to further authorities in due course. If it is not, we recommend that the Government bring forward primary legislation to enable fiscal agreements to be negotiated. In addition, we recommend that within six months after the next general election the Government and local authorities agree and set out the arrangements by which certain areas might secure a long-term fiscal agreement. (Paragraph 104)

34.  Central Government rightly has to ensure any introduction of fiscal devolution is done effectively and efficiently. Where an authority or group of authorities demonstrate that they meet the principles we outlined in the previous chapter and come within the framework we set out above, there should be a presumption in favour of fiscal devolution. In our view it is essential that the process develops on from City Deals which, despite their considerable benefits, have been characterised as bureaucratic, placing local government in the unequal position of supplicant. (Paragraph 107)

35.  To assist the development of the process we make two recommendations. First, where agreement between central Government and local authorities cannot be reached, there should be a process of impartial evaluation. We see a role for the independent body, described earlier in our report, to advise. Second, we recommend that local government examine whether a small group of strategic authorities, selected by their peers and with an agreed approach based on the principles we have outlined, present to the Government joined-up proposals for fiscal devolution to several areas in one go. In our view this would provide a collaborative approach, develop the framework and act as a way forward for authorities in future. (Paragraph 108)

Constitutional issues

36.  Wider questions about the role and place of local government in our constitutional settlement should not delay fiscal devolution. But implementation of this significant change will require appraisal. We therefore recommend that towards the end of the next Parliament a comprehensive assessment of the operation of any fiscal devolution and decentralisation take place. This assessment might be a starting point for a revised constitutional settlement. On this issue we welcome the Political and Constitutional Reform Committee's existing work, which we expect will inform any such revision. (Paragraph 111)

Control over business rates

37.  We consider that restoring the ability of local authorities to set the business rate multiplier to meet local circumstances, combined with the power to vary the rate for specific projects and categories of business, will provide authorities with a key lever in stimulating and fostering local economic growth as well as guaranteeing that they work closely with local business. It will ensure that local authorities have to consult with, and focus on the needs of, local business. We see a logic in the same multiplier being set across the devolved area. We also recognise, however, that there may be a concern about the potential for excessive increases in the multiplier. One option to constrain that would be for local authorities in a devolved area to be limited to increasing business rates by no more than the increase in the average council tax in the devolved area. The operation of the business rates levy would need to avoid penalising authorities that, after full consultation with local business, increase their multiplier. (Paragraph 119)

Business rates revaluation

38.  We detected little clamour for transferring the revaluation of business rateable values to local areas as part of the process of fiscal devolution. The main concern has been the delay in holding national valuations. The time has come to set a timescale for an independently commissioned national business rate revaluation and, to ensure it happens, for it to be set in primary legislation without the facility to change the date through secondary legislation. We recommend it takes place every five years, beginning in 2020, and within six months of a general election. Revaluation could then coincide with the resetting of the Business Rates Retention scheme, to which we see a strong link. Subsequently, it could coincide once every 10 years with the resetting of any assessment of relative need among local authorities, administered by the independent body to which we have referred. In our view such a process would ensure not only regular and fair equalisation and redistribution of resources, but predictability, allowing local authorities to plan ahead. (Paragraph 121)

39.  In sum, the independent body we recommend would introduce a substantial degree of objectivity into local government fiscal management. Specifically, it would be responsible for: assessing relative needs and resources every 10 years, starting in 2020 when the BRRS is rebased; evaluating proposals when a fiscal agreement cannot be reached; and commissioning the independent revaluation of business rates and council tax every five years, starting in 2020. (Paragraph 122)

Council tax

40.  We found across local government in England, if not a demand for full fiscal devolution in all areas, a strong appetite for greater fiscal responsibility. The Government is going to have to learn to have confidence in local authorities in the same way it has confidence in the devolved legislatures. For a start all local authorities should be trusted with responsibility for setting the council tax rate in their areas. We consider that all local authorities should have the freedom to set their local domestic property tax rates. There is no hard and fast rule that they will automatically use this flexibility to increase their council tax rates, but if they do they should be free to do so and then test local people's appetite for it, as they do for a range of decisions, on local election polling day. (Paragraph 125)

41.  Council tax rates are based on valuations made a generation ago, and those in the highest-banded properties are limited to paying no more than three times the tax of those in the lowest. The pretext for deferring revaluation—that it would increase most people's council tax—is erroneous if the revaluation is carried out properly and is fiscally neutral overall locally. Therefore a revaluation of itself must not affect a council's income. If nothing is done, there is a risk that the whole system will eventually collapse or, like domestic rates, have to be replaced. If there is a case for a revaluation of business rateable values—last carried out in 2010—the case for revaluation of domestic rates must be greater. We recommend that Government introduce legislation to ensure, for the purposes of Council Tax, domestic properties are revalued every five years. (Paragraph 128)

42.  There is also scope for further flexibility. We conclude that devolved areas—which we envisage, in the first instance, would be London or combined authority areas—should be given the power to introduce new council tax bands at the top end of the scale and to split existing ones. The national revaluation will therefore need to be precise, citing a property's price not just its band, so that any devolved local authorities wishing to introduce a new band are able to include the appropriate properties in it. Doing so might go some way to increasing fairness in the distribution of the tax burden locally. (Paragraph 129)

Stamp duty

43.  The yield from stamp duty in London and the South East is a fiscal anomaly in England. Full fiscal devolution of the tax in London could deprive the Exchequer of a significant amount of revenue that could be used elsewhere and for different purposes. As we have set out, to meet the principle of equalisation, it could be devolved in London subject to a levy requiring transfer of duty above an agreed threshold to the Exchequer. On the basis of this requirement, which could apply also to other devolved authorities, we recommend that stamp duty be included in the fiscal devolution framework. In addition, we would expect the Department for Communities and Local Government to monitor and review lessons that can be drawn from devolution of stamp duty in Scotland to inform its introduction in England. (Paragraph 131)

Other taxes and fees and charges

44.  Arrangements have been developed to allow the devolved nations to introduce new taxes, as well to take control of business rates, stamp duty and, in the case of Scotland, part of income tax. As we expect fiscal devolution in England would in the short term be restricted to a handful of areas the opportunity is available to replicate some of the Scottish and Welsh arrangements in areas in England with the capacity to take advantage of these resources and to implement projects with the potential to generate good returns on investment. At the minimum fiscal devolution should empower these authorities to introduce relatively low-yield taxes. A range of suggestions includes betting taxes and landfill and hotel duties. (Paragraph 134)

45.  Recognising what is happening in Scotland and Wales we see a case in the long term for examining the apportioning in a similar manner to Scotland a percentage of income tax or VAT to groups of authorities covering significant geographical areas in England. We recognise, however, this is an extension of the fiscal devolution on which we have not taken detailed evidence. We would not want consideration of devolving income tax and VAT to hold up fiscal devolution of property taxes, but Government and local authorities should evaluate the proposals. Evaluation of devolution of these taxes could and should form part of the comprehensive assessment of the operation of any fiscal devolution and decentralisation we have recommended to be carried out after the first wave of fiscal devolution has been implemented and which we describe in the previous chapter. (Paragraph 135)

46.  We recommend that as part of a devolution framework and in fiscal agreements the Government provide for the relaxation of the current controls on the levels of fees and charges local authorities can charge for services and the purposes to which the income generated can be disbursed. (Paragraph 137)


47.  One key aspect of fiscal devolution is its focus on stimulating economic growth. Local authorities in England wanting to grow their economies may therefore need to borrow to invest. Given the Government's focus on deficit reduction, however, we recognise that a general relaxation of the rules on borrowing is not appropriate at this stage. But those local authorities that negotiate a fiscal agreement with the Government will have had to demonstrate strategic financial management and competence. Such authorities should therefore have access to greater and more flexible borrowing powers—for the purposes of capital investment in projects clearly and quantifiably designed to stimulate growth. Enhanced powers should remain within the stringent prudential borrowing code, however, ensuring authorities have the means and capacity to meet their annual borrowing costs. This would allow them to pursue the innovative approach to borrowing that the Government has, commendably, negotiated with Greater Manchester, allowing it to benefit from increased tax take. Greater local revenue streams would enable local authorities to borrow to invest and so increase their tax yield and reinvest in further schemes. Devolved areas should have the power to determine what TIF projects to introduce without the need for Treasury approval but within the prudential borrowing code. Given the limited number of projects to which this would apply, this should be achievable in practice. (Paragraph 140)

48.  We reiterate our recommendation in a previous report that the Government lift the cap on local authorities' borrowing for housing. We believe this should be universally applied. (Paragraph 142)

National fiscal implications and management

49.  Growth in one area of England does not mean reduced growth elsewhere. Fiscal devolution focused on local growth may involve increased local spending financed from local or national taxes, borrowing or voluntary contributions through business levies. Under the current rules limiting gross expenditure, this would have to be offset by a reduction in expenditure. Applying that requirement to infrastructure projects would be unjustified. While we accept that all governments have to manage the resources taken by the public sector, we think it would be regrettable if the control system were used to hobble fiscal devolution in England. It has not obstructed fiscal devolution to Scotland and Wales. We recommend that the Government clarify how the controls on UK public expenditure will apply to fiscal devolution to Scotland and Wales and whether similar arrangements could be put in place for local authorities in England. (Paragraph 146)

50.  There are perhaps three ways in which the problem could be addressed. First, local authority expenditure on capital projects designed to stimulate economic growth could be taken out of the control total. It would be distinguishable by the ratings agencies, and would be used to invest in growth projects, a potentially virtuous circle. Second, the Government could agree to raise Total Managed Expenditure to accommodate expenditure devolved to local authorities in England. A third way would be to decrease central Government spending. (Paragraph 147)

51.  No Government having accepted fiscal devolution to Scotland and Wales should allow the Treasury's fiscal control system focused on gross expenditure to require every additional pound of additional public expenditure in Scotland and Wales to be offset pound-for-pound by a reduction in spending in England. Nor should such a perverse arrangement apply to additional public expenditure determined under fiscal devolution in England. Where such expenditure is fully funded by increased local taxes and charges a gross control of public expenditure cannot be justified. Fully funded expenditure does not increase the deficit. (Paragraph 148)

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