Fiddly. Hodgepodge. Hard to see a clear economic rationale. Very little detail. Still waiting.
These are a (not entirely random) selection of the words my colleagues have used to describe the tax and spending plans set out in John Healey's first Budget. Dealt a difficult hand by the wars in Iran and Ukraine and global bond markets, he cobbled together money for a modest ‘cost of living' package, and some extra state-funded loans to businesses and first-time buyers. But it was hard to elicit an overall economic or tax policy strategy.
But there is one area where the Government has set a clearer direction of travel. In the ‘fiscal devolution roadmap' published alongside the Budget, the Chancellor set out a balanced approach to sharing tax revenues with mayors. Full details are to be confirmed in next year's Spending Review. But it's clear the system will allow areas to gain financially from growth, but with guardrails that cap the biggest falls in funding by squeezing the most rapid growth. These changes could be the most important long-term legacy from this Budget.
The business rates bunny
There was a rabbit – at least a baby one – to pull out of the hat. 100% of business rates will be retained by councils and mayors by the end of the decade, up from 50% across most of England now. Mayors will get 20% from April 2027.
In both cases, this extra business rates revenues will replace existing grant funding, and a system of redistribution (‘tariffs' and ‘top-ups') will continue to operate – so there will be no overnight winners or losers. But going forward mayoral authorities and councils will financially gain (or lose) more than now, if the quantity and quality of non-residential property in their patches increases (or declines).
Safety nets will stop revenues falling indefinitely, funded by levies on areas with stronger performance. So far so familiar for councils – although a slide pack leaked last month suggests these ‘levies' may be reformed to apply to all (not just some) councils and mayors, but only for growth above a certain point.
A targeted slice of income tax revenue
The bigger change coming down the road is the plan to share income tax revenues with mayors from April 2028 – by which time mayors may be about to elected in nine further parts of England. We're still waiting to hear just how much revenues will be shared, exactly which grant funding this will replace, and some of the technical details. But we know enough to work out and assess the Government's overall strategy.
Revenues will be assigned to mayors based on where people live. That is by far the easiest approach administratively, and provides a slightly different, complementary set of incentives to business rates retention: focused on the employment and incomes of people living in an area, rather than working in businesses premises in an area.
Mayors' shares will be based on revenue from the basic rate of income tax. That helps reduce inequalities in revenues between mayoral authorities (most of the difference in revenues between London and the north, for example, is driven by top taxpayers). It will focus mayors' incentives on boosting employment and the incomes of low-to-middle income taxpayers. But it will blunt their incentives to boost the earnings of people already earning over £50,000. And plans to exclude income from property, savings and dividends means mayors could lose out if more of their residents decide to move into setting up and running their own small incorporated business. Mayors could and should be given a share of tax on all forms on taxable income in their areas.
Redistribution: big pitfalls avoided but some rough edges
Even if based on just the basic rate of income tax, revenues will vary around the country. Like business rates, the Government therefore plans a set of redistributive payments akin to ‘tariffs' and ‘top-ups' to align the funding mayors will receive with updated assessments of their spending needs that it plans to agree by next year's Spending Review. Expect these spending needs baselines to be a highly contentious issue.
This system of baselines and redistributive payments will allow all mayors to gain (or lose) from the same share of future changes in income tax revenues going forwards – again like business rates.
The redistributive payments will be increased in line with average income tax revenue growth across all mayoral authorities. That means mayors will see their funding grow faster than average if their underlying income tax revenues grow faster than average – and vice versa. Like many of the decisions made by the Chancellor, this is in line with recommendations we made in a report co-funded by CIPFA prior to the Budget. It will stop areas with higher than average starting revenues from seeing their funding pull ahead even if they grow no quicker than average – a pitfall it would have been easy to fall into, not least because the business rates retention scheme suffers from this problem.
But there are some rough edges. There will be a safety net to stop the largest falls in income tax revenues, funded by a levy tapering down growth in areas that have seen strong growth in revenues. The roadmap leaves open how this will work but hints that the thresholds involved will be fixed in real terms rather than growing in line with average revenue growth. That means over time, the safety net will be further and further behind average revenues, and the levy will bind for more and more mayors. It's not clear to me that that's the right approach.
Rolling, rolling, rolling
Last but not least, income tax revenues will be subject to resets. But unlike the business rate reset this year, this will not be a cliff-edge reset. Instead it will be a rolling reset. Growth in any given year will be retained for 10 or 15 years, before being redistributed. This will stop areas that have had a few good years of growth from having permanently higher funding – as well as areas that have had a few bad years having permanently lower funding. But in doing so it does reduce the financial incentives to grow revenues somewhat – because eventually you'll lose the benefit.
That's why I term this a ‘balanced' approach: areas will retain growth for a period of time, but there will be guardrails against large and permanent differences in funding that unchecked might contribute to further divergence in performance. Some may want a stronger focus on incentives for growth, while others might prefer even more protection against losses and divergence. But the Government has nailed its colours to the middle ground mast.
Where next?
People will also have different views on the next steps in the fiscal devolution journey.
Apart from the tourism tax, there are no tax-raising powers for mayors let alone councils – just a share in the growth in revenues of existing taxes. The number of times the roadmap highlights that income tax rates will continue to be set centrally suggests there is no appetite to move quickly to tax-varying powers alongside revenue retention.
But the door is left ajar for a wider suite of tax revenues to be retained locally – if a case can be made that this will be administratively feasible and economically beneficial. And Andy Burnham's hobby horse, land value uplift capture, makes an appearance as something the Government is actively exploring. Taxing unoccupied land, changes to how business rates retention treats revaluations and – heaven forbid – regular council tax revaluation – could all play a role in meeting such an aim. Does the Government's vision for devolution extend to property tax reform too?
But with the Government's message to the public focused on a set of policies to slightly ease the cost of living – giving local government new tax-raising powers seems off the table.
David Phillips is head of devolved and local government finance at the Institute for Fiscal Studies
