ECONOMIC GROWTH

Beware the allure of fiscal freedoms

Without boosting local government, plans for financial devolution at a time of such national economic fragility need to be viewed with caution, says Charlotte Alldritt.

Both Labour and the Conservatives claim they are best placed to deliver the growth required to get the UK out of its current economic malaise. And both are facing calls for more devolution to help achieve that aim.

The recent trailblazer deals in Greater Manchester and the West Midlands have the potential to forge a new relationship between central and local government. Labour has promised to go ‘even further' than the Tories. Fiscal devolution – handing places more powers to tax and spend money locally – is seen by many as a natural next step.

At the Centre for Progressive Policy (CPP), the think-tank I lead, we know that any future government intent on delivering fair growth will have little choice but to increase public spending. The CPP is exploring the options for this in a major report to be published this autumn, and fiscal devolution is one of the areas our research will explore, alongside national tax and spending policies.

While international evidence on the impact of fiscal devolution on driving growth and reducing inequalities is mixed, there are undoubtedly clear advantages for England in moving away from our extreme centralised position. Local leaders have better knowledge of their areas. Greater coordination across policy levers at a local level could lead to more integrated public services. A move away from our current system of ring-fenced, relatively small-scale funding pots could support better long-term strategic planning.

However, as CPP explored in a recent essay, given the current state of the UK economy and local government capacity, we must consider how equipped places currently are to absorb and benefit from additional tax raising powers. Without bolstering local government, plans to devolve the tax base at a time of such national economic fragility need to be viewed with caution as much as an eye for opportunity. We've been here before when George Osborne devolved with one hand and stripped away local funding with the other.

Austerity slashed local government spending as the complexity and fragmentation of the sector's funding increased. Between 2010 and 2018, at least 177 different funding pots were introduced. Not only did these fail to make up for the cuts, but the costs of bidding added to the strain – particularly on places with the least capacity. Ironically, despite a smattering of fairly similar devolution deals across the country during this time, the gap in places' ability to design and implement long term, strategic interventions actually widened. In terms of institutional capacity, Greater Manchester and the West Midlands signify the exceptions, not the rule.

Now, on almost a daily basis, another local authority warns of a section 114 notice. As places struggle to fund statutory services such as waste collection and social care, there are legitimate questions about how they take on additional tax raising powers now – however great the hope of more resources longer term.

While neither party is arguing for a ‘big bang' approach to fiscal devolution, neither is making the case for significant investment to level the playing field. Unfortunately the regional economic inequalities that make devolution so compelling are the same that necessitate safeguards to ensure fiscal devolution can reduce rather than exacerbate them. The emerging national debate looks to local fiscal devolution when other big national options – such as VAT, income tax or capital gains – are being ruled out in the run up to the General Election.

We must be honest about the political and economic tradeoffs that are equally (and sometimes more) relevant at a local level.

That said, there are some quick wins where Government could strengthen devolution without extending full fiscal powers. As the CPP has long argued, multi-year financial settlements for local government should fast be introduced, giving places greater certainty over future revenue streams and enabling longer-term economic planning. Greater powers to pool existing budget sources could also have a similar effect, as seen with a recently announced pilot that will allow 10 local authorities to pool three existing local growth funds.

Whoever wins the next election must take a serious look at local government capacity and financial sustainability. Otherwise, the allure of greater fiscal freedoms risks hanging an already beleaguered local government sector out to dry.

Charlotte Alldritt is CEO of the CPP

@CentreProPolicy

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