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A fiscal crossroads for Labour

Will an incoming Labour government seize the initiative on fiscal devolution as a way of driving its productivity and growth missions? Dan Peters reports.

With just over a week to go until the General Election, thoughts are concentrating on what the anticipated Labour victory might mean for local government.

The economic headlines of Labour's campaign have been dominated by leader Sir Keir Starmer's commitment to boosting productivity across the country and shadow chancellor Rachel Reeves's vow that her party would increase growth.

What is less clear is how Labour plans to do this and what role local government might play.

Some believe Labour will fail to achieve its productivity and growth ambitions without rewiring the incentives for councils and combined authorities, such as by devolving powers to local government to retain a share of income tax.

James Browne, a senior economic policy adviser at the Tony Blair Institute for Global Change think-tank, which reportedly has extensive influence in Keir Starmer's Labour, said the system of local government finance was ‘broken' and is among those who have backed giving powers to the sector to raise additional revenue.

English local government currently has a tax base that is small, narrow and does nothing to encourage growth.

As the Centre for Cities think-tank puts it, councils receive ‘few rewards for improving the prosperity of their area'.

A key obstacle to changing this is, as outgoing Conservative local government secretary Michael Gove has described, the ‘institutional resistance' of the Treasury.

Browne, who used to work for the Treasury, recognises this, describing what would have been a ‘hard battle within Whitehall' to get something like income tax devolution through.

Professor Tony Travers, from the London School of Economics, questioned whether Labour would be radical enough to take on Treasury opposition.

He suggested the party would be ‘more inclined' to push forward with greater devolution of budgets, and reform the housing and planning system.

‘I think they would probably do other things first,' Prof Travers added.

Labour figures themselves question whether the party will do what is necessary on fiscal devolution in power.

Visiting professor at King's College London, Graham Allen, a Labour MP for 30 years who has backed local retention of income tax, said: ‘I think people can see the wisdom of this and they definitely see it in opposition. However, when that last vote comes in and they're going to be the Government they look at it in a very different way.'

Browne adds: ‘What you see is a great deal of caution from Labour at the moment. Labour has made some noises about whether to devolve more powers to local authorities, but I don't think they've done very much about devolution of taxes.'

A former Labour adviser explained the party was ‘wary' of any policy that could be used by its opponents to suggest it would raise taxes.

However, they added: ‘I do have optimism about devolving a proportion of existing national taxation such as income tax because I know that's the only way that devolution goes next.'

Chief executive of the Northern Powerhouse Partnership think-tank, Henri Murison, argued local areas needed to be ‘given a stake in the long-term' and fiscal devolution was ‘integral to that'.

The partnership has argued that 1p on existing employers' National Insurance should be retained.

Murison continued: ‘At the moment, Greater Manchester can make good investment choices but the Treasury sees the benefit in taxation. That shouldn't be how it works.

‘There's huge levels of support across the political spectrum. We're not necessarily arguing for new money.

‘As a party in opposition, Labour has sought to avoid any accusation that they are looking to raise taxes by stealth. In the course of an election campaign talk about tax is always going to get the hares running. If there is a Labour government, as the polls suggest, I think we will see the intellectual completion of the box that [then chancellor] George Osborne opened with devolution 10 years ago.'

Managing director of senior officers' group Solace, Graeme McDonald, said allowing the sector to retain a share of income tax sounded ‘radical in UK context' but was the ‘norm' elsewhere.

He added: ‘Sustainable finance is likely to be anchored not around new local taxes but assigned revenues from national taxation and the more predictable revenues they bring.'

What is clear is that Labour will have to put more flesh on the bones of its devolution policy – and soon.

Director of policy and research at Centre for Cities, Paul Swinney, said ‘more detail on what further devolution looks like is required immediately after the next election should Keir Starmer be the next inhabitant of 10 Downing Street'.

Labour certainly has an opportunity to use its mayors to help it achieve its missions for productivity and growth.

A paper by the Onward think-tank on how to realise the potential of England's mayors argued they should be given a ‘devolved portion of income tax in exchange for reduced central transfers'.

It read: ‘The amount of income tax paid is directly related to the success of a mayor's economic strategy, providing a clearer incentive to pursue economic development.'

If Labour fails to take devolution to the next stage by granting local areas more control over tax, its mayors are likely to quickly grow restless and probably won't remain quiet.

Keeping Labour's mayors happy may also be crucial in helping the party deliver on its economic policies – the success of which will determine whether Sir Keir lasts longer as Prime Minister than a single term.

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