Learning to let go in the Midlands: next steps for fiscal devolution
26 October 2016
As a new dad, I’ve spent a lot of time thinking about the relationship I want to have with my daughter as she finds her way in the world. Having the faith she will think things through and learn calculated risks herself, with the help of rewards, praise and incentives must surely beat excessive paternalism - even if it means surrendering some control.
It seems I am not the only one grappling with such a dilemma. Building on the momentum established by the previous administrations, the May government has a once in a generation opportunity to reset the tone for central government’s relationship with local government. Which way to turn? Continue handing out ‘gold stars’ via off-the-shelf devolution deals and ‘treats’ through infrastructure funding or ease up the parent-child control and empower localities to deliver, enable, and finance local services innovatively and independently?
As ever the picture is not this simple, as set out lucidly in a new IFS report, ‘A time of revolution? British local government finance in the 2010s’, published this week with our support.
The report is the first of a series analysing trends since 2010 and looking forward to key funding issues, from the abolition of general grant funding to the complexities of 100% business rates retention and beyond. It presents an insightful analysis of improvements that have been made in recent years and areas where more focus is needed. What is strikingly clear is that finding solutions that are ‘fair’ for all and avoid unintended consequences is a Gordian knot and clear trade-offs are involved: ‘While decentralisation can provide additional policy levers and financial incentives, the trade-off is greater financial risk and potentially greater funding divergence. Whether those risks are worth taking on depends on just how powerful the policy levers and incentives are’.
To date, 100% business rates retention has attracted most attention when it comes to fiscal devolution. Our work supporting the West Midlands Combined Authority (WMCA) to weigh up the pros and cons of entering a 100% retention scheme pilot has brought home just how significant and complex the changes are. To start with, there are challenges around building a robust local evidence baseline from which to make plans. The IFS work highlights the national unevenness of the current arrangements, but even at a local level there are challenges in understanding common starting points, let alone the impacts of changes.
Nevertheless, in the region it is clear that business rates reform must be the first unsteady step on the path to true fiscal devolution. The Chief Executive of the WMCA has been increasingly vocal about the need to have ‘a well-stocked toolbox to hand, from which we can choose the tool that gets the job done’. Momentum is growing behind talk of a ‘West Midlands Exchequer’ with greater borrowing powers, alternative sources of local funding and better leveraging of the existing funds and assets. Supplementing the London Finance Commission with local ideas, the toolbox is filling up:
- ‘City bonds’ issued by regional mayors;
- New schemes to direct pension fund investments locally;
- Local tax-raising powers;
- Assigning a proportion of taxes such as income tax and VAT;
- Regional wealth funds; and
- Greater HRA borrowing and 100% right-to-buy receipts.
Taken together we are truly talking about a fiscal revolution. And of course, developing independence isn't just a permissive process, it can be asserted too. The toolbox that the West Midlands wants to build reflects what’s happening in other areas too. If central government keeps saying no, will we see teenage style acts of rebellion from the new mayors?
The benefits of this radicalism, especially in a post-Brexit era of passing down powers, are clear. Retaining a higher proportion of local tax revenues derived from a wide variety of different local revenue streams builds in more flexibility, resilience and incentives to grow, which are all vital for long-term public service reform and growth. But let’s not forget the risks that need to be managed; greater fiscal devolution will only work if we solve the riddles of insurance, equalisation, incentivisation and additional responsibilities.
For now, there are as many questions as answers when it comes to fiscal devolution: What more can local government as a sector to demonstrate its readiness to take on these risks? Can all places be expected to move at the same pace? Is government ready to cut the umbilical cord and are councils ready to throw away their safety blanket? While we may not yet know the length or direction of the road to greater fiscal independence, it’s clear that there’s no turning back and these are issues that will need to quickly be addressed.
We’ll be exploring these issues further with the IFS through a major new programme of research on local government finance.