As Government prepares to hand mayors a share of income tax and business rates, David Phillips of the Institute for Fiscal Studies tells LocalGov why England's regional finance reforms are modest by global comparison and what ministers still need to get right before the autumn Budget.
Plans to give metro mayors a share of income tax and business rates mark a significant shift for English local government. But according to David Phillips, Head of Devolved and Local Government Finance at the IFS, they're far from radical when set against how other countries fund their regions. ‘England does look different to most countries,’ he says. Both the share of funding going to regional government and the range of taxes it can raise are unusually narrow by international standards. Powers here are largely confined to economic development, skills, transport and housing – partly because English councils already handle responsibilities that sit with regional government elsewhere, and partly because England keeps big-ticket items like health centralised.
Phillips says other countries typically give regional and local government a broader basket of taxes, not just property taxes like council tax and business rates. That matters because it gives areas more control over their overall budgets and offers a form of insurance: if one revenue stream dips, another may hold up better. There's no single template to follow, he stresses, but England's direction of travel, including moves on tourism taxes and revenue assignment for income tax and business rates, edges it closer to the European norm, even if it stops well short of full devolution.
Manchester and the West Midlands: ready for the risk?
The Government's timetable – business rates devolution from April 2027, income tax from April 2028 – looks ‘eminently feasible’ for business rates, Phillips says, since a retention system is already in place. The complication is that Greater Manchester and the West Midlands already keep 100% of local business rates. Giving mayors a bigger cut means taking it from councils, who can initially be compensated by increasing their grant funding accordingly.
The bigger question is what happens in later years. If mayors take a larger share of future growth, councils could find themselves worse off than expected, and Phillips predicts ‘a bit of a barney’ between mayors and councils as a result (although, of course, revenues could also fall rather than grow in future).
He's clear this doesn't need to be all-or-nothing. Government can calibrate how much financial risk and reward mayors take on, starting small and increasing it if areas prove they can manage it. ‘You could start off with relatively less risk and reward, see how it goes,’ he says, ‘and then if they're responding well... you up the amount of skin they have in the game.’
Designing equalisation that doesn't punish poorer areas
With income tax revenue per person more than 3.5 times higher in London than the West Midlands, fair equalisation is critical. Phillips explains that full equalisation is possible at the point of introduction – no area needs to gain or lose on day one. The risk lies in what happens afterwards. If redistribution payments between richer and poorer areas are fixed in cash terms, they shrink in relative value as revenues grow nationally, letting wealthier areas like London pull further ahead. The fix, he suggests, is to uprate redistribution in line with average national revenue growth – preserving fairness while still rewarding individual areas that outperform the average.
Phillips also flags a technical decision with major consequences: how income tax is assigned. A flat percentage of all revenue would expose mayors disproportionately to the volatile, unequal top end of earnings. A flat number of pence in the pound across all tax bands, he argues, spreads incentives more evenly, reduces exposure to Government policy changes, and could pave the way for genuine local rate-setting powers in future. ‘I fear they might go down the easy one to communicate,’ he warns, ‘rather than the better one in terms of operation.’
What non-mayoral councils should push for
For areas without a mayor, Phillips says there are two live options: push for a mayoral model, since Government appears sceptical that accountability works well without one, or press ministers on whether alternative governance – such as a Greater London Assembly-style elected body – could unlock similar flexibilities and funding.
The Budget decision that matters most
Asked what Government must get right before the autumn Budget, Phillips returns to the two themes running through the conversation: designing an equalisation system that balances redistribution with genuine incentives to grow, and choosing the right mechanism for assigning income tax. Get either wrong, he suggests, and Government risks entrenching regional inequality or handing mayors a system that's simpler to explain than it is to operate fairly.
