How to draw the fiscal devolution roadmap

We are promised a fiscal devolution policy 'roadmap' from Treasury. Here's why there are so many wrong turns - and how we can design around them.

‘Manchesterism’ is, for obvious reasons, on a lot of people’s minds right now. But one important aspect of the Manchester economic model… never quite happened.

This gap in Manchesterism tells us something important about how difficult it can be to drive regional growth in England, and why real fiscal devolution would be revolutionary.

A lesson well earned

In 2012, a good idea seemed to be on the cusp of realisation in Manchester. It was called “earn back”. Someone had noticed that there were no straightforward ways to incentivise Greater Manchester to invest up front in growing its own economy.

Earn back was the solution. If Greater Manchester used local investment in infrastructure to generate additional growth, it would be allowed to recover a share of the extra national tax revenue that flowed back to the Exchequer.

Two years went by, and nothing happened. This wasn’t because Manchester lacked growth plans. Its city deal described a pipeline of up to 80 infrastructure, connectivity, or commercial projects.

The delay was because Treasury spent two years trying to invent a bespoke exception to the usual fiscal system and deciding how to calculate the additional tax revenues.

By Autumn 2014, Whitehall had given up. The plan switched to something much simpler. If GM could demonstrate that its investments were impactful, then central government would give it an additional capital grant.

But another conditional grant is not fiscal devolution — if anything, it is a reinforcement of fiscal centralism. This is how alien the idea of even rudimentary fiscal devolution is to England. There is no normal way to let a region invest in its own growth and retain a share of the return. Two wasted years of effort to make a limited example work within the existing system is the result.

Fiscal devolution in a hostile environment

The received wisdom has therefore been that, in order to achieve fiscal devolution, you’d have to break the system and start over. So the announcement — made by the Chancellor just a few months ago — took everyone in the policy world by surprise. The Treasury would produce a “roadmap” toward regional leaders taking on “a share of some national taxes which have, for too long, been allocated by central government … [looking at] income tax alongside other taxes, with reforms initially targeted at those places that have the greatest capacity to deliver them and the greatest potential to benefit.”

For many, fiscal devolution is the great white whale of our policy system. It is the missing ingredient which both causes and explains the deep overcentralisation of England. Even as national devolution has produced meaningful autonomy for Scotland, and to a lesser extent for Wales and Northern Ireland, England has been treated as an extended hinterland, only existing for a handful of its biggest cities.

A decades-long programme of decentralisation – with city deals, ‘levelling up’, and a “devolution revolution” all playing a part in recent years – has started to turn the tide, if slowly. The latest move, an English Devolution and Community Empowerment Act, included many important developments… but also jettisoned any ability to insist upon the creation of regional authorities or mayoralties at the last second of the legislative process, resulting in a compromised version of the “devolution by default” which had been promised in the early days of the current Government.

The map is still messy. The powers are still uneven. And, without significant action on fiscal autonomy, the whole system will remain riddled with unaligned incentives. The Treasury can talk up effective local growth policy all it likes, but areas won’t bother to be pro-business if they don’t see any of the financial benefits from it. Unfunded mandates are heaped upon local systems, but without the increased resourcing to match.

Fiscal devolution would be a genuinely dramatic shift. It would put firepower behind regional efforts to tackle the productivity puzzle, enabling places to go further in experimenting with approaches tailored to their specific context. It would help to peel away layers of man-marking and micromanagement by Whitehall, allowing for a more focused and strategic centre, and a shift to policy genuinely rooted in place, unencumbered by departmental silos. It would mean empowered local leadership, with meaningful decisions about revenue as well spending being taken closer to the people they impact. And it would end England’s outlier status as the largest and most complex country to manage almost all of its finances centrally.

A new initiative

We at Re:State recently announced our new Devo Next Initiative, an ambitious policy collaboration between strategic authorities (which has now grown, with eight strategic authorities participating).

The goal of the Initiative is to work together to set the agenda on the future of devolution policy.

Today, we have published Devo Next’s first major output. It is a statement of design principles for the promised Treasury fiscal devolution roadmap. These core principles have been developed collaboratively with the strategic authorities participating in the Initiative, and discussed with policymakers in Whitehall.

They are not the final policy platform for any individual or organisation, but rather the guide ropes for achieving meaningful and lasting fiscal reform.

Mayoral Strategic Authorities want real fiscal devolution. This means a fiscal settlement that:

• Offers actual fiscal autonomy, not better-labelled grant funding, which means genuine discretion over how money is spent from place to place

• Disrupts and streamlines how devolution funding currently words, bringing an era of multi-departmental negotiations to an end

• Gives places a very direct stake in local growth, or the incentive structure will remain too weak

• Threads the needle of fair equalisation, so that all places are resilient to shocks, and poorer places are not simply left behind

• Shifts accountability, ending the upwards-looking norms of today and empowering local democratic and technical scrutiny

These design principles are a test for the fiscal devolution roadmap: metrics to determine whether the Treasury’s plan can finally change the political economy of devolution. The Government’s policy must give strategic authorities genuine revenue autonomy, freedom to spend across departmental boundaries, a direct stake in the growth they help generate, and a fair but credible system of equalisation and risk-sharing.

More than anything else, Whitehall must listen carefully to the Strategic Authorities which are best placed to understand how fiscal devolution must be designed if it is going to work.

In the coming weeks we will be publishing our own detailed proposals for what fiscal devolution should look like, setting out both an ambitious, long-term vision for fiscal autonomy in England, and the more immediate steps that will set us on the road to getting there.

And if the roadmap does not similarly work within design principles like those we publish today, then the long hunt for the white whale of fiscal devolution will continue.

Design principles for the fiscal devolution roadmap is online now.