Fiscal and economic policy in the Burnham era

Devolution is the word of the month

If there is a word that has come to signify Andy Burnham’s policy agenda, it’s devolution. The new Prime Minister has made it a central plank of his speeches, and said he wanted to ‘deliver growth in every postcode’ (although most people will be taking it a little less literally than FT Alphaville).

The devolution agenda itself is not new. The territorial departments, the Scottish and Welsh Offices, existed from 1885 and 1965 onwards, controlling various aspects of spending policy such as economic development, health, education, agricultural policy, among others. Northern Ireland itself had devolved government (or ‘home rule’, as it was known back then) from the early 1920s until 1972.

On top of operational devolution, the Blair government embarked on a project of political devolution in the late 1990s. It created four new devolved directly elected assemblies and parliaments, in Scotland, Wales, Northern Ireland and London – the latter accompanied by a directly elected mayor. The three nations with newly created parliaments gaining control over health, education and local government policy, among other areas, although even there, differences remained – devolution remains highly asymmetric across Scotland, Wales and Northern Ireland. London, on the other hand, was much more like a strategic planning authority, with competencies on planning and transport, but relatively limited in its purview.

The remaining eight ITL 1 (then called NUTS 1) regions of England also had newly created regional assemblies, although these were indirectly elected by the local authorities within the regions. Progress came to halt, however, when proposal for the North East Assembly to become directly elected was rejected in a referendum in 2004.

Devolution in England since then has taken a more fragmented form, with combined authorities being the preferred method. Although the groundwork was laid out during the Gordon Brown government, it was under the Conservative-Lib Dem coalition that the first combined authority (Greater Manchester) came into existence. This has created a patchwork of authorities, covering large parts of England while others remain in a kind of unreformed type of local government.

The first combined authorities have in many ways stepped into the vacancy left by the abolition of metropolitan county councils in the 1980s, and are meant to provide local authorities with a forum for more cohesive and strategic decision-making than in a world where each authority makes decisions fully independently. They were also a way of devolving power in a different form to the mayor-led councils that were almost universally rejected in referendums in 2012.

Can devolution be a growth strategy?

Devolution is mostly a political accountability agenda, ensuring that decisions are taken by politicians with smaller constituencies and a more local focus. It would be fair to say that there is a broad consensus in the UK that more devolution would be good for political accountability and to increase proximity between decision-makers and inhabitants, as exemplified by the one-way devolution journey we have been on since 1998 – even with a few bumps in the road in the form of rejected referendums on specific proposals.

This is a different question as to whether or not devolution would improve economic outcomes across the country. The idea behind it might be that there is local knowledge that cannot be harnessed by a centralised state, but that a more localised arrangement may be able to access. It may also allow people to align spending and taxation decisions further to their preferences.

There is inevitably a tension between those local preferences and the need for provision of some services that are not particularly pleasant to live with, but are necessary. A simple example is in the planning for the building of a new prison, which inevitably attracts objections from those living near the proposed site. But if a society decides it needs more prison places, they need to go somewhere, and simple solutions such as local vetoes would result in nothing being built.

It is a paradox that the UK is heavily centralised in some areas – it has been said that it is one of the most centralised countries in the world, although the metric by which that is defined can be debated – but in issues such as planning, it is actually hyper-localised, which itself paralyses the system. So it’s far from clear that a one-way street towards further devolution in all cases would lead to better outcomes.

There is also the possibility that some places will take decisions that will come to be seen as wrong or deleterious to outcomes. The whole point of devolution is for smaller groups of people to exert more control over the political decisions that affect them, but that leaves open the real possibility that some places will benefit tremendously and others will do much worse than under the current, more centralised decision-making system.

It is of course possible that places that are doing less well economically today will be able to make decisions that will improve their conditions dramatically. But that is only one possible outcome, and one which cannot be guaranteed under a framework which is predicated on freedom to make different decisions. Further devolution implies living with the possibility that some places will do significantly better than others, and those may well be the places that are doing well already. Regional inequality may widen or narrow with more devolved powers – it’s impossible to know in advance.

Income tax devolution within England

Many of the changes Andy Burnham has been discussing seem focussed on English devolution, which is perhaps unsurprising given that there is already further devolution to Scotland, Wales and Northern Ireland.

One of the areas that has caught attention has been the announcement of income tax assignment to English mayoral regions. The detail is scant at this point, and we’ll have to wait until the Budget for the proposals to be fully formed, but it seems set to encompass only assignment of revenues, not policy control.

This is a narrower set of devolved powers than for Scotland and Wales, which not only keep revenues but also have control over some elements of the structure of income tax – though more in Scotland than in Wales. One thing that will need to happen is some sort of grant adjustment to account for revenues being kept from income tax rather than coming from grants, which can incentivise authorities to try and grow their local economies – to the extent that it is possible.

But as the experience of Scotland and Wales has demonstrated, the design of those grant adjustments matters immensely. Different areas have very different revenues per person, and whether that is directly taken into account or not will determine who wins and loses out. And without powers to raise further revenue, areas that perform less well may have no way of raising further revenue from income tax. The size of the share kept by authorities will matter a lot.

What does this mean for Scotland?

We’ll have to wait and see. Many of the elements talked about by the PM are already devolved in Scotland, be they in terms of spending responsibilities or income tax devolution, so this agenda may not change things as much as in other parts of the UK.

What is unknown is whether there will be an agenda to create any combined or mayoral authorities in Scotland. Glasgow and Edinburgh city regions are the largest UK settlements without a combined authority, and there have been at times call for those supra-local authority elements to be created north of the border.

Where they sit constitutionally however can be awkward. Combined authorities are not traditional local government bodies in England, but they are able to levy parts of council tax in some cases. The city deals in Scotland that the Conservative UK Government created in the last few years had a form of Barnett by-pass which was not popular with the Scottish Government, and any movement on mayoral authorities in Scotland may well come to be at the forefront of constitutional stooshies.

One area that could have major consequences for Scotland is social care reform in England. Whatever form it takes, it seems likely to involve a broader socialisation of costs, such that public spending will rise – perhaps substantially so. If that is the case, there would be significant additional Barnett consequentials, which would be the other side of any additional tax that is raised to pay for the cost of the reform, and which could very likely also apply to Scotland, depending on which taxes are targeted.

On policy, changes have been mostly around the edges

Many of the changes announced last week – the cut to VAT on domestic energy use (which will apply UK-wide), the business rates relief for pubs in England and the £2 cap on bus fares in England – are small in the grand scheme of the public finances.

But what they do display is a trend towards complicating rather than simplifying the tax system. Of course there will be beneficiaries – particularly those getting that tax relief. But this comes at the cost of making Britain’s notoriously arcane VAT system even more of a Swiss cheese. As for business rates, the idea that it will be paid for by higher taxes on vape shops and gambling arcades means difficulties in implementation (at which point does a shop that sells vapes become a vape shop? How often will this be revisited? etc.) which illustrate the trade-off that often rears its head between simplicity and fairness of taxation.

Perhaps these will be seen as worthwhile trade-offs in these cases. But we hardly start from a simple tax system, and the many distortions we already have risk being made worse by tinkering impulses instead of fundamental reform.

The macroeconomic background hasn’t changed

Perhaps the real reason why the detailed policy announcements so far have been around the edges is that the public finances situation has not changed significantly from that faced by the Starmer government.

The deficit last financial year (2025-26) was 4.2% of GDP, far above what is sustainable on an ongoing basis, and getting down to the levels proposed in the last OBR forecast will still imply pretty tight spending controls and taxes going up. Debt is around 94% of GDP, and actually rose in 2025-26, as did net financial liabilities (the Government’s preferred debt metric).

If anything, some of the short-term indicators have got worse since the OBR’s last forecast. With the war in Iran, energy prices have increased, and so has the clamour for support for households this coming winter if the war is still ongoing. Meanwhile, gilt yields are about 0.5 percentage points higher than in February, which is an increase of around 10% – with knock-on effects on debt servicing costs, meaning new Chancellor John Healey is looking at a pretty difficult picture when he presents his first Budget this autumn.