This month Rachel Reeves announced £2.3bn in additional funding for cities and a plan to devolve – for the first time – the power to keep tax revenues raised in local areas. Joey Gardiner poses the five questions that spell out what this could all mean for regeneration and development plans
In this month’s Mais Lecture, the chancellor Rachel Reeves did her best to distract attention from the worsening global economic situation with a speech that focused on a variety of long-term economic priorities. Within it was a section on regional economic growth and productivity hailed by some as among the most significant interventions on the subject for 50 years.
In it Reeves announced a package of measures for UK city regions that contained not just targeted funding, designed in a way to give them more control over their destiny, but also – for the first time – the promise cities could keep hold of locally raised tax receipts: so-called “fiscal devolution”.
Giving cities control of the tax income raised locally is something that economic development professionals have been long campaigning for as an essential step to overcoming the UK’s stark economic inequality, which sees so much of the nation’s wealth created in London. In developed nations, the UK is a major outlier by having just 1.7% of GDP taxed locally, comparedwith an OECD average of 3.7%. France, by comparison, has 6.5% taxed locally, Sweden 15%.
Reeves said any such move would be, initially, revenue neutral – meaning cities would not end up with more or less money due to it – and that it could involve income tax or potentially other taxes, “with reforms initially targeted at those places that have the greatest capacity to deliver them, and the greatest potential to benefit.”
The chancellor said she wanted the change to deliver a “permanent transfer of power and resources”, with “the proceeds of growth benefiting the places that generated that growth”.
However, with the exact form of the devolution now being worked up, she ruled out giving cities any powers over settings tax rates or thresholds themselves.
So, how might Reeves’ package of measures impact upon city plans for development and regeneration? Below Building answers the key questions.
Why is the extra £2.3bn of funding for cities that has been found important?
The “City Investment Fund” package is made of two separate funding streams – a £1.5bn Housing Acceleration Fund, and a £800m City Densification Fund, which runs to 2031. The densification fund is grant funding to be used to address viability gaps on projects that – according to an update to the Northern Growth strategy published last week - “cannot proceed without grant funding, and where no other instrument can bridge the gap between cost and value”. However, city regions will have flexibility as to how they apply it, as it will be delivered via their “integrated settlements” – the overarching devolution deals with government in which mayoral authorities gain control over delivery in return for agreeing to hit certain outcomes.
What’s interesting is that the chancellor is really seeing changes in the built environment as a way to improve the productivity of the entire country
Anthony Breach, Centre for Cities
The £1.5bn Housing Acceleration Fund, on the other hand, is recyclable loan funding for “financial transactions” to provide finance for housebuilding. The growth strategy said mayors will be able to use it to “offer lower cost loans and investments”. These announcements follow on from the announcement of a £500m Mayoral Revolving Growth Fund announced last year.
Anthony Breach, director of policy and research at the Centre for Cities, said: “What’s interesting is that the chancellor is really seeing changes in the built environment as a way to improve the productivity of the entire country.”
Breach says the funds mark a big difference from the past inefficiency of requiring cities to engage in multiple competitive bidding rounds to secure cash: “There’s now quite a few different considerably sized funds that are coming forward.
“If you add all that up together, it becomes quite a considerable amount of not just funding, but also government attention to this issue.”
Why is the proposal for “fiscal devolution” to city regions important?
It is not clear what proportion of national taxes the Treasury is considering devolving, and Reeves’ confirmation that any action will be “revenue neutral” at first will mean there can be no immediate big bang impact. The further effects would unfold slowly, in that any growth in tax revenues experienced beyond what would be expected would get to be kept by the city region.
Why then, does Tom Riordan, former Leeds City Council chief executive and now the government’s northern growth envoy, describe Reeves’ speech as one that “stands up there with the most significant regional policy speeches of the last 50 years”?
You need to give an incentive to mayors to do the things that are most growth generating, where the upside of that growth comes back to them
Henri Murison, Northern Powerhouse Partnership
Henri Murison, chief executive of the Northern Powerhouse Partnership, says this is significant because of the way it completely changes the incentives in local government around growth. Where previously, Treasury redistribution formulas would mean that any increased tax revenues generated from growth would be whisked away to help less fortunate areas, now cities will know they can fill their city halls coffers by growing their economy – meaning they should take different decisions.
He says: “You need to give an incentive to mayors to do the things that are most growth generating, where the upside of that growth comes back to them.
“At the moment the mayor has no incentive to do things that lead to growth. They’re more incentivised to do things that are popular.”
This is devolution proper. It’s something the regions have been waiting for for a long time
Stephen Beechey, Wates
As well as giving cities more incentive to invest in things that grow their economy it should in the medium term give them more money to do so. Stephen Beechey, group public sector director at contractor Wates, said: “This is devolution proper. It’s something the regions have been waiting for for a long time.”
One central government insider, who declined to be named, said “It’s also a big cultural shift, it’s moving from that parent-child dynamic between government and the cities, where historically they’ve come in asking for things. This is growing up.”
How could this become important for development and regeneration?
Incremental growth in tax revenue is not, however, on its own likely to quickly pay for big investment in new development by cities. What makes this particularly interesting, is the theoretical ability to borrow against the future tax revenues generated by an investment – be it new homes, offices or infrastructure – a mechanism known as Tax Increment Financing (TIF).
This is used successfully around the world, particularly in Europe in the US, to deliver local infrastructure and regeneration, such as at the Atlantic Station Tax Allocation District, in Atlanta, USA, where a 138-acre brownfield site was regenerated using money borrowed against expect future tax receipts. “The most exciting thing that it does is allow investment,” says Centre for Cities’ Breach.
[Tax Increment Financing] It will be significant if they can borrow, or if they get enough income tax growth receipts to make them pro-house building
Tim Leunig, London School of Economics
“It’s a very obvious end destination that would be desirable […] borrowing directly in capital markets against local tax receipts, basically issuing bonds.
“This would unlock not just additional product finance, but also a wider range of capital structures that are more conducive to investment and to growth in places, and it’s one of the really big reasons why we should do it.”
Economist Tim Leunig, visiting professor at the London School of Economics, says: “It will be significant if they can borrow, or if they get enough income tax growth receipts to make them pro-house building.”
Proponents see this mechanism as potentially key to unlocking some really major projects, such as the proposed undergrounding of the station at Manchester Piccadilly, or the West Yorkshire mass transit system.
If you just took the West Yorkshire transport budget [mayor] Tracy Brabin could borrow £15bn and build a mass transit system herself
Henri Murison, Northern Powerhouse
The Northern Powerhouse’s Murison says: “If you just took the West Yorkshire transport budget, currently an annual settlement, if you turned that into a share of national insurance revenue, then [West Yorkshire mayor] Tracy Brabin could borrow £15bn against that today, and build a mass transit system herself. The leverage is massive.”
Becca Heron, strategic director of growth and development at Manchester City Council, says she doubts that TIF on its own will be enough to solve the funding dilemma for the multibillion-pound plan to underground Picadilly, but agrees the potential to borrow is a very positive step. “It’s about how they can empower local areas to leverage that growth to generate further funding for more investment,” she says.
If it’s revenue neutral, who would be the likely winners and losers?
The outcome for mayoral areas involved would depend both on the extent of fiscal devolution offered – Reeves suggested devolution would not be distributed evenly, at least at first – and then their subsequent economic performance.
In theory, the faster an authority’s tax base grows, the more it will win – whereas those that struggle could see their income stall or even dip, favouring those areas with stronger economies. The LSE’s Leunig is unambiguous: “London is the place this is most likely to matter,” he says.
Local politics would make a bigger difference to who the winners and losers are than the current economic performance of a place
Anthony Breach, Centre for Cities
However, Anthony Breach says you can’t assume this will just mean that the already wealthier places will benefit most – the point is about growth, which may be easier in some cases to achieve from a lower base.
This assumption also ignores that some UK cities are already fast growing – Manchester was the fastest growing sub region of the UK from 2015 to 2023, topping a £100bn annual GVA economy. “I would say local politics would make a bigger difference to who the winners and losers are than the current economic performance of a place,” Breach says.
Poorer places, he says, are penalised by the current system if they grow their taxbase, as grant funding is withdrawn when deprivation declines. Conversely, he says, the proposed change means that “a Nimby authority that is affluent may in relative terms lose out if it decides it really does not want to grow its taxbase.”
What are the big unanswered questions?
Reeves has set the ball rolling on the idea of fiscal devolution – but has not said when, how and in what form it will be brought forward. There has been no formal consultation, so there is very little understanding of what is being considered by the Treasury, beyond the broad signposts staked out in her speech.
Reeves mentioned that the government was considering “income tax and other taxes” for the scheme. The government insider said: “A big choice is going to be if they use something that’s clean fair and progressive, like income tax, or go bolder and use this as an opportunity to reform and make local something that’s arguably broken, like property taxes.”
The big question is whether mayors get borrowing powers. If so, they can borrow for infrastructure
Tim Leunig, London School of Economics
For the development sector, however, most eyes will be on the extent to which councils will be allowed to borrow against future tax receipts. The LSE’s Leunig says: “The big question is whether mayors get borrowing powers. If so, they can borrow for infrastructure. It is not certain.”
The insider says he is encouraged at least by the fact there was nothing in the announcement that appeared to rule out borrowing. “They’ll want responsible treatment of the new powers. But the fact they’ve not said anything on borrowing is a good sign.”
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