Greater devolution is coming, but is it enough to reform local government finance?

Andy Burnham’s government has promised greater devolution. Having written about local government tax policy for over 20 years and having studied it for more like 50 years, I was pretty cynical that we wouldn’t get much real change. My suspicion based on pre-Budget leaks was that any changes would be limited to giving more central government money to local government leaders. That has happened but Burnham’s government does intend to go further. 

What was announced in the Budget? 

The Budget set out plans to re-allocate more funding and investment decisions to local leaders in England. Alongside it, the government published a Fiscal Devolution Roadmap which proposes providing local authorities with a greater local share of tax receipts, more funding and increased borrowing capability. 

Mayors are to receive 20% of business rates revenue from 2027 and a share of income tax receipts from April 2028. The Chancellor also announced that all business rates would be retained locally by 2030. These are changes to where tax receipts go rather than a new power for English mayors to set income tax rates. 

The package includes an initial £285 million of Good Growth funding for next year. Local leaders would be able to support priorities such as housing, transport and high street regeneration without seeking approval for each project from Whitehall. Areas not yet covered by strategic authorities would also be able to access a share. A £1.5 billion borrowing facility is being designed with mayors for introduction from 2028. 

The Budget also confirmed plans for mayors and other strategic authority leaders to introduce an overnight visitor levy from 2028. This levy would give local leaders the ability to impose a new tax charge. 

The Budget also announced further business rates support in England from 1 April 2027. For qualifying retail, hospitality and leisure properties, the rateable value threshold for full small business rate relief will rise from £12,000 to £18,000. Relief will then taper to nil at £21,000 rather than £15,000. Relief for qualifying pubs, social clubs and live music venues will increase by 20 percentage points to 35%. The package also includes a two-year freeze in retail, hospitality and leisure bills in real terms and a further year of support under the 2023 Supporting Small Business scheme. This will be partly funded by extending the transitional relief supplement for two years. 

Is this real devolution? 

As our trans-Atlantic cousins would remind us, there is no taxation without representation. At the same time, allocating central government monies to local representatives (whether elected or not) doesn’t amount to devolution as central government controls the purse strings. Is it home rule or devolved government? 

I thought the government wouldn’t go the whole hog but they’re definitely going further than I expected. That said, there’s a big catch. Back in 2004 when I was writing about the Lyons Review and when the Liberal Democrats were proposing a local income tax, the key point was what tax revenue do you give local government? Business rates revenue was taken away from local authorities in 1990. It’s now proposed to restore that source of revenue directly to local government but with no reform of the proliferation of tax authorities (when I last added them up in 2022 there were 333 taxing authorities in England in addition to HMRC). Is this reform and serious devolution? 

Also, the 2024 Labour manifesto said: “The current business rates system disincentivises investment, creates uncertainty and places an undue burden on our high streets. In England, Labour will replace the business rates system, so we can raise the same revenue but in a fairer way. This new system will level the playing field between the high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship.” 

Does this announcement mean that replacing the business rates system is now dead? Also, business rates doesn’t raise enough revenue for local authorities in any case. Hence the need to allocate a share of income tax, but that doesn’t feel like devolution – just a different way of re-allocating national revenue. The decisions on that tax are being made by the Chancellor. Even on business rates, will local authorities in England have any power over the rates being set?

More tax on hospitality? 

The Budget does contain some good news for hospitality businesses as far as business rates are concerned, with an increase in small business rate relief, but that entire relief is a reflection of the inadequacies of the current business rates system. Granting greater relief further hollows out the tax base. And then the kicker. 

More relief for hospitality on business rates but with a tourist tax. The proposed overnight visitor levy does give local leaders a new tax choice. The government confirmed plans in September for English mayors and other strategic authority leaders to charge a percentage of accommodation costs. Providers would be liable but could pass the charge to guests.  

There is a case for asking visitors to contribute towards the local services they use, but that does not explain why another charge should be concentrated on accommodation businesses. Day visitors also use roads and public spaces yet would remain outside an overnight levy. 

Calling it a tourist tax does not make the commercial cost disappear. Passing it on makes a stay more expensive, while absorbing it reduces the business’s margin. Either way, it could put pressure on investment and employment in the very economy the levy is intended to support.

That pressure comes on top of higher employers’ national insurance from April 2025, partly offset for eligible businesses by a larger employment allowance. Holiday accommodation providers have also lost the furnished holiday lettings tax regime.

Business rates need more than another relief 

Against that background, the announced  business rates reduction for qualifying pubs, clubs and live music venues from April 2027 is welcome but it does not answer the wider question of how business premises should be taxed. 

Holiday accommodation shows how relief in one part of the system can create difficulties elsewhere. Qualifying holiday lets may have no business rates bill because of small business relief, while properties outside the rules face council tax. Tightening the boundary changes who pays without resolving the underlying inconsistencies between the two systems. 

The problem extends beyond holiday accommodation to council tax itself. In England it still uses property values from 1991, making the link between today’s values and the tax bands increasingly outdated. Property remains a sensible local tax base because it cannot move, but new charges are no substitute for updating the existing system. 

Yet the high value council tax surcharge, commonly called the mansion tax, adds another layer. Announced in the 2025 Budget, it will apply from April 2028 to owners of English homes worth £2 million or more, alongside council tax. Councils would collect it, but the money would go to central government without giving them control over the tax. If you’re confused by inconsistent tax policy choices at this point, then I’m with you too. 

This new surcharge raises questions about valuations, band boundaries and the position of owners with limited income, for whom a payment deferral mechanism is proposed. More fundamentally, why create another property tax and valuation exercise while leaving the main domestic property tax tied to 1991? 

What is missing is a coherent link between local responsibilities, reliable funding and accountable tax choices. Revenue sharing and a wider choice of local taxes can both play a part, but neither removes the need to reform council tax and business rates. 

I first wrote about this in Taxation in 2004 under the title ‘The Never Ending Story’. More than 20 years later, we still have a collection of measures rather than a clear strategy. More concerningly, hospitality businesses are potentially seen as a cash cow to help fund other political priorities in many parts of England.