Andy Burnham, the incoming MP for Makerfield and a widely anticipated candidate for Labour Party leader, is exploring a significant shift in national economic policy: the devolution of income tax powers to local authorities. Economic advisor Lord Jim O’Neill confirmed the proposal is under serious consideration, marking a potential departure from the incremental fiscal adjustments seen over the past 13 years.
Lord Jim O’Neill, a key advisor to Mr. Burnham, previously served as an economic adviser during Mr. Burnham’s tenure as Mayor of Greater Manchester.
What is constitutional devolution?
The proposed policy, described by allies as “constitutional devolution,” would grant local governments control over income tax, moving beyond the current system of limited fiscal transfers from Westminster. According to Lord O’Neill, speaking to LBC, the strategy aims to move away from the “drip feeding” of funds to local areas, which he suggests has characterized the last decade of governance.
The core argument for this shift is the necessity of local decision-making. Lord O’Neill noted that Westminster-based policies often fail to address specific regional needs, such as the distinct adult skills requirements in places like Rotherham compared to Reading. He emphasized that redistributing power away from the capital is a vital step for regional development.
What are the economic risks and implications?
While the proposal aims to empower local authorities, it faces potential friction with broader financial market realities. Lord O’Neill warned that the United Kingdom cannot sustain current levels of public spending without risking negative reactions from financial markets. He specifically pointed to 10-year gilt yields, which he noted are currently higher than those of Greece, as a reflection of concerns regarding debt levels and rising public expenditure.
The proposal represents a tension between the desire for local autonomy and the constraints of national fiscal stability. While devolving income tax could theoretically allow for more tailored regional investment, it introduces significant complexity regarding how tax revenues are balanced across the country, particularly as the UK faces pressure from global bond markets regarding its debt-to-spending ratio.
What happens next?
The immediate next step is an formal study of the feasibility of income tax devolution. While business rates devolution is considered a “very strong probability” by Lord O’Neill, the income tax element remains in the exploration phase. It is currently unclear how such a system would impact the national distribution of tax revenues, or how a potential Labour government would reconcile local tax control with the need for national fiscal discipline.
Frequently Asked Questions
Who is proposing the change to income tax?
The proposal is being examined by Andy Burnham, the incoming MP for Makerfield, with support from his economic advisor, Lord Jim O’Neill.
What is the main goal of the devolution plan?
The plan seeks to move away from centralized control by giving local authorities the power to manage their own income tax, allowing for more specific, locally-driven economic and skills-based policy decisions.
Has the government committed to this change?
No. Lord O’Neill stated that exploring the devolution of income tax is on the agenda to be studied in a “serious way,” but it is not currently an enacted policy.
How might local control over income tax alter the economic landscape of your specific region?
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