Economic Affairs Committee
Tuesday 15th September 2026
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15:11
Speaker 1
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Speaker 1
But I think what we've got to be really clear on is that the measures we're really talking about fiscal devolution, that the Prime Minister, you've got the overnight visitor levy, which is a single new tax being potentially introduced by mayors that want to use it. This is talking about is how are combined authorities, mayoral combined authorities, by and large funded by central government. And the way that that actually works is I think fiscal devolution is a slight misnomer.
It's not technically fiscal devolution. So what government are doing, and they've been pretty clear on this, is that we get an. I'll make up the numbers for the purposes of the example. To keep it simple, the Tees Valley has in grants and other monies from central government, say £1 billion over the next three years. And what government are going to do is calculate the amount of money that we currently get, and they're going to say, well, that's equivalent of, again, let's make it up 3% on income tax.
So we're going to allow you to retain 3% of income tax. The reality is they're not giving us 3% of income tax. What they're doing is replacing a series of grants with strings attached. And they're going to replace it with a single block grant, what's called a section 31 grant, which gives me, as mayor, full autonomy on how to spend it. And they're saying, well, that's the equivalent of 3% of income tax to set up fiscal devolution properly.
You are having to set up, in effect, mini HMRC, which is not the which is not the game. And what's clear is, is then the responsibility of the mayor to provide an appropriate business case as a spending decision to justify the spend of that money. But government at that point don't tell you how to spend the grant. So in reality, it's a movement of chairs. It's not actually fiscal devolution. The next outstanding question, which hopefully we will hear more come the budget is what is the level of that? Because if it is a like for like replacement of what we already have, we've already made significant spending commitments on infrastructure.
That means that if we get fiscal devolution that replaces the £1 billion worth of grants with a with a £1 billion grant, well, then all we're doing is substituting one grant with a single grant, and our spending commitments are already made. If if fiscal devolution is additional money on top of that, then one, it gives us more flexibility to look at pipelines of how we invest in infrastructure, job creation, getting sites ready for investment. So we've got to be really clear what fiscal devolution is and isn't.
The second part that I would say, which irrespective of what we call it, what the government is proposing, helps very positively in two ways. One, it would help with flexibility because the strings attached, which I'll be honest, over the last 3 or 4 years happened in the last two years of the previous government. It certainly happened in the first two years of this government, where it was more decentralisation than it was devolution. So we would get money, but DWP or DFT would be like, you can only actually spend it on this and your budget.
On transport, only 10% could be spent on roads. So it was quite restrictive. So having full flexibility to say we can spend it on what we like, but we've still got to justify ourselves through a business case and a spending decision through to the accountability framework. That's a good thing because it means that we can manage our budgets because if certain projects are delayed or for whatever reason, within year and multi year, we can move our accounts around so we can move money from transport to business or business to culture or whatever it might be.
And the second thing that it does is it gives a long term settlement. So what the settlement is going to be is not a three year transport settlement, but a long ten, 15, 20 year settlement to say year in, year out, this is what you're going to get. So that longer term planning, particularly when you're looking at infrastructure paired with flexibility, are two significant benefits of this reform. But I just want to be clear that this isn't fiscal fiscal devolution in the strictest sense, which you may or may not have seen when I started to talk about tax rebates, because there's a misunderstanding about what the mechanism is and how you would go about doing something like that.
It's not technically fiscal devolution. So what government are doing, and they've been pretty clear on this, is that we get an. I'll make up the numbers for the purposes of the example. To keep it simple, the Tees Valley has in grants and other monies from central government, say £1 billion over the next three years. And what government are going to do is calculate the amount of money that we currently get, and they're going to say, well, that's equivalent of, again, let's make it up 3% on income tax.
So we're going to allow you to retain 3% of income tax. The reality is they're not giving us 3% of income tax. What they're doing is replacing a series of grants with strings attached. And they're going to replace it with a single block grant, what's called a section 31 grant, which gives me, as mayor, full autonomy on how to spend it. And they're saying, well, that's the equivalent of 3% of income tax to set up fiscal devolution properly.
You are having to set up, in effect, mini HMRC, which is not the which is not the game. And what's clear is, is then the responsibility of the mayor to provide an appropriate business case as a spending decision to justify the spend of that money. But government at that point don't tell you how to spend the grant. So in reality, it's a movement of chairs. It's not actually fiscal devolution. The next outstanding question, which hopefully we will hear more come the budget is what is the level of that? Because if it is a like for like replacement of what we already have, we've already made significant spending commitments on infrastructure.
That means that if we get fiscal devolution that replaces the £1 billion worth of grants with a with a £1 billion grant, well, then all we're doing is substituting one grant with a single grant, and our spending commitments are already made. If if fiscal devolution is additional money on top of that, then one, it gives us more flexibility to look at pipelines of how we invest in infrastructure, job creation, getting sites ready for investment. So we've got to be really clear what fiscal devolution is and isn't.
The second part that I would say, which irrespective of what we call it, what the government is proposing, helps very positively in two ways. One, it would help with flexibility because the strings attached, which I'll be honest, over the last 3 or 4 years happened in the last two years of the previous government. It certainly happened in the first two years of this government, where it was more decentralisation than it was devolution. So we would get money, but DWP or DFT would be like, you can only actually spend it on this and your budget.
On transport, only 10% could be spent on roads. So it was quite restrictive. So having full flexibility to say we can spend it on what we like, but we've still got to justify ourselves through a business case and a spending decision through to the accountability framework. That's a good thing because it means that we can manage our budgets because if certain projects are delayed or for whatever reason, within year and multi year, we can move our accounts around so we can move money from transport to business or business to culture or whatever it might be.
And the second thing that it does is it gives a long term settlement. So what the settlement is going to be is not a three year transport settlement, but a long ten, 15, 20 year settlement to say year in, year out, this is what you're going to get. So that longer term planning, particularly when you're looking at infrastructure paired with flexibility, are two significant benefits of this reform. But I just want to be clear that this isn't fiscal fiscal devolution in the strictest sense, which you may or may not have seen when I started to talk about tax rebates, because there's a misunderstanding about what the mechanism is and how you would go about doing something like that.
15:14
Lord Liddle
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Lord Liddle
And apart from the benefits you outlined in your answers, are there other any other reasons why you think fiscal devolution is a good thing? By that I mean does it improve local accountability? Will it make it easier for services to be run more efficiently than they are? How important is revenue certainty, which Lord Ashton, you indicated was important? How important is revenue certainty to your efficiency, the efficiency of your outputs as a as a local mayor?
15:15
Speaker 2
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Speaker 2
Well, I think the two points I pick up on what Lord Hutchinson. One is that at the moment, as you said, quite a lot of our funding comes in the form of a government grant. Now, it's great that we've had, you know, multiple year grant and we've had some we've had an integrated settlement in London which enables us to move money around between different responsibilities, and there's less strings attached to it. But we can't borrow against that grant, because obviously a future government could just take a decision not to not to give a grant at all, or to give a smaller grant and so on.
The if if the principles of the devolution of a piece of income tax rate are followed through, that would allow you to borrow against that, that income tax, because, as you said, it's a long term, reliable source of income going into the future. And the the second thing is, and you're absolutely right, if it's just swapping one grant for a grant by another name, that's one thing. But if you're actually able to capture some of the increase by engendering and promoting growth in your area, and income tax, for example, goes up and you're able to capture some the increase and there's an incentive there, then that does give another, another incentive to local groups.
And it's a significant change of in the sort of power structure between regional government and national government. But I do think there is a there is an accountability issue there in terms of. And there's and there's a principle here, which is that we've had we've had actually historically very strong city government in in the United Kingdom, you know, going back, you know, a thousand years to the strength of the City of London.
And, you know.
The if if the principles of the devolution of a piece of income tax rate are followed through, that would allow you to borrow against that, that income tax, because, as you said, it's a long term, reliable source of income going into the future. And the the second thing is, and you're absolutely right, if it's just swapping one grant for a grant by another name, that's one thing. But if you're actually able to capture some of the increase by engendering and promoting growth in your area, and income tax, for example, goes up and you're able to capture some the increase and there's an incentive there, then that does give another, another incentive to local groups.
And it's a significant change of in the sort of power structure between regional government and national government. But I do think there is a there is an accountability issue there in terms of. And there's and there's a principle here, which is that we've had we've had actually historically very strong city government in in the United Kingdom, you know, going back, you know, a thousand years to the strength of the City of London.
And, you know.
16:09
Speaker 1
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Speaker 1
If some to regional mayors and some to local authorities. And we've already seen, for instance, just in the last few weeks under this administration, the Prime Minister's push on homelessness and the obvious thing to do would be to provide that in our area anyway to the local authorities directly, because they have teams, they understand the problems in place. They often understand the individuals who impact on some of their social care provision, but government have given it to regional authorities.
Now, what happens in reality is we work closely with the local authorities and recognise their better place to be able to deliver that provision, so we end up, in effect, being a passport funder of that, allowing them to deliver the provision. But the clear indication is it's for and for the foreseeable it's going to be regional devolution rather than local authority devolution. And I think just very quickly touch upon your point around democratic deficit. I believe I can say this because I also used to be a councillor for six years, seven years before I was elected as mayor.
Certainly in my part of the world, in my experience, I would say that most people, the vast majority of people, could not name who their local councillor is. They certainly couldn't name who the leader of their local council is. Council is they rarely engage with the local authorities, largely because actually there are very few services really delivered by local authorities any more beyond adult and children's social care. So a number of the local authorities that come under the Tees Valley, more than 80% of their budgets goes fully on adult and children's Goes fully on adult and children's social care.
And so the idea that they can engage with the public properly, they can deliver services properly outside of that remit, just doesn't really exist. And I also think maybe it's because we're the flavor of the month of the minute, because different administrations, and now we have a prime minister who is a mayor. There's a huge amount of scrutiny and accountability to directly elected mayor, and we find that turnout is marginally higher than it tends to be at local authority level, particularly in my part of the world.
And you find that the scrutiny element of that and the direct link to local. people we've run and government actually require us on an annual basis to run surveys looking at awareness of what the combined authority does, what the mayors do, etcetera, etcetera. And you find the.
Now, what happens in reality is we work closely with the local authorities and recognise their better place to be able to deliver that provision, so we end up, in effect, being a passport funder of that, allowing them to deliver the provision. But the clear indication is it's for and for the foreseeable it's going to be regional devolution rather than local authority devolution. And I think just very quickly touch upon your point around democratic deficit. I believe I can say this because I also used to be a councillor for six years, seven years before I was elected as mayor.
Certainly in my part of the world, in my experience, I would say that most people, the vast majority of people, could not name who their local councillor is. They certainly couldn't name who the leader of their local council is. Council is they rarely engage with the local authorities, largely because actually there are very few services really delivered by local authorities any more beyond adult and children's social care. So a number of the local authorities that come under the Tees Valley, more than 80% of their budgets goes fully on adult and children's Goes fully on adult and children's social care.
And so the idea that they can engage with the public properly, they can deliver services properly outside of that remit, just doesn't really exist. And I also think maybe it's because we're the flavor of the month of the minute, because different administrations, and now we have a prime minister who is a mayor. There's a huge amount of scrutiny and accountability to directly elected mayor, and we find that turnout is marginally higher than it tends to be at local authority level, particularly in my part of the world.
And you find that the scrutiny element of that and the direct link to local. people we've run and government actually require us on an annual basis to run surveys looking at awareness of what the combined authority does, what the mayors do, etcetera, etcetera. And you find the.
16:10
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16:11
16:11
Speaker 1
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Speaker 1
the combined authority does, what the mayor is responsible for, what they've done is. significantly higher at a mayoral level than it is about speaking about their own local authority. So I. personally don't think that there is a democratic deficit. I actually think having this is a genuinely open debate, but my view is having, at a regional level, a directly elected mayor who is directly elected by the electorate on a four year basis, I think increases actually local government accountability to the electorate, who just find it easier to understand and engage with a single person, what they do, what they don't do.
And that's where it gets a bit muddy, because often they think you're responsible for things you're not responsible for either. Central government is an arm's length government body is a local council is. And so there is still a huge education piece. I mean, I've been mayor for nearly ten years, and you still find yourself saying, this is what we do. This is what we don't do. You often where's your where is your gold chain? I'm not ceremonial mayor.
We do this or what does that mean? How is that different from that guy? You know?
And that's where it gets a bit muddy, because often they think you're responsible for things you're not responsible for either. Central government is an arm's length government body is a local council is. And so there is still a huge education piece. I mean, I've been mayor for nearly ten years, and you still find yourself saying, this is what we do. This is what we don't do. You often where's your where is your gold chain? I'm not ceremonial mayor.
We do this or what does that mean? How is that different from that guy? You know?
16:11
Lord Carrington of Fulham
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Lord Carrington of Fulham
So there is still a huge education piece to do with the public. I understand exactly what you're saying. I think your point about people not being able to identify their local councillors or the leader of the local . Council, Actually, dare I say , it applies to mayors as well, and MPs and possibly the MP as well, but because but what? And I was interested that you were talking about adult social services, which social care which and indeed send and all the rest of it.
It. Those are expenses which are dictated by the central government to be spent by local councils. As I understand it, pretty much it's a requirement for councils to provide that, regardless of whatever else they can do. Actually, what most people think about the local council is been clearance and potholes, and neither of those are under the regional authority. What worries me about the way you've been talking? I don't disagree with it.
I think what you're saying is actually the way the wind is blowing. But what worries me about it is that we are moving towards regional government, that if we are saying strategic authorities are now going to be local councils working with the mayor, what that eventually means is the mayor dictating to the local councils, because unless the locals have a veto on the mayor, which has been suggested to us by other evidence in the past, which came slight surprise to, I suspect, of some local mayors.
But is this the way this is all going, or should we be worried about the fact that local that we are setting up regional government without any real thought about how that relates to the local government and what the democratic deficit then becomes between the two? Because a mayor of London, for instance, I'm a Londoner, I've lived in London all my life. I'm a Londoner, I know London well. The mayor in London, if he starts to be, have the powers of a regional strategic authority in the way that Manchester perhaps even has to dictate the local councils in London, you would have an enormously complicated problem because of the differences between the local councils across London and the nature of their populations, the nature of their economies, the nature of their tax bases and so on.
It. Those are expenses which are dictated by the central government to be spent by local councils. As I understand it, pretty much it's a requirement for councils to provide that, regardless of whatever else they can do. Actually, what most people think about the local council is been clearance and potholes, and neither of those are under the regional authority. What worries me about the way you've been talking? I don't disagree with it.
I think what you're saying is actually the way the wind is blowing. But what worries me about it is that we are moving towards regional government, that if we are saying strategic authorities are now going to be local councils working with the mayor, what that eventually means is the mayor dictating to the local councils, because unless the locals have a veto on the mayor, which has been suggested to us by other evidence in the past, which came slight surprise to, I suspect, of some local mayors.
But is this the way this is all going, or should we be worried about the fact that local that we are setting up regional government without any real thought about how that relates to the local government and what the democratic deficit then becomes between the two? Because a mayor of London, for instance, I'm a Londoner, I've lived in London all my life. I'm a Londoner, I know London well. The mayor in London, if he starts to be, have the powers of a regional strategic authority in the way that Manchester perhaps even has to dictate the local councils in London, you would have an enormously complicated problem because of the differences between the local councils across London and the nature of their populations, the nature of their economies, the nature of their tax bases and so on.
16:14
Speaker 2
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Speaker 2
Isn't this a problem in devolution? Well, I with respect, I don't think that's where we are. I come back to the, you know. 93% of the of the money raised in London is raised goes to central government and they choose how to spend it. We're we're taking baby steps in the direction of creating a strong regional structure of, of mayors. predominantly to take on some of the functions that otherwise would have been delivered by national government in those areas.
I think the crucial thing is to be clear about who's doing what.
I think the crucial thing is to be clear about who's doing what.
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