Westminster is finally admitting what local leaders have said for decades: centralizing every single penny of tax revenue breeds massive regional inequality.
The government is quietly drawing up plans to hand billions of pounds raised by business rates over to regional mayors. Local Government Secretary Steve Reed confirmed that fiscal devolution is firmly on the table. Chancellor Rachel Reeves wants to announce the initial framework in the upcoming budget.
But don't assume this is a straightforward win for local councils. Behind the scenes, it's a complex, high-stakes gamble that could just as easily starve poorer regions as it could supercharge prosperous ones.
The Secret Scale of the Devolution Plan
Right now, business rates are a massive cash cow for Whitehall. Last year alone, the tax raked in £26.4 billion from shops, offices, pubs, and warehouses across the country. It's a property tax based on rateable value, and historically, central government has tightly controlled how that cash gets redistributed.
The new proposal doesn't mean handing over all £26.4 billion overnight. Instead, ministers are looking at letting regional mayors keep a significant chunk of the growth and baseline revenue generated within their borders.
Think about the sheer scale of mayoral budgets today. Sadiq Khan managed a £22 billion budget in London last year. By contrast, regional mayors across the north and midlands operate on a fraction of that. Giving metro mayors direct access to business rates completely changes the power dynamic. It gives local leaders long-term financial certainty to fund infrastructure, transport, and public services without begging the Treasury for grants.
This isn't just about business rates either. The Treasury is looking at a wider menu of regional taxes. They're actively studying options to devolve elements of income tax. There's a parallel consultation on a national "tourist tax," which would let local areas slap a supplementary levy on hotel and holiday let stays.
The Danger of the Economic Death Spiral
The logic behind fiscal devolution sounds great in a textbook. If a region supports its high street and attracts major employers, its business rates revenue goes up. The mayor gets more money to invest, creating a virtuous cycle of economic growth.
But what happens to the areas that are already struggling?
If you tie local funding directly to local business health, you risk punishing places that need help the most. An industrial town with shuttered factories and empty retail parks can't generate the same tax revenue as a booming tech hub or a bustling commercial city center. Without a massive safety net, fiscal devolution could trigger an economic death spiral for poorer regions.
Steve Reed acknowledged this risk, admitting that an "equalisation mechanism" is mandatory. Poorer areas can't just be left to sink. The government wants a system that rewards fast economic growth while maintaining a baseline floor to support deprived communities.
Balancing that equation is incredibly difficult. If you redistribute too much of the cash to poorer areas, you kill the incentive for richer areas to grow. If you don't redistribute enough, the regional divide gets significantly wider.
High Streets are Already Reaching Their Limit
This policy shift comes at a time when business rates are a toxic political battleground. Small businesses, particularly independent pubs and hospitality venues, are furious.
A post-pandemic revaluation caused taxable rates to skyrocket for thousands of high street premises. Combined with rising energy bills and staff costs, many independent operators feel they're at the absolute limit of survival. Sir John Whittingdale recently challenged the government in the House of Commons, warning that mounting fiscal pressures are threatening to crush local high streets completely.
Mayors want control of the cash, but they also want the power to cut the burden. Greater Manchester Mayor Andy Burnham has pushed hard for a 20 percent cut to business rates for pubs, alongside lifting the threshold to exempt more small firms entirely.
Here is the catch: under the current Treasury proposal, ministers are willing to hand over the revenue, but they aren't planning to give mayors the power to set the tax rates themselves. Whitehall will still set the "multiplier"—the pence-in-the-pound rate used to calculate the bill. Mayors will essentially be regional tax collectors, managing the cash but unable to rewrite the rules to protect their own high streets.
How Local Leaders Should Prepare for the Shift
This policy isn't fully formed yet, but the direction of travel is entirely clear. Regional authorities and local business groups can't afford to sit back and wait for the budget announcement.
If you run a regional business alliance or work in local government, you need to start auditing your local tax base immediately.
- Map your vulnerabilities: Identify which sectors drive your local business rates revenue. If your area relies heavily on traditional retail, you're at risk. You need plans to diversify into logistics, green energy, or digital hubs.
- Form regional coalitions: Individual councils will have zero leverage when the equalisation formula is drafted. Mayors and council leaders must band together to demand a transparent redistribution system that doesn't penalize post-industrial towns.
- Build commercial partnerships: Start designing local infrastructure projects that directly support business expansion. When the revenue shift happens, the regions with shovel-ready growth projects will lock in the financial rewards first.
