John Healey will have to carry out Andy Burnham's devolution plan. Devolution is Burnham's preferred growth lever. Mauricio Alencar explores how devolution under Chancellor Healey could save Britain or destroy it.
In 1998, two of the closest aides of then-chancellor Gordon Brown produced a report into the regional economic divide in Britain.
The report, called 'Towards a new regional policy: Delivering growth and full employment' proposed building up what it called "regional development agencies," or RDAs, encouraging local leaders to "work with business" and boost investment. In the 12 years that followed, those investment bodies spent billions of pounds.
The report's authors were Ed Balls and one John Healey. The latter now finds himself at the helm of the Treasury, with a renewed mandate from his new boss, Andy Burnham, to figure out how to devolve fiscal power and deliver "growth in every postcode."
The RDA legacy
Balls and Healey's vision was not without its critics. The RDAs would later be shut down under George Osborne's cost-cutting programme beginning in 2010. A National Audit Office report suggested that the bodies had generated returns to the multiple of three for some areas, driving returns in both the short and long term. But the report also found that they often complicated priorities and lacked accountability, while many bodies had failed to deliver on over-optimistic projections. To their critics, these institutions were nothing more than quangos redistributing public cash.
Reflecting on the role of RDAs in 2021, Healey said the Coalition government's move to abolish them was "desperate" as he accused Boris Johnson's 'Levelling Up' campaign as being "entirely specious". He argued that RDAs had forced a mindset shift in Whitehall that had previously "never really" taken the view that local leaders could shape economic policy. He said the case for devolution was based on "potential", greater creative thinking, and geography-based policymaking, which the business department was "resistant" to.
Burnham is devoted to devolution. From his first day in Downing Street, Andy Burnham has devoted himself to the cause of devolution. Spreading power around the country appears to be the government's preferred growth lever. Burnham said opening Number 10 North was the "best day of my life".
In 2025, the former Greater Manchester mayor created a £1bn "Good Growth Fund" for the region, financed by local government pension pots, government grants and cash from Rachel Reeves' National Wealth Fund. It dwarfs London mayor Sir Sadiq Khan's £70m fund.
Currently, local governments and mayors are receiving about £83bn in grants from the government while authorities also collect council taxes and retain some receipts from business rates. Other charges may be imposed by mayors.
Under plans being drawn up for the Budget, mayors are set to get a bigger portion of taxes "raised in a community", on the basis that retaining more cash will encourage local leaders to drive growth.
Concerns over "postcode lotteries" and a loss of control over public finances have long unnerved the Treasury. But the UK, which has one of the world's most centralised governments, already suffers from wider regional inequality than countries such as Germany and Sweden that have spread powers away from capital cities. Labour centrists believe that devolution, done right, is both ideologically coherent and economically beneficial. Critics consider the agenda a distraction to a wider pro-growth mission.
Fiscal formula debates
While fiscal devolution was just an addendum to former Chancellor Rachel Reeves' March lecture on growth, it is the central pillar of Burnham and Healey's mission in government. Yet the two leaders have been warned: get this wrong, and it could deepen economic divides and entrench Britain's economic malaise.
"If you get it wrong the first time, unwinding it will be a nightmare. If you get it right first time, then investors will start to think, 'Actually, game on'," said Professor Philip McCann, an urban and regional economics professor who is part of the Productivity Institute.
Treasury officials face several landmines when designing a revenue distribution scheme. Firstly, that the funding distribution does not leave some regions behind due to endemically weaker growth. Secondly, that reforms can stay for the long-term and withstand cuts introduced by any future government. And third, that reforms create sustained long-term gains rather than short-lived benefits.
Exactly how to distribute the cash is now the hot Westminster debate giving officials a headache.
The straightforward framework would be to provide different areas with a flat percentage of revenue generated locally. At a surface-level reading, this is what Burnham and Healey seemed to suggest when they said authorities would be able to retain a portion of income tax receipts generated.
Such a system would almost exclusively benefit London. As the accountancy BFN highlighted in 2024, Kensington and Chelsea generated some £4.5bn in income tax receipts in 2022 compared to £920m for Manchester City Council, which was behind scores of other London councils as it finished 62nd on the income tax list. London's higher growth rate
Oxford Economics researcher Liam Sides pointed out that if London grew at a faster pace and retained more of the income generated locally, it would create a "self-reinforcing cycle of faster growth" for the city. Then, as London builds its economic fortunes due to its record of higher growth, central government could claw back funds from the region, redistribute them to low-growth areas and de facto "punish" the capital for delivering greater returns.
"At which point," Sides said, "the whole purpose of incentivising growth is completely undermined."
Instead, changing tax revenues kept by local leaders may need to be based on more than the size of local income, or how local income grows over time.
The Institute for Fiscal Studies' David Phillips has another idea. A framework based on sharing a flat portion of income tax receipts generated locally could be volatile on a year-to-year basis and make local tax systems over-reliant on the wealth of higher income tax rate payers. Instead, a flat pence in the pound in each tax band would mean that the central government paid the cost of any tax rate cuts while encouraging local governments to benefit from increasing the pay of taxpayers across all income levels.
But the Productivity Institute's McCann said any revenue sharing should be framed around risks priced in by investors in areas that are less economically productive, such as in the North East of England. He argued that public cash should be used to de-risk investments in such areas, crowding in more private investment that generates real growth. Cash would then be retained in local regions' investment pots as assets deliver returns while support would be reduced over time, although the government would have the complex task of ensuring that growth incentives remain.
This informs the reasoning behind the state-owned British Business Bank and the larger National Wealth Fund, which allow smaller businesses to get access to finance and larger projects to receive some backstop support. McCann said the two organisations would become "critical" where local regions have investment pots of their own. But he cautioned that the bank had "lost its real sense of where it's going", citing its focus on green investments. The National Wealth Fund has also suffered some teething problems since it was renamed and expanded when Labour came into office.
McCann suggested that Burnham's announcements suggest he was "getting it right" so far, with the former mayor having previously run a housing investment loans fund. This might be the way Burnham's promise to give Brits greater "public control" could manifest itself.
At some point, Burnham and Healey's vision for devolution is likely to collide with politics. Ben Houchen, the Conservative metro mayor of the Tees Valley in the North East, vowed to use any extra income to offer tax cuts to locals, prompting ministers to say he would not be allowed to do so.
A number of think tanks and organisations which caution against an expansion of the state also wrote to the Treasury to protect taxpayers from unrestrained spending and new stealth taxes being imposed on them. Other left-leaning organisations, including the Labour-linked Institute for Public Policy Research (IPPR), believe mayors should have the power to borrow to fund infrastructure projects.
Legal guardrails are likely to be built to maintain strict controls on how newly-empowered policymakers can or can't use money. That means lawyers may find new friends in locally-elected leaders searching for loopholes.
Under-scrutinised local officials could well get into hot water, local government isn't always a byword for financial probity, and require a bailout from the government, putting further pressure on public finances. For instance, local authorities in Nottingham and Birmingham have run into financial issues due to over-spending and failed investments on everything from energy schemes to housebuilding. More recently, the Scottish government, which has the powers to change income tax rates, has come under fire after a levy hike on the rich by the SNP led to a drop in revenue.
While a breakup of tax powers is unlikely to be a central feature of upcoming devolution plans, offering English or Welsh leaders greater powers over setting some rates could further complicate the wider system.
A comprehensive devolution programme will likely take years and outlast Burnham or Healey. The Centre for Cities, one of Burnham's favourite think tanks given its focus on mayoral powers, says that the initial focus should be on metro mayors before an expansion to local authorities. It could leave areas in the West Midlands or Cornwall lagging behind but researchers at the organisation say tax bases across mayoral strategic authorities vary less while city leaders don't need to provide a wide range of essential services such as social care, unlike local councils and authorities. Mayors therefore may be better positioned to drive growth, not least because cities tend to provide better financial outcomes anyway.
The think tank argues that just one per cent of income tax is needed for devolution to begin having some effects, though safety nets and a "contribution threshold", where successful mayors delivering higher gains share a part of tax receipts with under-performing regions, would ensure that regional inequalities don't widen.
Early mistakes around the crucial formula for how cash is distributed could backfire. The Treasury has very little time to plan, with the Budget just two months away. But local mayors might hope that, after thirty years of waiting to deliver on devolution, Healey is ready for the challenge.