The Treasury's Biggest Gamble: Reeves Bets on Income Tax Devolution to Close Britain's North-South Divide

Chancellor Rachel Reeves has unveiled a sweeping plan to give England's regional mayors control over a share of income tax revenues — the most ambitious fiscal devolution proposal in English history. Announced during the prestigious Mais lecture at Bayes Business School on March 17, the proposal would fundamentally reshape the financial relationship between Westminster and the regions, transferring power over nationally collected tax revenues to local leaders for the first time [1][2].

The move sits at the heart of Labour's growth strategy, which argues that Britain's chronic productivity problem cannot be solved from Whitehall alone. But critics warn the plan risks creating a patchwork tax system, deepening inequalities between richer and poorer regions, and amounts to political window-dressing in the absence of concrete details.

What Reeves Actually Proposed

Speaking to an audience of economists, business leaders, and policymakers, Reeves directed Treasury officials to "work with mayors and businesses to develop a roadmap for future fiscal devolution, to be published at this year's Budget" [1]. The proposal would give regional leaders "control of a share of some national taxes which have, for too long, been allocated by central government," with income tax identified as the primary candidate alongside other levies [2].

Crucially, Reeves stressed that the plan would not raise taxes. "This is not about new taxes and it's not about higher tax rates — I will not ask taxpayers to pay more," she said [1]. Instead, the proceeds of locally generated economic growth would flow back to the places that created it, rather than being pooled in the Treasury and redistributed centrally.

The reforms would initially target regions "that have the greatest capacity to deliver them and the greatest potential to benefit" [3] — widely interpreted as meaning the established mayoral combined authorities in Greater Manchester, the West Midlands, West Yorkshire, and other metropolitan areas.

Four guiding principles were outlined: empowerment, accountability, sustainability, and fairness. The roadmap must also manage the tension between allowing regions to benefit from growth and protecting the Exchequer from volatile receipts [1].

£2.3 Billion in City Investment Funds

Alongside the income tax proposal, Reeves announced £2.3 billion in new City Investment Funds — a mix of grants, loans, and patient capital that mayors can deploy for city-centre regeneration, housing, and private investment attraction [2][4]. Of this, up to £1.7 billion will flow to mayors in major Northern city regions: Greater Manchester, West Yorkshire, the North East, Liverpool City Region, and South Yorkshire [4].

The funds are backed by a commitment to business rates retention, giving established regional leaders "control over long-term, self-sustaining capital; theirs to generate returns from, theirs to invest" [1].

Reeves also doubled down on corridor-based growth strategies, announcing £15.6 billion for Northern transport infrastructure spanning nine cities from Liverpool to Hull — covering "new trams, new train stations and new bus routes" — and doubling funding for Cambridge to over £800 million as part of the Oxford-Cambridge growth corridor [1].

Why England's Fiscal Centralisation Is the Problem

The UK is one of the most fiscally centralised nations in the developed world. While Scotland and Wales have had income tax powers devolved since the Scotland Act 2012 and the Wales Act 2014 respectively, English regions have been almost entirely dependent on funding allocations from Whitehall [5][6].

This centralisation has coincided with — and arguably entrenched — some of the most severe regional economic disparities in any OECD country. In 2023, London's GDP per capita stood at £63,618, compared with just £26,347 in the North East of England — a gap of more than £37,000 per person [7]. Apart from London and the South East, no English region exceeds the national average of £37,135 per capita [7].

Source: ONS / Statista

Data as of Jun 1, 2025CSV

The consequences are visible across every economic metric. Productivity in many Northern and Midlands regions lags 20-40% behind London and the South East. Wage growth outside London has been persistently slower, and the gap has widened since the 2008 financial crisis [8].

Proponents of fiscal devolution argue that this centralised model creates a vicious cycle: regions cannot invest in the infrastructure and services that would attract business, because they lack the revenue base; and they lack the revenue base because they cannot attract business. Giving mayors a direct stake in income tax revenues, the argument goes, would create a virtuous cycle where local leaders are incentivised to grow their economies because they directly benefit from the tax receipts.

The Scottish Precedent: Promise and Caution

Scotland's experience with income tax devolution offers both encouragement and warning for Reeves' plans. Since gaining control over income tax rates and bands, the Scottish Parliament has established a distinctive five-band structure, with average tax rates approximately three percentage points higher than equivalent UK rates [9].

Operationally, HMRC found it "relatively straightforward" to administer different tax rates in Scotland [9]. But the fiscal consequences have been sobering: Scotland's budget has come under pressure from weaker tax revenue growth than initially projected, and is forecast to be smaller than it would have been without devolution [9].

The lesson for English regions is clear: fiscal devolution can provide policy flexibility, but it also transfers economic risk. Regions with weaker economies could find themselves trapped — unable to raise rates for fear of driving out taxpayers, yet starved of revenue compared to wealthier neighbours.

The Accountability Question

One of the strongest arguments for fiscal devolution is democratic accountability. Currently, English mayors control significant spending but raise almost none of their own revenue, creating what political scientists call an "accountability gap" [5]. When mayors spend central government grants, there is limited incentive to ensure value for money because the political cost of raising revenue falls on Westminster, not on local leaders.

The Institute for Government has noted that England "remains a highly centralised country with mayoralties relying heavily on central funding," with roughly half of England's population still lacking any devolution deal at all [5]. The government's English Devolution and Community Empowerment Bill, currently progressing through the House of Lords, aims to bring nearly 80% of the population under mayoral governance through new elections in May 2026 [10].

The overnight visitor levy — a tourist tax that mayors will gain the power to introduce — represents the most concrete new revenue-raising power on offer. Unlike the voluntary charges already operating in Manchester and Liverpool, this will be a statutory levy expected to generate "substantially higher income" [5].

Political Reaction: Vision or Distraction?

Shadow Chancellor Sir Mel Stride dismissed the announcement as a diversion. "Rachel Reeves wants to blame everybody else but herself for her dreadful management of the economy," he said, pointing to £66 billion in tax increases, stalled growth, and deteriorating business confidence under Labour [3].

The Institute for Public Policy Research (IPPR) offered a more measured endorsement, calling the announcement "a welcome shift toward rebalancing Britain's economy" while emphasising that income tax devolution alone would not be sufficient — it must be paired with additional powers and investment to "truly rival economic opportunities in the South" [3].

The Institute for Government's analysis was notably cautious. While acknowledging the ambition, analysts pointed out that Reeves' lecture was "notably brief" on devolution specifics and referenced adult education budgets "already devolved to most combined authorities," suggesting practical plans remained underdeveloped [11]. More fundamentally, the IfG warned that Reeves' debt rule "will severely constrain capital spending" unless accompanied by tax increases or spending cuts — neither of which she discussed [11].

The Implementation Minefield

The devil, as always, is in the detail — and there is very little detail so far. The Treasury has committed only to publishing a roadmap at the autumn Budget, meaning concrete proposals are at least six months away.

Several fundamental questions remain unanswered:

How much income tax? Reeves has not specified what share of income tax revenues would be devolved. Scotland controls all income tax rates and bands on non-savings, non-dividend income. A similar model for English regions would represent a radical transfer of fiscal power; a smaller share — say, assigning a fixed percentage of receipts — would be more manageable but less transformative.

Which regions first? The "greatest capacity" criterion suggests a tiered rollout, beginning with established mayoral authorities. But this creates a two-speed England where more developed regions gain fiscal tools to accelerate growth while less developed areas wait.

Fiscal equalisation? Without a robust equalisation mechanism, income tax devolution could widen rather than narrow regional disparities. London and the South East generate disproportionate income tax receipts per capita. If those receipts are partially retained locally, poorer regions could receive even less from the central pool.

Administrative complexity? Identifying taxpayers by region, managing cross-border workers, and handling the interface between local and national tax systems all present significant operational challenges, as Scotland's experience has demonstrated [9].

Source: FRED / Federal Reserve

Data as of Mar 13, 2026CSV

A Generational Gamble

Reeves described devolution as "a generational opportunity for Britain's regions to make their own future" [1]. The framing is deliberately grand — and the stakes match it.

If income tax devolution works as intended, it could break the cycle of centralised decision-making that has left much of England economically stagnant for decades. Mayors with a direct financial stake in local growth would have powerful incentives to cut planning delays, invest in skills, and attract business — all without requiring additional public spending.

But if the equalisation framework is inadequate, or if the devolution is too timid to make a real difference, the policy risks becoming another entry in the long list of "levelling up" initiatives that promised transformation and delivered disappointment.

The autumn Budget roadmap will determine which path Britain takes. For now, the most significant fiscal reform proposed for England in a generation remains exactly that — a proposal.