Britain's new growth program changes two decisions at once: who chooses regional projects and who keeps part of the tax revenue when they succeed. The government plans to give English mayors a share of locally generated business rates and income tax, while changing central appraisal so places are judged partly on economic potential rather than only current output.
That creates a plausible mechanism, not a guaranteed growth rate. Local leaders may know which transport connection, skills program or housing constraint blocks investment. A longer revenue horizon can reward them for fixing it. Yet places begin with very different tax bases, and local receipts can move for reasons no mayor controls. Equalisation is therefore not a side payment; it determines whether the policy narrows regional gaps or compounds them.
A tax share changes the mayor's payoff
The government's July devolution announcement says mayors will begin retaining a greater share of locally generated revenue from spring 2027, starting with business rates. Details for income-tax retention will come in a roadmap alongside the autumn Budget. The Institute for Fiscal Studies expects income-tax sharing from April 2028.
The incentive differs from a grant. A grant determined in Whitehall can finance local investment, but it may be confirmed for only a few years and can be weakly connected to the extra tax base a successful project creates. Revenue assignment gives a mayor a direct financial gain when local employment, wages or commercial property strengthen. It may also support longer planning because the funding rule can outlast a spending settlement.
But attribution is difficult. A local tax receipt may rise because of national inflation, a sector boom or commuters whose work and residence sit in different authorities. If a formula rewards the entire increase, local government receives both the effect of its decisions and a windfall from outside conditions. If the centre repeatedly resets the baseline, it can remove the incentive it intended to create.
Equalisation is inside the growth formula
The IFS estimates that replacing current integrated settlements for established northern and Midlands mayoral authorities would require roughly 6% to 9% of local income-tax revenue. For Greater London, less than 1% would cover its existing integrated settlement. It also estimates per-person income-tax receipts are more than 3.5 times higher in Greater London than in the West Midlands.
Those gaps make a uniform share deceptively simple. Giving every mayor the same percentage exposes weaker areas to a smaller and potentially more volatile funding base. Equalising receipts according to need protects services and investment capacity, but aggressive equalisation reduces the marginal reward for generating additional tax. The IFS argues that careful design can soften this trade-off, not eliminate it.
The form of assignment also changes behavior. A fixed share of all income-tax receipts gives authorities a larger gain from additional income earned by top-rate taxpayers than from the same income increase among basic-rate taxpayers. Assigning fixed percentage points from each band could reduce that bias and some volatility. Design choices therefore encode an economic objective: attracting high earners, raising broad wages, developing commercial property or some combination.
The Green Book test moves from present to potential
Chancellor John Healey's September 7 speech added a second mechanism. He said economic-potential analysis would enter government investment decisions so places are assessed on what they could become, and pledged to sharpen the focus of public financial institutions already backed by £200 billion. A ministerial statement to Parliament linked that approach with changing the Green Book and reducing regional disparities in public investment.
This can correct a circular problem. Areas with high existing productivity often produce stronger conventional benefit-cost cases because they have dense demand, higher wages and established infrastructure. Directing capital only toward today's measured output can keep reinforcing yesterday's geography. An economic-potential lens can value the removal of a binding constraint elsewhere.
The danger is replacing a measurable bias with discretionary optimism. Every place can describe potential. A credible appraisal needs a counterfactual, a delivery institution, a timetable and a way to distinguish new activity from firms merely relocating across a boundary. Public financial institutions can share risk, but their £200 billion backing is not a new single spending pot, and alignment with priorities is not the same as project additionality.
Additional output is the result that matters
The scale of the challenge is visible in ONS regional productivity data. In the 2023 estimates, output per hour in London was 28.5% above the UK average and the South East 7.7% above. All other regions were below; the West Midlands, East Midlands and North East were around 15% lower. ONS cautions that subregional estimates can be volatile and revised, so the figures are a baseline rather than a policy scorecard.
The strongest counterargument to skepticism is information. Mayors can observe local bottlenecks more closely than central departments and coordinate transport, housing and skills at the scale where firms hire. Even an imperfect fiscal link may improve accountability: voters can compare local choices with local outcomes.
Evidence should now move from announcements to design and results. The Budget roadmap must specify shares, baselines, equalisation, insurance against downturns and treatment of councils that already retain business rates. Later evaluation should track private investment, real wages, employment, journey times and business formation relative to credible comparison areas—not just gross tax receipts.
The policy would look stronger if local gains persist after adjusting for national cycles and do not come at neighboring regions' expense. It would look weaker if richer tax bases pull away, funding swings force short-term cuts or project appraisal becomes a catalogue of untested potential. Devolution can change the payoff for local growth. The equalisation and measurement rules decide whether that payoff becomes additional national output.