New revenue-sharing with mayors needs careful design to avoid richer areas’ funding quickly pulling ahead

The government has committed to sharing a portion of income tax revenues with England’s regional mayors from April 2028. The crucial details of how this revenue assignment plan will be implemented are expected in a ‘fiscal devolution roadmap’ alongside this Autumn’s Budget. A new IFS report – produced as part of the IFS Green Budget 2026 with support from CIPFA and the Nuffield Foundation – lays out the key issues, choices and trade-offs the Chancellor faces in the design of the new system. 

The government has already said the system will be ‘fiscally neutral’ initially – new assigned revenues will replace part of the grant funding mayors currently receive from the government such that overall, they don’t see an overnight increase or decrease in funding. Tax rates will continue to be set in Westminster. But, over time, areas will gain revenue if their local economies and tax revenues grow – and lose if they do not – providing a financial incentive to support growth. 

Billions of pounds of funding per year for transport, skills and economic development are at stake. Our analysis shows that without careful design, richer areas such as Greater London could see their funding pull significantly ahead of poorer mayoral areas in the North and Midlands, and areas without mayors. Rather than helping narrow regional inequalities, as government intends, this could widen them. 

Our report finds that: 

• The government should operate a system of ‘equalisation payments’ (to/from mayors) to offset large initial differences between assigned tax revenues and the grant funding being replaced. This could avoid overnight winners and losers. In 2023–24, income tax revenues per person ranged from an estimated £2,390 (in today’s prices) in the Tees Valley to £8,590 in Greater London. 
• The decision of how to update the system in future years will be crucial. If equalisation payments are fixed or increased only in line with inflation, they will shrink relative to (growing) assigned tax revenues. As a result, those mayoral areas which start with high tax revenues compared with the grants they forgo would see their revenues after equalisation outpace other parts of the country even if their underlying income tax revenues did not. Under some reasonable scenarios, funding for Greater London in particular could pull ahead to the tune of billions of pounds per year within 10 years – even if income tax revenues in the capital grew no faster than anywhere else. The total share of income tax revenues assigned to mayors would also grow over time, leaving less for the government to spend on national services and parts of England that lack regional mayors. 
• To avoid this, there is a strong case to increase equalisation payments each year in line with national growth in income tax revenues. This would maintain the amount of redistribution relative to national revenues, without weakening mayors’ financial incentives: they would still gain if their income tax revenues grew faster than the national average and lose if their revenues grew more slowly. Differences in growth between areas could still lead to big differences in funding for different mayors in the long run though – this is what ‘rewarding areas for local growth’ means. 
• In recent years, income tax revenues per person have grown more than twice as fast in London, Cambridgeshire and Greater Manchester than in the North East and the Tees Valley. This is largely the result of UK government policies which increased the share of income taxes collected from high earners. While patterns of growth could differ in future, the government needs to decide now how willing it is to see differences in local tax performance – as a result of government policies or differences in underlying growth – actually feeding through into the funding available to mayors. Resetting the system periodically, setting funding floors or charging levies on fast-growing areas could limit divergences in funding, but would also weaken incentives for mayors. 
• Choices over these and other aspects of the design of the new system should reflect how important the government thinks financial incentives are relative to some of the other potential benefits of revenue assignment. Allowing mayors to retain more of the increases (or falls) in local tax revenues for longer would give them a bigger financial incentive to enact policies that boost the incomes of local residents. Revenue growth as a result of mayoral investments could help repay debts incurred to pay for the up-front investment costs. But another potential benefit is helping mayors plan for the longer term by giving them greater certainty over funding than they currently get from year-to-year grants. A system that limits both big falls and big rises in revenues would weaken financial incentives somewhat, but provide more certainty over future funding.

David Phillips, head of devolved and local government finance at the Institute for Fiscal Studies and an author of the report, said:

‘The design of the new revenue-sharing arrangements for England’s regional mayors will be one of the most consequential decisions taken at this year’s Budget. While there might be no effects on funding on day one, over time some parts of the country will gain financially and others lose. 

‘That effect is part of the point of the reform: with more skin in the game of economic growth, mayors will be more incentivised and empowered to support growth through local policies and investments. But careful design will be needed to prevent richer areas’ funding unfairly pulling ahead. The government must also decide how big a gap in funding it is willing to see between “winners” and “losers” in the years ahead.’

Iain Murray, Director of Public Financial Management at CIPFA, said:

‘Allowing mayoral strategic authorities to retain a share of income tax revenues is a bold change to both the tax and local government funding systems; its significance should not be underestimated. While this change would initially be revenue neutral, mayors should respect the very different nature of this funding source, recognise that in their policy priorities and look to the long term.

‘Measures that encourage strategic public investment in regional growth are welcome. But both the government and mayors will also need to adapt to new financial risks as well. This means having in place systems – and the professionals to run them – to identify and manage the financial and strategic risks and opportunities that revenue assignment will bring to England’s mayoral authorities.’

Mark Franks, Director of Welfare at the Nuffield Foundation, said:

‘Regional inequalities in England are already wider than is easy to reconcile with either fairness or economic efficiency. Tax-sharing with England’s mayors has the potential to help, but the design of the new funding system will be critical in determining whether reform improves opportunities for people in poorer areas and strengthens the economy as a whole or allows existing gaps to widen further.’