By Akira Matsutani – Director General, Japan Local Government Centre, London.
Translated by Keith Kelly.
15 Whitehall office
As the UK edges steadily toward deeper decentralisation, the next frontier is becoming unavoidable: the fiscal question. Structural reform of local authorities is moving ahead, but once the institutional map is settled, attention will inevitably shift to who controls the money – and how.
For all the political rhetoric about empowering place, meaningful devolution will require one uncomfortable but unavoidable step: strengthening local taxation. Council Tax (local residents’ tax) alone cannot shoulder the expectations being placed on local government. New, locally driven revenue sources will need to be explored. But that immediately raises difficult questions about the balance between local autonomy and national coherence.
Some commentators have floated the idea of converting portions of VAT or income tax into fully local taxes. In reality, that is unlikely. These are core national revenue streams, and the Treasury is not about to surrender them wholesale. A more plausible pathway – one many countries have adopted – is the shared tax base model, where both central and local government draw from the same sources, with locally varying rates. But if we the UK goes down this route, we it must also confront the technical challenges that follow: varying tax rates across regions, defining taxable items, and ensuring administrative systems can cope.
Even if countries get local taxation right, another, larger issue looms: inequality of tax capacity between areas. The more revenue we devolve, the more pronounced the geographic disparities become. That is why fiscal equalisation mechanisms are not an optional extra; they are the backbone of any functional decentralised system.
The UK already has the Revenue Support Grant, but its scale today is modest – only £1.9 billion in 2023–24, less than 1% of total local revenue. By contrast, Japan’s equivalent equalisation system distributes around £95 billion annually – roughly 16% of local revenue. That reflects decades of debate in Japan about how to devolve power while still ensuring residents in every community receive core public services.
Japan’s system is built on a simple principle: allocations start from the estimated level of service demand in each municipality. In other words, equalisation is designed to guarantee that every resident, regardless of where they live, can access essential services. There is something in that principle worth thinking seriously about as the UK revisits its own settlement.
Of course, no country has produced a perfect formula. Fiscal decentralisation is always a balancing act: between autonomy and solidarity, between local choice and national accountability. But what matters most is that these questions are recognised as structural, not temporary. They determine whether decentralisation genuinely empowers local leaders – or simply hands them responsibility without the means to deliver.
As the UK reopens the debate on fiscal devolution, local government must be at the centre of shaping what comes next. The opportunity here is not merely to secure more money, but to design a settlement that is coherent, sustainable and fair. And as ever, the greatest value lies in conversation – learning from international experience, challenging assumptions and collectively imagining what a truly empowered local state administration should look like.
