Mayors to keep more local cash under plans considered by Jeremy Hunt

Mayors and councils will keep more taxes paid in their local areas under plans being studied by Jeremy Hunt to boost local coffers.

The Chancellor has told colleagues that he is keen to increase the amount of business rates local areas can keep from the current 50pc level.

Mr Hunt is eager to move away from the current system of “top-ups” and “tariffs” that he believes offers little incentive to attract new businesses. Under the current system, revenues from business rates above a government-set threshold are mostly clawed back by Westminster. These funds are then used to subsidise poorer areas.

The Treasury is expected to raise £28.5bn from business rates this year, making it the sixth biggest revenue generator for the Exchequer.

This week, the Chancellor set out a vision for more “local decision making” and a desire to move more “decisively towards fiscal devolution” in a major speech on the economy.

The changes to business rates are being explored as part of wider devolution plans that could see some metro mayors receive billions of pounds in department-style settlements to spend on the local economy.

Andy Street, the West Midlands Mayor, has urged the Government to move away from a “begging bowl” culture of competitive funding pots where every spending decision is subject to Westminster scrutiny.

West Yorkshire Mayor Tracy Brabin has also criticised a system that “forc[es] local areas to compete against each other”, arguing that this is not “the way we level up”.

Mr Street is seeking broader funding deals like the £1bn granted in 2021 to improve the region's transport system.

The West Midlands already retains all of the business rates it collects alongside other areas including Andy Burnham's Greater Manchester, Merseyside, and Cornwall. The schemes, which formed part of devolution deals that took effect in 2017, are all cost neutral, meaning each area had to forgo central government grants in other sectors such as health and transport. West and North Yorkshire also took part in a pilot that enabled the areas to retain 75pc of business rates.

“The biggest challenge is to try to make it fiscally neutral,” said one local leader in discussions with Downing Street.

“They seem very open to letting us keep more money but are trying to make it about flexibility and certainty over long term funding.”

Mr Street, the former boss of John Lewis, is also pushing for wider powers that will allow local areas to retain more of the money collected from other taxes, including stamp duty and air passenger levies.

However, it is understood that these proposals are not currently a priority for the Treasury as Mr Hunt prepares to deliver his March budget.

Michael Gove, the Levelling Up Secretary, has in the past supported proposals to hand control of business rates directly to elected mayors, which he said would help to boost investment. He has also suggested Mayoral spending powers could be extended to policing and education.

Tees Valley Mayor Ben Houchen has called for more powers to cut taxes to attract business investment.

Mr Hunt said this week that he was working to ensure that Mayors like Mr Street and Mr Houchen “have the tools they need to deliver for their communities”.

However, Mr Hunt's proposals are likely to face resistance from Rishi Sunak, with Number 10 understood to be less keen to devolve more powers to the local authority level.

"They quite like giving powers to combined authorities, because there is a perception that they are better at using public money because they're a narrower organisation,” said one government source.

George Osborne, the former Chancellor, introduced a business rates retention scheme in 2013 that allowed councils to keep up to 50pc of local business rates. The goal was originally to move to 100pc by 2020, but this was delayed due to concerns it could create a postcode lottery where only already-strong areas thrived.

Government insiders said a devolution drive remained a priority but that new powers would initially be focused at the combined authority level, led by elected mayors. A Treasury source stressed that no decisions had been made on policy.

A Treasury spokesman said: “We don’t comment on speculation regarding tax policy.”