English regions should be funded by local taxes, not grants, think tank says

By Andy Bruce

MANCHESTER, England, Sept 16 (Reuters) - England's mayors should be funded from taxes raised in their own regions rather than government grants, with safeguards so poorer areas do not lose out, a think tank said on Wednesday as ministers ready plans to shift power from London.

Fiscal devolution is the centrepiece of Prime Minister Andy Burnham's drive to reduce London's economic and political dominance in one of the world's most centralised and most unequal developed democracies.

Centre for Cities, a think tank, said elected mayors should be able to keep around 7% of locally generated income tax receipts and 2% of their regions' corporation tax revenues.

The proposal would replace almost £5 billion ($6.74 billion) of existing funding that mayors receive from Britain's finance ministry in grants, making it cost-neutral.

To stop richer regions pulling away, the think tank proposed a system, modelled on Switzerland, guaranteeing every area a minimum funding floor, funded by a tariff on those with the largest tax bases.

Only about 6% of tax in Britain is raised below the national level, compared with 20% in France and roughly half in Germany and the United States, according to data from the Organisation for Economic Co-operation and Development.

"This government has rightly placed fiscal devolution at the centre of its plans to rewire the state," said Andrew Carter, chief executive of Centre for Cities. "It is now critical that it does not miss the opportunity to do so in a way that maximises the potential for economic growth."

Carter welcomed a proposal by Burnham to allow regions to retain a share of their income tax haul but he saw a risk that the government would refrain from also using the "vital lever" of corporation tax due to its perceived complexity.

Centre for Cities said mayors should be able to keep their share of corporation tax revenues without being subject to the Swiss-style mechanism used to redistribute income tax.

This would push mayors to encourage local business and allow them to invest in high-productivity sectors, the report said.

The government is likely to outline more of its fiscal devolution plans in the coming weeks ahead of finance minister John Healey's budget on October 28.

Unlike English regions, Wales and Scotland already have devolved parliaments and partial tax-raising powers.

($1 = 0.7416 pounds)

(Reporting by Andy BruceEditing by William Schomberg and Sarah Young)