Learning from local government finance across the world: an update 2026

The local government finance observatory is a partnership between the LGIU and the University of Northumbria. Led by Dr Kevin Muldoon-Smith, at the University of Northumbria, this research examines in detail how local government is funded in different countries.

Introduction: two years on – progress on the surface, crisis beneath

When this research was first published in January 2024, England’s local government finance system was in acute distress. A small but growing number of councils had issued Section 114 notices, 39% of senior council figures suggest they will need exceptional financial support (EFS) in the next five years, and nearly a decade of austerity had left the system structurally depleted. The proposals set out in that report – reworking the Fair Funding Review, establishing territorial equalisation, creating a standing intergovernmental commission, and exploring the assignment of national tax revenues to local authorities – were drawn from comparative international evidence and were presented as a coherent, systemic response to a systemic problem.

Two years on, there has been real movement. The Labour Government has introduced the first multi-year Local Government Finance Settlement in more than a decade, covering 2026–27 to 2028–29. Fair Funding Review 2.0 (FFR 2.0) has updated the needs assessment formulae for the first time since 2012, incorporating updated deprivation indices and population projections. The Chancellor’s Mais Lecture in March 2026 announced their intention to increase fiscal devolution to mayors, including a share of national taxes. A Recovery Grant has been maintained to redirect resources toward the most deprived authorities. Multiple funding streams have been consolidated. These are, without question, meaningful steps.

And yet, the Local Government Association estimates a funding gap of £6.2bn across 2025–26 and 2026–27 just to sustain services at their current, already diminished, levels. Exceptional financial support has been provided to multiple local authorities since 2020–21, with 35 requiring it simply to balance their 2026–27 budgets. Cost and demand pressures – particularly in adult social care, children’s social care, homelessness and home-to-school transport – are rising faster than any plausible funding trajectory. 

What the government has largely achieved is better navigation of an underfunded system – more equitably distributed, more predictably timed, with reduced bureaucratic overhead. What it has not achieved is a system that is adequately resourced, purposefully designed, or capable of delivering genuine fiscal resilience for all localities. The analogy of battening down the hatches is apposite: the ship has been steadied, but it is still taking on water, and the pumps remain insufficient.

This update to the original research extends the analysis to address two further dimensions: the Chancellor’s fiscal devolution proposals as announced in the Mais Lecture, and the broader question of what a genuinely systematic approach to sub-national finance in England might look like. In doing so, we draw on additional comparative international evidence (the research project continues to publish national analyses of sub-national funding systems) and engage directly with questions posed in parliamentary and policy consultations about the purpose, design, governance and delivery of fiscal devolution. This is in order to provide an evidence base for those involved in sub-national finance arrangements to inform, and at times challenge, current working practices and suggested policy reforms.  

What has changed – and what the changes do not resolve?

Fair Funding 2.0 is a welcome and overdue correction. The updated formulae draw on the 2025 English Indices of Multiple Deprivation and current population projections. But critics from the County Councils Network and Local Councils Network have raised concerns that the approach disproportionately favours urban authorities, taking less account of measures such as rural remoteness that reflect genuine cost differentials. A fair funding system must reflect all dimensions of need – deprivation, rurality, demography and service cost.

Multi-year settlements address a long-standing structural dysfunction. Single-year settlements forced councils into reactive financial management, precluding the medium-term planning on which preventative investment depends. Germany’s Länder operate within multi-year fiscal frameworks as a matter of constitutional practice; Switzerland’s cantons similarly plan on three- to five-year cycles. The principle is sound. The risk in England is that multi-year certainty is delivered at an insufficient funding level, locking in inadequacy rather than resolving it.

Funding consolidation – reducing the number of grants and competitive bidding processes is consistent with international best practice. Japan, Germany and Italy all utilise relatively unconditional fiscal transfers that afford local discretion. Ring-fencing and competitive bidding culture extract significant administrative costs while distorting local spending toward centrally defined priorities rather than locally assessed need. 

What none of these reforms resolves is the fundamental sufficiency question. Against rising demand from ageing populations and post-pandemic service recovery, this is not a stable platform. 

The purpose of fiscal devolution – and its limits

The Chancellor of the Exchequer, Rachel Reeves, announced in the Mais Lecture on 17 March 2026 that the Treasury planned to “develop a roadmap for future fiscal devolution, to be published at this year’s Budget”:  

This will set out plans to give regional leaders control of a share of some national taxes which have, for too long, been allocated by central government. 

They will look at income tax, alongside other taxes, with reforms initially targeted at those places that have the greatest capacity to deliver them, and the greatest potential to benefit.

…

Reforms will be fiscally neutral, focused on sharing and retaining a portion of existing revenues, with the proceeds of growth benefiting the places that generated that growth, while managing volatile receipts both for local areas and for the Exchequer.  

The Chancellor’s announcement has rightly been welcomed as a significant conceptual shift. For decades, England has been among the most fiscally centralised states in the OECD, with local authorities and MSAs exercising almost no control over taxation. The proposal to give metro mayors a share of national tax revenues, including income tax, represents the most substantial devolution of fiscal power in the English context since at least the introduction of business rate retention in 2013, and potentially since the abolition of domestic rates in 1990.

The stated purposes of this devolution are primarily economic: to drive regional growth, incentivise local investment, and ensure that the proceeds of growth benefit the places that generated them. These are legitimate objectives. The international evidence that fiscal centralisation hampers regional economic dynamism is substantial. OECD analysis consistently identifies sub-national fiscal autonomy as a driver of productivity and investment. Nordic models, particularly Sweden and Denmark, demonstrate that meaningful local revenue authority, embedded in robust equalisation frameworks, is compatible with both economic performance and social equity.

However, the evidence also demands nuance. There is a widely held assumption in English devolution discourse, often treated as axiomatic, that greater fiscal autonomy leads to better outcomes – financially, democratically and economically. The comparative evidence is more qualified. Autonomy generates asymmetric gains: it disproportionately benefits localities with buoyant, growing economies and relatively low service demand. For structurally disadvantaged areas – post-industrial towns, coastal communities, areas with high deprivation and low tax bases – autonomy over income tax or business rates retention can deepen inequality rather than reduce it. Scotland’s national government experience with devolved income tax is instructive: revenue performance has been constrained by a weaker underlying economy.

The Chancellor’s own formulation acknowledges this, indicating that reforms will be fiscally neutral and initially targeted at those places that have the greatest capacity to deliver them and the greatest potential to benefit. The risk is that a tiered devolution creates a two-speed sub-national finance system, in which well-resourced MSAs gain both fiscal autonomy and growth dividends while structurally under-resourced local authorities remain dependent on an inadequate grant system.

The international evidence points to a clear design principle: fiscal autonomy is not a panacea, and without meaningful equalisation, it is not even a net positive for the system as a whole. Germany’s fiscal constitution is instructive. German municipalities receive a share of income tax and levy trade tax revenues – the Gewerbesteuer – but these are nested within a comprehensive system of vertical and horizontal fiscal equalisation (Länderfinanzausgleich) that redistributes resources across regions, ensuring that all Länder and municipalities have access to broadly comparable per-capita resources. Italy operates a similarly layered system, with shared tax revenues complemented by the Fondo di solidarietà comunale for municipal redistribution. Denmark’s municipalities retain significant income tax-setting powers, but within a national equalisation framework that aims for full equivalence. In none of these systems does fiscal autonomy operate in isolation from redistribution. The two are designed as a unified system.

The mayoral tier and the problem of incomplete architecture

The Mais Lecture proposals, and the broader trajectory of English devolution, have concentrated fiscal and governance innovation at the MSA level. The creation of new City Investment Funds, the expansion of Investment Zones and now the prospect of income tax assignment all reinforce this tier. This is not without merit: mayors are increasingly credible economic actors, capable of strategic planning and investment delivery. The Greater Manchester and West Midlands combined authorities represent genuine capacity.

But the concentration of reform energy at the MSA tier creates a structural tension that the current policy architecture does not resolve. The purpose of MSAs, as growth accelerators and strategic commissioners, is qualitatively different from the purpose of local authorities, as deliverers of statutory services, guarantors of welfare, and democratic anchors in communities. These are not competing functions, but they require different financial architectures. Growth-oriented fiscal devolution at the MSA level does not address the funding adequacy crisis at the local authority level, and in some configurations, it may exacerbate it, particularly if potential tax increment financing or business rates uplift at the MSA tier reduces the resource base available for redistribution to district and borough councils.

Canada’s experience offers a relevant parallel. Canadian provinces and major municipalities have long held significant fiscal autonomy, with provinces controlling income tax rates and municipalities levying property taxes. However, the mismatch between fiscal capacity and service responsibility at the municipal level – particularly in smaller and more deprived municipalities – has generated persistent fiscal stress. The Federation of Canadian Municipalities has repeatedly documented the inadequacy of its own-source revenues against rising infrastructure and service costs, a dynamic strikingly similar to England’s predicament. 

Australia’s experience with horizontal fiscal equalisation through the Commonwealth Grants Commission provides a contrasting model. The CGC calculates each state’s fiscal capacity relative to a national average, redistributing GST (Goods and Services Tax) revenues to ensure that all states can deliver comparable service standards at comparable tax effort. The mechanism is transparent, independently administered, and consistently updated. It does not prevent states from exercising fiscal autonomy, but it ensures that autonomy is not the sole determinant of adequacy. 

Fiscal powers: what should be devolved, and to whom?

The Mais Lecture opens a significant policy space. The question of which fiscal powers should be devolved, and to which tier, is complex but tractable if approached systematically.

Income tax sharing is the most consequential option and the one explicitly flagged by the Chancellor. The Scottish government model demonstrates that partial devolution of income tax is administratively feasible, but it also demonstrates that the economic returns are highly dependent on underlying economic performance. For MSAs, a retention share of income tax growth above a baseline – analogous to the business rates retention model – would provide growth incentives without exposing local finances to the full volatility of the income tax base. Japan’s Trinity Reform of the early 2000s offers a useful template: the programme systematically reworked central-local financial relations over a parliamentary term, shifting from conditional grants to unconditional transfers and shared tax revenues, accompanied by expenditure mandate reform.

Property taxation represents the most compelling case for local reform. Council tax is widely acknowledged as regressive, outdated (based on 1991 valuations in England), and politically constrained by referendum requirements. Comparative evidence is striking: in Germany, Switzerland, Denmark and Sweden, property or land value taxes form a substantial component of local revenue, regularly revalued and capable of capturing economic growth in property markets. Canada’s experience with land value capture through development levies also offers lessons for growth-positive local taxation. While not a proposal for the devolution of a new power as such, reforming council tax enables the meaningful devolution of other major revenue streams within a whole system approach.  

Tourism and visitor levies are well established across European city-regions, in Barcelona, Amsterdam, Paris, Rome and Berlin, and represent modest but symbolically important additional revenue streams. Visitor levies are a step in the right direction, but yields are limited due to geographical concentration. 

What should only be devolved with caution, or should be devolved only within equalisation frameworks, are taxes whose revenue is significantly correlated with economic geography. Business rates retention has demonstrated this problem: the scheme has rewarded buoyant southern and urban economies while leaving struggling northern and rural authorities dependent on redistribution that has not kept pace with their diverging fiscal positions. Any income tax sharing model that creates analogous incentive structures without robust equalisation could reproduce this dynamic at greater scale.

Governance, principles and the systemic deficit

The governance of fiscal devolution should be built on transparency, democratic accountability, and, critically, system coherence. Our original research called for a standing commission to manage intergovernmental fiscal relations. This recommendation remains outstanding and arguably more urgent than it was in 2024. The absence of a structured forum for negotiating fiscal arrangements between central and local government has meant that reform has proceeded in a fragmented, top-down fashion. 

The announcement of a Mayoral Council, bringing together mayors and the Prime Minister for regular structured dialogue, is a welcome and significant step in this direction. It represents the most developed intergovernmental forum yet established in the English context, and its potential to anchor fiscal devolution negotiations within a more deliberative, partnership-based framework should not be understated. If the Mayoral Council develops genuine agenda-setting power, rather than functioning as a consultative body with central government retaining effective control over outcomes, it could begin to approximate the kind of intergovernmental coordination institutions that underpin fiscal federalism in Italy and Germany. However, it also exposes a structural limitation that must be directly addressed: it brings together mayors, but it does not represent the full landscape of English local government. Communities with no prospect of MSA status in the near term have no equivalent seat at this table. The risk is that the Mayoral Council becomes a forum for negotiating fiscal devolution on behalf of those represented, while the governance of broader local government finance – adequacy, equalisation, needs assessment – continues through the older, more fragmented central-local machinery, entrenching rather than resolving the two-speed dynamic identified elsewhere in this paper.

Redistribution mechanisms must be designed as a system, not assembled piecemeal. The current landscape – needs assessment, business rate retention, Recovery Grant, ringfenced grants, Exceptional Financial Support – is a selection of interventions each designed to address the most proximate failure, without holistic redesign. The international models explored in this research share a common feature: they treat fiscal redistribution, fiscal stability and fiscal autonomy as jointly designed components of a single fiscal constitution, not as sequential policy interventions. Denmark and Sweden are good examples of statutorily embedded, formula-driven equalisation that is resistant to short-term political manipulation because it operates within a negotiated framework with strong local government associations as counterparties. Italy’s Constitutional Court has jurisdiction over fiscal arrangements between tiers, providing arbitration of disputes. Germany’s Finanzausgleich has been the subject of constitutional litigation that has clarified principles applicable to the whole system. In each case, the governance architecture is not an afterthought to fiscal design – it is constitutive of it.

The Mayoral Council could, in time, evolve into something closer to this model, but only if its remit is deliberately broadened beyond growth and investment to encompass the full range of fiscal relationships between central and sub-national government, and only if complementary structures are created to give non-mayoral local government equivalent standing in the system. The proposal in the original research for a standing English Devolution Council – encompassing all tiers, independently chaired, with a formal role in needs assessment, equalisation design, and fiscal dispute resolution – remains the more complete institutional response. The Mayoral Council and such a body are not mutually exclusive; they could form complementary pillars of a more developed intergovernmental settlement, with the Mayoral Council focused on strategic growth and fiscal devolution at the MSA tier, and a broader commission addressing the systemic adequacy and equity questions that apply to all localities.

The question of respective roles is not merely organisational but constitutional, and the international evidence provides reasonably clear guidance for each tier. Central government’s role is typically as guarantor of the system, setting the fiscal constitution, administering national equalisation, establishing the needs assessment framework, and providing independent arbitration when disputes arise between tiers. This is the model in Germany, where the Federal Government and Bundesrat share responsibility for the Finanzausgleich, and in Australia, where the Commonwealth Government administers GST distribution on the independent advice of the Commonwealth Grants Commission. In both cases, central government sets the rules but does not operationally control local fiscal decisions. In England, by contrast, central government retains close operational control over local authority spending through grant conditions, referendum principles, and borrowing limits, in a way that reflects an enduring culture of financial tutelage rather than a mature intergovernmental settlement. The alternative direction of travel is toward a central government role that is lighter on operational prescriptions but more robust in constitutional guarantees, ensuring adequacy and equity across the system, rather than managing it transaction by transaction.

MSAs occupy the intermediate tier, and their role in fiscal devolution should be purposively defined as strategic economic governance – spatial planning, transport, housing, skills and inward investment – rather than service delivery. This distinction matters because it implies a different funding architecture: MSAs are appropriately financed through growth-related revenues, potential retained business rates uplift, and, if the Mais Lecture proposals proceed, income tax sharing arrangements. These are revenues with an economic logic, reflecting the MSA’s role in growing the tax base. What MSAs should not be required to do, and what their fiscal architecture should not be designed to achieve, is substitute for the adequacy of local authority funding. The confusion of these two purposes, growth finance and service finance, is one of the most persistent sources of incoherence in English devolution policy. The French experience is instructive here: the inter-municipal groupings (intercommunalités) that operate at a scale comparable to MSAs have a clearly bounded strategic remit and a distinct funding stream from the communes that deliver local services beneath them; similar systems operate in Germany, Italy and Japan. Maintaining that separation of purpose and funding is essential to a coherent English settlement.

Local authorities are the primary tier for statutory service delivery, placemaking, and the primary democratic relationship between the state and the citizen. Their fiscal role should reflect this: a broad, unconditional revenue base adequate to their statutory responsibilities, with local discretion over deployment and local accountability for outcomes. This means reformed property taxation, a meaningful share of locally generated revenues above a guaranteed baseline, and freedom from the competitive grant culture that has consumed management capacity and distorted spending priorities for over a decade. Japan’s post-Trinity Reform ensures local authorities retain a stable, formula-driven share of national tax revenues that is not conditional on central approval of spending decisions; German municipalities have the right to set their own multipliers on shared taxes, giving them genuine revenue authority within a nationally equalised system. Both models offer England a more coherent template than the current hybrid of grant dependence and nominally devolved retention schemes.

Communities and their democratic representatives occupy the fourth tier of this governance architecture, and their role is too often treated as an afterthought in fiscal devolution discourse. Fiscal devolution creates real winners and losers at the local level; its legitimacy depends on citizens understanding what is being devolved, to whom, and on what basis. The Danish model of high local income tax variability across municipalities is sustainable in part because Danish citizens have a well-developed understanding of the relationship between local tax rates and local service quality, supported by transparent reporting and local democratic accountability. In England, where council tax is widely seen as opaque, unfair and disconnected from service quality, there is a significant democratic deficit to address before fiscal devolution can be genuinely citizen-facing rather than institutionally driven. 

Delivering change: timescales, capacity, and the long game

Fiscal devolution is not quick, and its complexity is routinely underestimated at the point of political announcement. Scotland’s partial income tax devolution took approximately four years from initial design to implementation, and has required continuous recalibration since, including protracted negotiation of the block grant adjustment mechanism that determines how devolved tax revenues interact with the Barnett Formula. Germany’s post-unification equalisation reform consumed a full parliamentary term and required Federal Constitutional Court intervention to resolve disputes about its design. Japan’s Trinity Reform required cross-party consensus sustained over several years and was accompanied by a fundamental renegotiation of expenditure mandates between central and local government. The timetable implied by the Mais Lecture, a roadmap at the autumn Budget, is therefore ambitious. A roadmap is not implementation; the distance between the two, in a policy domain of this complexity, is substantial and must be managed with realistic expectations.

The capacity challenge operates at three distinct levels, each of which requires deliberate investment. At the centre, HM Treasury and HMRC face methodological questions that are not yet resolved. Building the data infrastructure to support credible attribution will itself take time, and any system implemented before these questions are settled risks producing allocations that are contested, volatile, or inequitable. In theory, the Office for Budget Responsibility would also need to develop new methodologies for forecasting subnational tax receipts, adding a further layer of institutional preparation.

At the MSA level, capacity constraints are significant and unevenly distributed. Greater Manchester and the West Midlands MSA have developed relatively sophisticated finance, analytical and strategic planning functions, but MSAs, particularly those more recently established or covering less economically complex areas, have thin teams and limited in-house fiscal expertise. Managing a devolved income tax share would require capabilities in revenue forecasting, baseline negotiation, fiscal risk management, and public financial reporting that go beyond what some MSAs currently possess. The Canadian provincial experience is illustrative: even well-resourced provinces with long-established tax administrations have found the management of income tax sharing agreements with the federal government to be administratively demanding, requiring specialist capacity that took years to build. England’s MSAs would be starting from a considerably lower baseline. 

At the local authority level, the capacity problem takes a different form. Years of austerity have hollowed out the finance functions of many councils: experienced Section 151 officers have retired or moved to the private sector, analytical capability has been cut alongside other corporate services, and the audit market has been reduced. The National Audit Office has repeatedly flagged the local audit crisis as a systemic risk; until it is resolved, there is a real question about whether the financial reporting and governance standards necessary for devolved taxation are achievable across the full range of English local authorities. Germany’s system of constitutionally independent Courts of Accounts at Federal and Land level, the Bundesrechnungshof and Landesrechnungshöfe, demonstrates that independent audit institutions with genuine constitutional standing are both achievable and valuable in a multilevel governance system. 

Primary legislation will almost certainly be required for any material fiscal devolution. The Scotland Act precedents, the Cities and Local Government Devolution Act 2016, and the current legislative architecture for MSAs all indicate that substantive fiscal powers, as opposed to grant arrangements, require a statutory foundation. Secondary legislation may handle specific rate-sharing mechanisms or the technical parameters of baseline agreements, but the principal framework would likely need primary legislation. In a five-year parliament, with a legislative programme already heavily committed, this constrains the window for design, consultation and enactment considerably. The experience of Welsh income tax devolution (albeit the power to vary rates has not been exercised), enabled by the Wales Act 2014, amended by the Wales Act 2017 and still subject to ongoing fiscal framework negotiation, illustrates how long the legislative and intergovernmental journey can be even when political will is broadly present. A realistic timetable, openly communicated, is itself a form of capacity management: it allows institutions at all levels to plan workforce development, systems investment and governance reform in parallel with the legislative process rather than scrambling to catch up after it.

Conclusion: systemic reform or systemic risk?

England’s local government finance system is in a better condition today than it was when this research was first published in early 2024. But it is not a holistic sub-national system commonly seen in international locations. It remains underfunded in absolute terms, unequal in its distribution, and architecturally fragmented in its relationship between fiscal autonomy and redistribution. The reforms of the past two years have addressed some symptoms without treating the underlying condition.

The Mais Lecture represents a genuine opportunity. The assignment of national tax revenues to sub-national government, the fourth proposal in the original research, is now on the policy agenda in a way it was not in 2024. But its transformative potential will be realised only if it is embedded in a broader systemic redesign that ensures all localities, not just the most dynamic, have access to genuine fiscal resilience.

The international evidence is consistent and clear. Fiscal autonomy without equalisation rewards economic geography, not democratic service provision. Multi-year settlements without adequate funding lead to managed decline. Fair funding without adequate resourcing redistributes insufficiency. What England needs is a fiscal system for sub-national government: a system-level settlement that is purposively designed, structurally coherent, independently governed and adequately resourced. The pragmatic sequencing – needs assessment first, equalisation second, fiscal devolution third – remains valid. But the destination must be a genuinely integrated system, not a further accumulation of ad hoc interventions.

The ship has been steadied. It is time to consider whether it is seaworthy for the journey ahead.