Fair representation is the first pillar of constitutional renewal. Federalism is the second. The third and final pillar is fiscal federalism.
Without financial autonomy, political devolution is incomplete. Without it, devolution is symbolic. With it, it becomes real.
The United Kingdom remains highly centralised not only politically but financially. Most revenue is collected by Westminster and redistributed through complex grant systems. This creates dependency, weakens accountability, and encourages short-term decision-making. Governments often spend money they do not raise and raise money they do not directly spend.
A durable federal settlement requires power, responsibility, and funding to be aligned.
Under fiscal federalism, state governments in Scotland, Wales, Northern Ireland, London, and the English regions would control meaningful portions of major tax bases, including elements of income taxation, business taxation, and consumption taxes. They would gain genuine responsibility for shaping economic development and funding public services.
In return, they would assume responsibility for major domestic functions including health, education, housing, transport, infrastructure, and regional economic development.
This alignment is crucial. Those who make decisions should manage the consequences. Citizens should be able to see clearly who raises revenue, who spends it, and who is accountable for outcomes.
Local government would also gain stronger fiscal powers. Councils could make greater use of land value taxation, tourism levies, congestion charging, and other locally appropriate revenue sources. This would reduce dependency on central grants and improve responsiveness to local priorities.
National solidarity would remain essential. Fiscal federalism is not a race between regions. A federal equalisation system would ensure that wealthier areas contribute more to support less prosperous parts of the country. This preserves cohesion while allowing genuine autonomy.
Such arrangements are common in successful federations because they balance fairness with decentralisation. Regions gain freedom to innovate and tailor policies to local conditions, while citizens retain the benefits of belonging to a wider national community.
Fiscal federalism also encourages policy innovation. Different regions can pursue approaches suited to their own economic circumstances. Successful policies can then be adopted elsewhere, creating a system of practical experimentation rather than uniform central direction.
The political appeal is broad. Labour supporters gain stronger tools for long-term regional investment and economic rebalancing. Conservatives gain reduced bureaucracy and clearer accountability. Greens gain the ability to tailor climate, energy, and infrastructure policies to local conditions. Reform UK supporters gain visible and meaningful decentralisation of financial power away from Westminster.
Just as importantly, fiscal federalism need not expand the size of government. Indeed, by replacing complex grant mechanisms and overlapping administrative structures with clearer responsibilities, it may allow government to operate more efficiently and transparently.
Together, the three pillars form a single constitutional settlement. Fair representation ensures votes translate into representation. Federalism ensures power is exercised at the level where decisions are experienced. Fiscal federalism ensures that authority, responsibility, and funding operate together.
Each pillar depends on the others. Fair votes without devolution leave power concentrated. Devolution without fiscal autonomy leaves governments dependent. Fiscal autonomy without democratic legitimacy risks weakening accountability.
Taken together, however, they create a coherent vision: a United Kingdom where votes count, where power is closer to people, and where funding reflects real economic geography rather than political convenience.
This is not a programme for breaking up the Union. It is a programme for making it work. By restoring the connection between democratic choice, political authority, and financial responsibility, it offers a more balanced, durable, and genuinely democratic future for the United Kingdom.
* Iain Donaldson is the treasurer of the Rochdale Liberal Democrats.
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7 Comments
@Iain,
“Without financial autonomy, political devolution is incomplete…….”
The problem, from a macroeconomic perspective, is that full financial autonomy is only possible for a currency issuer. But, presumably, you aren’t advocating that every region in the UK should have its own currency.
The indivdual states of the USA have a mix of Federal and local taxes and a mixture of Federal and local spending. I wouldn’t say that it’s a case of Federal taxation/spending is bad and local taxation/spending is good. If I was pushed I’d be more inclined to say that it was the other way around!
The Federal government in the USA, as the currency issuer, has the ability to ensure that the difference in economic performances in various states is equalised. Arguably it should do more. As the currency issuer it can borrow money more cheaply than the individual states. The Federal government collects a substantial proportion of income taxes and also pays out a substantial proportion of unemployment revenue.
We could endup with Federal system which has all the disadvantages of the euro zone. There individual economies are limited in what they can do to stimulate their economies if, and when, unemployment gets too high. The maintenance of a coherent UK demands that those governments in wealthier areas spend relatively less than they receive in taxes whereas those in the less affluent should spend more.
This is always going to be a difficult sell for a party with the majority of support in afluent constituencies.
You use the phrase “fiscal federalism” and “financial autonomy” but have not used the phase I had hoped to see that is drawn out of both: fiscal autonomy.
As you will be aware, fiscal autonomy means that all tax revenues raised in the federal unit would be kept by each federal unit, and the central government then raises the revenue it requires for reserved matters, like defence etc, by receiving contributions from each federal unit based on an agreed formula.
Fiscal autonomy has the clear advantage of providing the maximum incentive for federal units to have policies that maximise their tax base as they will benefit from the proceeds.
I think there is actually significant common ground between the comments by both Petyer and Kira, and the original article.
The article does not argue that central government taxation and spending are inherently bad, nor that every function should be devolved. Rather, it argues that political authority, fiscal responsibility, and democratic accountability should be more closely aligned than they are today.
You rightly point out that successful federations combine federal and regional taxation and spending. That is precisely the model being proposed. In the United States, Canada, Australia, Germany, and other federations, regional governments exercise substantial fiscal powers while the federal government retains responsibility for macroeconomic management, redistribution, and national priorities.
I also agree with your observation that national solidarity requires transfers from wealthier areas to less prosperous ones. The article explicitly supports a federal equalisation mechanism for that reason. Fiscal federalism is not intended to create a competition between regions or abandon redistribution. It is intended to make responsibility clearer while preserving social cohesion across the Union.
Where there is perhaps the greatest agreement is on accountability. Citizens should be able to see who raises revenue, who spends it, and who is responsible for outcomes. At present, the UK’s grant-based system often obscures that relationship, allowing devolved and local governments to blame Westminster while Westminster blames local administrations.
The goal of fiscal federalism is therefore not to weaken the Union, but to strengthen it by creating a clearer and more transparent connection between decision-making, funding, and democratic responsibility while maintaining the benefits of a common currency and a common national framework.
I think the main point of disagreement concerns the relationship between fiscal autonomy and monetary sovereignty.
It is certainly true that only a currency issuer possesses full monetary sovereignty. However, fiscal federalism does not require constituent governments to issue their own currency. If it did, most of the world’s successful federations would be impossible.
California, Texas, Ontario, Alberta, New South Wales, and Bavaria all share a common national currency and central bank, yet they exercise substantial fiscal powers over taxation and spending. Fiscal autonomy and monetary sovereignty are related concepts, but they are not the same thing.
I am also not convinced that the eurozone is the most relevant comparison. The eurozone is a monetary union rather than a true federation. Its difficulties stemmed largely from the absence of strong fiscal transfers, equalisation mechanisms, and common stabilisers. By contrast, federations such as the United States combine a shared currency with significant regional autonomy precisely because they possess federal institutions capable of redistributing resources during economic shocks.
That is why the article explicitly proposes equalisation. Wealthier regions would continue contributing more, while less affluent regions would continue receiving support. The intention is not to remove redistribution but to ensure that governments have greater responsibility for raising at least part of the revenue they spend.
The UK’s current system is unusual in how heavily both political and fiscal power are concentrated at the centre. The proposal seeks to rebalance that relationship, not by fragmenting the currency or abandoning solidarity, but by moving closer to the arrangements already operating successfully in many established federal democracies.
@ Iain,
There is common ground on the federal question insofar as we agree that it could work. A federal system works well in Australia. The Aussie system is better than USA’s and far better than in the EU which I would term a quasi-Federal system which does need to drop the ‘quasi’!
However, many will agree with Kira when she writes “all tax revenues raised in the federal unit would be kept by each federal unit”. This is not the way to success. In 2024/25, the Barnett block grant amounted to £45bn in Scotland, £20bn in Wales and £18bn in N.Ireland. I would term these payments as fiscal equalisers. Many in England, particularly in London and the S.E. will be arguing that therefore they are £83 bn worse off. This is not keeping all ‘all their tax revenues’.
Arguably, a better way to calculate these fiscal equalisers is to base them on levels of unemployment, population movements, house prices, and incomes for similar occupations. I’m not sure if the Australians get a good score on these criteria by good management but we don’t see same level of imbalance as we do even in a non-federal UK.
“The Commonwealth collects most of the tax, but then shares it around, providing about a half of the revenue spent by the states…”
I’m not sure that Kira would approve! But something like this needs to happen to make a Federal system work effectively.
https://findanexpert.unimelb.edu.au/news/4447-factcheck–how-much-of-australia%27s-tax-is-collected-by-states-and-territories%3F
@ Kira,
I asked Google’s AI two questions:
“is government spending higher per person in Scotland than England?”
Ans: Public spending per person in Scotland is roughly 14% to 22% higher than the equivalent spending in England, depending on how shared UK-wide costs (such as defense and debt interest) are allocated.
“is the Barnett block grant just repaying the taxes that Scotland paid in the first place”
Ans: No, the Barnett block grant is not just a direct repayment of taxes collected in Scotland. Rather, it is a population-based funding mechanism determined by the UK government’s spending decisions in England, which is paid for by the pooled tax revenues of all UK nation.
It’s obviously a complex but important issue. Obtaining a general agreement on how such a system of fiscal transfers should work to ensure the viability of a UK federation is going to be difficult.
This is the problem faced by the EU and the eurozone. The German government, and German voters, are flatly against such a system being introduced there. They see it as they who will be paying the taxes while others will be spending the revenue.
One of the aims of most societies is some sort of redistribution. So fiscal federalism must have a mechanism for the rich regions giving to the poorer. Without this the poorer become poorer. Of course with this comes the possibility of undue influence.