LANCASHIRE would be one of the biggest beneficiaries of a think-tank proposal to allow councils to keep a small proportion of the income tax raised in their area – and create a pot to redistribute retained cash to those parts of the country that need it most.

The idea – contained in the 'Funding Fair Growth' report by the Centre for Progressive Policy (CPP) – would devolve two per cent of income tax receipts to local authorities.

Half would be kept by the top-tier council in the area where it was generated, while 40 per cent would be divvied out nationwide and the remaining 10 per cent invested in rebuilding local government capacity in 'lagging areas'.

Illustrative modelling by the CPP estimates that, under the suggested scheme, Lancashire County Council would get an annual £118.7m boost – the eighth-highest increase in the country.

And Blackburn with Darwen and Blackpool councils would reap the rewards of the redistribution of funds. Blackburn with Darwen would get around £26.8m extra.

There would be a more equal split between the two sources of extra funding in the case of the county council – with more than 52 per cent coming from retention and the remainder from the retained share of revenue raised within its patch.

But Tory deputy county council leader County Cllr Alan Vincent, finance cabinet member, said while local authority budgets would seemingly get uplifts, the resultant gap left in Whitehall’s coffers would have to be plugged.

“This [proposal] is nice in theory, but would leave a hole in central government finances which would have to be filled by raising tax in some other way – or, more likely, simply [by] reducing the amount they give in grant to local authorities, so the net effect would be neutral,”  he said.

The CPP acknowledges it is not the first think tank or group to call for local retention of a proportion of income tax, but says that it has gone “a step further” with the suggested redistribution that lies at the heart of its proposal.

“[This] redistributive mechanism [would] compensate poorer areas to help level the playing field, as well as ring-fencing a proportion of revenues in order to support the development of capacity in local areas facing acute staffing issues. The 40 per cent redistributive element would also provide significant revenue boosts to poorer areas with weaker local economies,” the CPP report adds.

Its redistribution calculations are based on an illustrative scenario using a funding formula that considers factors including income deprivation and the percentage of the local labour force without an NVQ3 qualification – equivalent to A-Levels – or higher.

In two-tier areas like that covered by Lancashire County Council, the CPP proposes the highest level of local government should act as the lead authority for income tax retention, but oversee spending based on “a pooling of revenues accrued through district councils in order to support more cohesive, cross-border local economic planning”.