05/10/2015 13:32 BST | Updated 05/10/2016 06:12 BST

Osborne's Mission to Finance the Future

Chancellor George Osborne is developing a habit of making significant devolution announcements in Manchester. Last summer he launched the idea of a Northern Powerhouse, consisting of greater regional devolution and connectivity between northern city regions. In his keynote address to the Conservative Party Conference in Manchester on Monday, Osborne unveiled what he called a "devolution revolution".

In a surprise announcement, Osborne said the Government would devolve business rates to local councils, £26billion in total. Calling it the "biggest transfer of power" to local authorities in living memory, Osborne is hoping that by devolving this tax responsibility, it will act as an incentive to drive business growth, with all revenue being spent on local services.

In the debate around the Northern Powerhouse, and devolution in general, there has been a growing argument that if Osborne wants to demonstrate his seriousness, he must start to take action on fiscal devolution.

Why? Two reasons. First, devolving fiscal power away from the Treasury would undo over a century of centralisation and be a clear signal of intent about challenging this trajectory. Second, local authorities need the ability to fully manage their own affairs. This is hard to do when councils depend on hand-outs from Whitehall.

Critics of Osborne have already pointed out that unleashing tax competition within the UK will lead to an inevitable race to the bottom. Richard Murphy, an economic adviser to Labour, said the policy would mean that those who rely on local council services would lose out.

This is the classic argument about the relationship between the rate of taxation and the resulting revenue, otherwise known as the Laffer curve. The key question is whether revenue will increase or decrease over time.

Some areas will be confident that revenue will grow, such as central London and prosperous city areas like Greater Manchester. Osborne, though, will be judged by how effective the policy is in driving economic activity outside of these areas. Will Blackburn or Burnley benefit in a similar way to Manchester?

In the process of pushing forward the devolution agenda, Osborne has crossed a lot of lines commentators and critics thought he would shy away from. First, he signed a deal with a group of ten Labour councils in Greater Manchester. Next, Osborne agreed to the devolution of the NHS budget to Greater Manchester. In his party conference speech he formally began the process of fiscal devolution.

Osborne's devolution agenda, bound up in the Northern Powerhouse, is about tackling the North-South economic divide. At the Labour Party Conference last week in Brighton there was lots of talk about new public investment in infrastructure, given the level of need and its role in facilitating economic growth.

This is a political red line Osborne is yet to cross. His recent trip to China appealing for greater inward investment, along with his plans to create six new British Wealth Funds to invest in infrastructure, highlighted Osborne's current approach: anyone but central Government to fund infrastructure investment.

The creation of six new British Wealth Funds is no guarantee that future infrastructure funding needs will be met. Nor can he rely on cities introducing an additional local levy on business rates to fund city infrastructure projects, as he announced would be available in his speech.

Osborne is doing everything he can to build a Northern Powerhouse with minimal funding from the Treasury. Fiscal conditions are tight and Osborne doesn't have the room for much manoeuvre.

A pivotal test for the Northern Powerhouse will be whether all of Osborne's supply side measures can deliver on his promise. If they do, Osborne will be praised for a series of bold decisions. If they don't, he may need to consider how far he is willing to go in order to meet his rhetoric.