Economic Theory

An article from an unlikely future. Part 2: Decentralisation

The Economist, 11 April 2020

– Continued from part 1 (healthcare) –

Up until 2016, the UK was one of the most centralised countries in the world. What was strange about this arrangement was that even though nobody seemed to like it, no government ever did anything about it. The term ‘Whitehall’ was almost never used with positive connotations. ‘Whitehall’ had become a synonym for aloofness, bossiness and mandarin rule; it was The Castle from Franz Kafka’s same-named novel writ large.

‘Localism’, in contrast, had already been a popular buzzword during the coalition years, but back then, it never made it beyond the buzzword stage, and there was a simple reason for that. In those days, proponents of localism essentially argued for autonomy without responsibility. Therefore, they sounded too much like Syriza supporters, for whom ‘autonomy’ meant ‘the autonomy to use somebody else’s credit card as we see fit’.

After the 2015 election, initially things looked set to continue in this way. But towards the end of 2015, the penny finally dropped in Westminster, and the new government embarked on a gradual transfer of both taxes and responsibilities to the local and regional level. During the coalition years, £19 out of every £20 raised in tax revenue accrued to the national level. This share has now fallen to less than £2 out of £3. The more prosperous English towns and cities have become fully self-funding. The less prosperous ones receive a top-up from a fiscal adjustment fund, modelled on the Swiss Interkantonaler Finanzausgleich, but they, too, are expected to cover the bulk of their expenditure from locally raised taxes. Policy areas like infrastructure, welfare and housing have been fully handed over to the local level. Scotland and Wales have become fully self-governing, and a similar ‘home rule’ arrangement for Northern Ireland is in the process of implementation.

“It was a transparency shock” remembers Polly Titian, a local councillor at the time. “Local authorities differed massively in spending efficiency, and under the new system, this translated into sharp differences in local tax rates. People began to ask uncomfortable questions. They wanted to know why taxes in a neighbouring town were so much lower, when their infrastructure and public services were at least as good as ours. Some of the more mobile ones began to vote with their feet.”

Transparency and competition between localities led to much greater scrutiny for public spending. Spending on vanity projects and so-called ‘public sector non-jobs’ was slashed, outsourcing to charities and private companies increased, and public spending became more finely attuned to taxpayers’ priorities.

The new fiscal arrangement also led to a profound change in attitudes to economic activity. “Under the old system, communities often saw investment as a threat to be fended off”, explains Councillor Joe Everett. “Of course we wanted tax revenue. Lots of it actually. But we wanted it to be generated somewhere else, somewhere far away from us. We wanted Whitehall to collect the revenue, and hand it over to us. That was no longer an option under the new system. We had to think of investment projects in terms of trade-offs. We could still say no, we could still be obstructionist, but blocking things is just less fun when you know that you are also turning down millions of pounds in the process.”

Especially for communities in proximity to the large and medium-sized airports, decentralisation has been a fiscal bonanza. Most of the tax revenue generated at and around an airport now stays in the surrounding localities, which has enabled them to cut taxes for other businesses and residents, whilst simultaneously improving public services. This turned the political dynamics of airport expansion on its head. Anti-expansion protests waned, and in 2017, people actually started demonstrating for airport expansion. Politicians who had built their careers on stoking anti-airport grievances were forced into humiliating U-turns. Something very similar happened in the area of fracking, which, once almost universally rejected, has since become one of the fastest-growing industries.

The corridors of Whitehall, the former centre of concentrated power, are still bustling, but more with tourists than with busy mandarins. Several of the former Whitehall departments have been converted into museums. Most Londoners are happy about the tax revenue those tourists bring, because unlike in the past, it actually stays in London.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

2 thoughts on “An article from an unlikely future. Part 2: Decentralisation”

  1. Posted 17/05/2015 at 19:33 | Permalink

    I’ve long been in favour of quite radical decentralisation in the UK. In fact, I’m in favour of a federal system. Currently, however, federalism is talked about with regard to the Home Nations, something which, clearly, wouldn’t work with England being so dominant.

    Regions would also not be successful because in order for subnational units to be given greater responsibilities while remaining (if not becoming more) democratic and accountable, people need to feel a sense of affinity with them. Regions like ‘North West’ just don’t inspire that kind of sentiment, as the artificial sounding name suggests.

    Counties on the other hand are entities with which people do relate and feel a sense of belonging. And because they’re smaller and greater in quantity than regions would be, the level of competition between them in terms of things like tax and public services would be greater, and they’d be more democratic and accountable because decision are being taken even closer to the people they effect. Of course, I’d like to see decentralisation take place within counties to districts/boroughs and cities, and for areas like Greater London, Greater Manchester and the West Midlands become Independent Cities (London, Manchester and Birmingham, respectively) with County level status and powers.

    Decentralising power equally to all subnational units would be key to avoiding the kind of constitutional mess we’re experiencing now with Scotland.

    Of course, for all this to happen though, the message of decentralisation and localism needs to get out there. I’d be very interested in seeing a more detailed IEA piece about the various options for decentralisation such as which subnational entities to use, the powers they would have and the transitional arrangements for achieving this.

    So I suppose this comment is me saying ‘Can that happen, please?’.

  2. Posted 18/05/2015 at 01:42 | Permalink

    I will pass this on to the Centre for Independent Studies here in Australia. Even more is it important here to get the States off the Commonwealth “teat”.

    I would like to see this expanded – how exactly is the transformation to be initiated and carried through? At least in the UK you have no problems with a Second House with an obstructive majority of ALP, Greens and independent Senators.

    The Commonwealth has no hospitals to run, no schools to run (those in the Territories are run by Territory governments) but we have a large Department of Education and a large Department of Health – which at least has the justification of quarantine (think Johnny Depp”s dogs!). The Commonwealth taxes fuel for motor vehicles, and provides money to the States and Territories for roads – very difficult to decide where the balance lies between insufficient funds to States for roads, as motoring organizations whine, or too much, as public transit enthusiasts complain. But while the Commonwealth is willing to give money to the States for major urban motorway projects (East-West Link in Melbourne, cost anywhere between $8B and $18B, and WestConnex in Sydney, at least $10B but more like $15B), not a penny for urban rail or light rail projects which are arguably of better value to more people, and are believed to have better BCRs.

    Good work, I like the article.

    Dudley Horscroft

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