Economic Theory

Fiscal decentralisation should be pursued to ensure long-term economic prosperity


Monetary Policy

The IEA's reacts to the announcement that Barclays are to cut 19,000 jobs over the next 3 years

Economic Theory

Political interference in wage setting should be avoided

Housing and Planning

A book about the prospects for reducing the size of the state
The government should transfer responsibilities for spending and taxation to local authorities in order to increase long-term economic growth.

The decentralisation of spending and taxation responsibilities to local authorities would encourage greater efficiency within government and increased responsiveness to local needs. New research from the Institute of Economic Affairs suggests that fiscal decentralisation will also result in local governments being more accountable to the taxpayer. If the share of taxes given to local governments was increased from its current 5 per cent to 15 per cent, the UK would be up to £70 billion better off.

In A U-Turn on the Road to Serfdom, Grover Norquist suggests that drastic reforms are required to reverse the ever-increasing size of the state, a trend experienced in most western nations. The report proposes a reassessment of the scale of government to achieve a reduction in taxation and spending.

Recent spending patterns have caused western economies to suffer strains previously associated only with periods of wartime finance. Increasing expenditure on welfare benefits is detrimental to GDP and governments can no longer use taxation as a sole deficit reduction tool. The report argues that excessive taxation will further reduce efficiency. Reducing spending is a more effective way to reduce a deficit without negatively impacting economic growth.

Key findings:

•    Western governments have overshot the optimum tax burden people are willing to endure. In an attempt to combat this problem, governments have reverted to measures such as running large deficits and quantitative easing. The resulting uncertainty that arises from these policies has deterred private investment.

•    Increased public spending leads to a reduction in national output. Means-tested welfare benefits to people of a working age are the most damaging form of public expenditure – reducing the supply of labour available to the private sector and having a negative overall effect on potential GDP.

•    Those who entered the labour force at the age of 15 in 1960 could have been close to 3.2 times better off as a 68-year-old, if government spending ratios had remained at their level in 1960.

•    Governments can no longer reduce deficits through taxation alone. Taxes pose hidden as well as direct financial costs. Therefore, attempts to reduce deficits through increasing taxes will lead to lower growth, reduced output and possibly worsen the deficit in the long run.

•    Competition between individual states in the US has resulted in government that is more responsive to local needs and has enabled methods of best practice to emerge, increasing efficiency and reducing spending.

Fiscal decentralisation:

•    The success of fiscal decentralisation in the United States can be applied to the UK. In order to reduce the size of government, local authorities should be granted greater autonomy over both spending and taxation.

•    Greater tax competition and accountability will result in considerable benefits to the taxpayer. Providers of public services will become more responsive to local preferences.

Commenting on the research, Mark Littlewood, Director General at the Institute of Economic Affairs, said:

“We have seen the damage caused by staggering budget deficits and high levels of government spending. A movement towards fiscal decentralisation offers an opportunity to reduce the cost of government by re-evaluating the scope of publicly funded services. It also means the decision makers have far more insight into their local area and the possibility for policy experimentation will ultimately lead to the creation of best practices.”

Notes to Editors:

To arrange an interview about the publication please contact: Camilla Goodwin, Communications Officer: [email protected] or 07821 971 443.

This report, A U-Turn on the Road to Serfdom, is taken from a lecture delivered by Grover Norquist to the Institute of Economic Affairs at its 2013 Hayek Memorial Lecture on 3 July 2013. To download the full report, click here.

Grover Glenn Norquist is the founder and president of Americans for Tax Reform. He is the creator and organiser of the Taxpayer Protection Pledge, a public written commitment to oppose all tax hikes, signed by most members of the US Congress. Norquist is a graduate of Harvard College and Harvard Business School. He also serves on the board of directors of the Center for the National Interest, the Parental Rights Organization and the National Rifle Association.

This research also features contributions and commentary from three experts:

Nima Sanandaji is a Swedish author of Kurdish origin who holds a PhD from the Royal Institute of Technology in Stockholm. He has written books and reports about policy issues such as women’s career opportunities, integration, entrepreneurship and reforms which encourage innovation in the provision of public services.

Matthew Sinclair is a senior consultant at Europe Economics – a consultancy specialising in economic regulation, competition policy and the application of economics to public policy and business issues – and a former chief executive of the TaxPayers’ Alliance. He was the editor of the book How to Cut Public Spending (2010) and author of Let Them Eat Carbon: The Price of Failing Climate Change Policies and How Governments and Big Business Profit From Them (2011).

David B. Smith studied at Trinity College, Cambridge, and the University of Essex in the 1960s. He then worked as an economist, predominantly in banks and the securities industry, until the mid 2000s. David is currently a visiting professor at the University of Derby and maintains his own econometric forecasting model of the international and UK economies at Beacon Economic Forecasting. He has written extensively on monetary policy and financial regulation as well as on public spending and tax issues.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.