• The UK should develop a federal structure of government with very limited responsibilities being held by the UK government.


• All other functions should be the responsibility of a Scottish and a “Rest of UK” – or separate English, Welsh and Northern Irish – parliament


• There should also be a significant decentralisation of regulation, tax raising and spending responsibilities to local government within nations.


• Such moves could raise GDP per capita by 6%

Over-centralisation hampers economic growth and leads to poor government services and higher taxes, argues a new IEA paper. In the UK, just 5% of revenue is raised locally, compared with 50% in Canada and 29% in Germany, making the UK the most centralised government in the G7.

Furthermore, the UK’s current devolution settlement has led to unrepresentative government, with an in-built bias towards ‘big government’. The nations of Britain that tend to be more supportive of higher levels of regulation and spending have devolved powers, and are over-represented at Westminster.

Our system also leads to representation without taxation – MPs have responsibility for determining legislation that doesn’t affect their constituents.

Federal Britain: The case for decentralisation proposes that the UK develop a federal structure of government with just a small number of functions – such as defence and foreign affairs – being determined at a UK level. At the same time, the paper calls for further significant decentralisation to national and local government – going far beyond the government’s current plans for city regions. Decentralising government would allow greater experimentation, better matching of services to local preferences and greater competition between providers of government-funded services.

Problems with the current devolution settlement:

·         Proposed solutions, such as EVEL, are impractical. The ‘English votes for English laws’ system would weaken accountability. It would see some MPs responsible for two sets of issues and others only one, and identifying the executive responsible for English issues would also become very difficult. Government could become totally unstable.

·         Spending and taxation are not aligned. The UK’s current devolution settlement is the worst of all worlds. Revenue raising is much more centralised than spending. If local governments don’t raise their own revenue, they have no incentive to grow their tax base by following policies that are favourable to business and attractive to the local population. Innovation is reduced, and if grants are ring-fenced there is very limited scope for experimentation.

–           Reforms to date have been piecemeal. Ad hoc arrangements to date – such as city deals – do little to decentralise. Many of the government’s so-called decentralisation proposals actually take powers away from lower levels of local government and give it to higher levels. They also take power away from citizens and give it to local government rather than truly decentralising away from Westminster.

–           Local government is heavily restrained by central government regulation. Local authorities are often simply implementing national government guidelines. Government figures show that in 2011 there were over 1,300 local authority statutory duties laid down my parliament.

The benefits of decentralisation

·         Decentralising spending, revenue raising and regulatory decisions would significantly improve the UK’s economic performance. Fiscal decentralisation is associated with higher national income, better school performance and higher levels of investment.

·         Handing responsibility to the local level would help ensure that services and regulation were better matched to people’s preferences and circumstances. Moreover, it would lead to competition between local authorities as voters could move from one local authority to another if their own was ineffective. The erosion of the tax base that would result from such decisions would provide the right incentives for local government to be effective and efficient.

A Federal UK:

·         A federal government would have responsibility for defence, foreign affairs, border control and management of existing debt, to be financed by a specific federal tax. To prevent centralisation – which has hampered the US and other federal structures – unanimous agreement of all nations within the federal structure would be necessary for further powers to be passed up to federal level.

·         Individual nations (Scotland and Rest of UK) would be responsible for all functions such as health, education, policing, housing and planning, working-age welfare and environmental policy. Except for working-age welfare, which would be financed by government grant but administered locally, all these functions together with existing local government functions would be financed by local revenue streams such as business rates, consumption taxes, taxes modelled on the current council tax and tourist taxes.

·         At all levels of government, the relationship between revenue raising and spending would be very clear. Accountability, competition and experimentation would all be boosted, and public services would be aligned to the preferences of local electorates.

Commenting on the report, its author, Professor Philip Booth, commented:

“The UK’s approach to devolution is incoherent and unstable. It’s clear that the only long-term stable solution is to create a proper federal state with a very small number of powers held at UK level. All other issues should be the responsibility of separate governments in Scotland and the Rest of the UK (or England, Wales and Northern Ireland). There should then be a sweeping decentralisation of regulation, tax and spending powers to local government. With very few exceptions, each layer of government must raise what it spends.”

Notes to Editors:

For media enquiries please contact Stephanie Lis, Head of Communications: slis@iea.org.uk or 0207 799 8900 or 07766 221 268.

To download the full report, Federal Britain: The case for decentralisation, click here. For the summary, click here.

This report is part of the Paragon Initiative – the IEA’s biggest-ever research programme. Across the next five years, we’ll:

• Analyse the failure of current polices through a far-reaching series of nearly 50 books and papers scrutinising every area of government activity

• In late 2015, we’ll publish peer reviewed works on devolution, the structural flaws in the NHS, privatising the railways and labour market regulation

• They’ll be quickly followed by works on the future of the BBC, a free market alternative to the NHS and the damaging effects of migration controls

• Later in 2016, we’ll investigate child care, the state of social housing, government funding of the arts and more

• All backed by a co-ordinated and comprehensive programme of stimulating events, compelling ieaTV films and targeted communications reaching policymakers, practitioners and opinion-formers

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.