Federal Britain: The case for decentralisation
The IEA launches a major new five-year project
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· The UK’s current devolution settlement leads to unrepresentative government and has an inbuilt bias towards “big government”. This situation is exacerbated because nations with devolved government are over-represented in the UK parliament compared with their population when it might be expected that they would be under-represented.
· The UK has the most centralised government of the G7, as measured by the proportion of revenue raised by sub-central government. In the UK, only 5 per cent of revenue is raised locally, as compared with 50 per cent in Canada and 13 per cent in France which is the next most centralised country by this measure.
· Measured by the proportion of total government spending undertaken by sub-central government, the UK does not fare quite as badly. However, it is amongst a group of three countries in which between 20 and 30 per cent of all government spending takes place at sub-central central government levels – this is much less than the G7 average. A further indication of the degree of centralisation in the UK is the fact that, in 2011, UK local authorities had over 1,300 statutory duties laid down by parliament. In other words, local government has substantial spending responsibilities but very often these involve fulfilling statutory obligations.
· There are a number of benefits from decentralising government. Amongst other benefits, decentralisation promotes greater experimentation, better matching of services to local preferences and greater competition between providers of government-funded services.
· Theory is confirmed by the evidence. Fiscal decentralisation is associated with higher national income, better school performance and higher levels of investment. In particular, the decentralisation of revenue-raising powers has a stronger effect on performance than the decentralisation of spending. The evidence suggests that increasing the local share of taxation from 5 per cent to 20 per cent (still low by G7 standards) could raise GDP per capita by 6 per cent. With especially low levels of revenue decentralisation, and as a large country, the UK is in a particularly good position to gain from transferring powers and revenue-raising responsibilities from central to local government.
· The UK needs to reform in two areas. Firstly, a federal state should be created with Scotland and either the rest of the UK (RUK), or England, Wales and Northern Ireland separately, becoming nations within a federal union. The federal government should have a very limited number of powers including defence, foreign affairs and border control and a small parliament and executive. No other proposed solution to the “English question” can provide the same stability or beneficial economic outcomes. Secondly, there should be radical decentralisation of powers within Scotland and RUK to local government. The principle that should be followed is that of “subsidiarity”: this does not mean central government pushing powers downwards whilst keeping ultimate control. Rather, control should be at local level unless functions cannot be performed locally. Current UK government proposals to devolve powers to cities do not deal with the problems identified by this research and may well exacerbate them.
· Federal states have a tendency towards centralisation, the US being an important example. Centralisation would be prevented by requiring unanimity amongst the parliaments of all the individual nations as well as agreement of the federal parliament before any further powers were passed to the federal (UK) level.
· Within the federal nations, responsibility for the following should be transferred from national government to local level: environmental policy; working age welfare; education and health; granting of permissions for and regulation of natural resource exploitation; lifestyle regulation; policing; and housing and planning. Local authorities could join together to provide some functions, such as policing, where local geography or other circumstances made that desirable. In addition, there should be complementary reforms to promote autonomy for individuals, families and civil society institutions, especially in relation to health and education.
· Except for working age welfare, which would be largely financed by government grant but administered by local government, all local government functions would be financed entirely by local revenue streams. Theses would come from user charges and from some combination of the following taxes to be determined at local level: taxes modelled on the current Council Tax; land value taxes; taxes on business property; natural resource levies; consumption taxes; variation in income taxes; and tourist taxes.
· Two crucial principles must be applied when implementing these proposals. Firstly, revenue must be raised by the layer of government that is undertaking spending. Secondly, one layer of government must not bail out the debts incurred by any other layer of government. To prevent the problems seen in the euro zone, the central bank would not accept Scottish or RUK (or English, Welsh and Northern Irish if appropriate) bonds as collateral in monetary policy operations.
The paper featured in The Telegraph, The Daily Express, The Daily Star, The Western Mail, The Guardian, CityAM, and the Washington Post.
To read the press release, click here.
To read the summary of Federal Britain, click here.
2015, Readings in Political Economy 3