Radically decentralising power to town halls may pay UK growth dividend

Philip Booth
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NO MAJOR UK political party is interested in a radical decentralisation of power. The Conservatives, in particular, are scarred by their experiences of “loony-left” councils in the 1980s, and we certainly don’t want to go back to those days. The big flaw in the local government system then, however, was the disconnect between the franchise and the tax base. After the business vote was abolished, councils voted for more and more spending. They loaded the costs on businesses and, often, a small number of domestic ratepayers.

But genuine fiscal autonomy would be an extraordinarily positive force. It would require, however, central government to stop dictating to local authorities what services should be provided and how. In fact, central government would stop financing local authorities entirely. Councils themselves would have to choose how much revenue to raise and how to raise it – as long as the tax base is broad.

Indeed, Grover Norquist, president of Americans for Tax Reform, argued in his Hayek lecture, published by the Institute of Economic Affairs last week, that fiscal autonomy is crucial if we are to reduce government spending and taxes. In the US, where state governments have far more autonomy, good ideas implemented by one state are copied by others. And states that reduce taxes attract business and grow their tax base, encouraging others to follow suit. In Britain, local authorities may be much more development-friendly if they kept the local taxes that new development generated.

And as Matthew Sinclair, a consultant for Europe Economics, shows in a commentary on Norquist’s lecture, this is not just a US phenomenon. The international evidence shows that fiscal decentralisation makes government more accountable. Sinclair argues that it will also deliver smaller and more efficient government, and consequently stronger growth.

The UK is an outlier in international terms. Local government’s share of total tax revenue is just 5 per cent. Although one should regard these estimates with caution, some models have suggested that, if that share rose to 15 per cent, the government would save about £70bn a year through increased efficiency. The magnitude of this estimate can certainly be disputed, but the direction cannot. But to make decentralisation work, it is essential that both tax-raising and spending powers are given at the local level. Just devolving spending powers will not work.

Sadly, the government shows no appetite for radical action. Its policy in Scotland has been particularly misconceived. It should have given Scotland the option of raising around 80 per cent of its own taxes and being responsible for all spending apart from defence, some elements of justice and a few other areas. Scottish MPs could then have been restricted to voting at Westminster only on those matters for which Parliament remained responsible. Instead, we will get a dog’s breakfast if there is a “no” vote in the independence referendum. There will be some devolution of spending, and constitutional incoherence as Scottish MPs retain their votes in Westminster.

Coalition ministers have not thought seriously about fiscal decentralisation. It is time that they did.

Philip Booth is editorial and programme director at the Institute of Economic Affairs, and professor of insurance and risk management at Cass Business School, City University.