Federal Britain

The Case for Decentralisation

Philip Booth

• Publisher: London Publishing Partnership
• Year: 2015
• eBook ISBN:
  9780255367158
• Edition: 1

The UK has the most centralised system of government amongst major economies. This results in poorer services, lower economic growth and higher taxes. We have also developed an approach to devolution that is incoherent and unstable. This short book proposes an entirely new set of constitutional arrangements. It proposes that the UK should develop a federal structure of government with only a small number of functions such as defence and border control being determined at the UK level. All other functions would be the ultimate responsibility of individual nations within the UK, though Wales, Northern Ireland and England could combine together if they wished. The author also proposes further radical decentralisation of government. Local government should become responsible for a much wider range of functions and raise the revenue to finance them. In areas such as health and education, the government role would be diminished further as parents, families and civil society institutions are provided with finance to directly procure their own services. Overall, this is a radical plan to completely change the nature of government in the UK.It would return power to the people and reverse the long trend of centralisation that has happened since World War I.

1. Introduction

The current UK constitutional arrangements with regard to devolution and local government are a mess. In itself, this might not be a problem. Many aspects of the UK government have evolved rather than being rationally designed. That is the nature of a country without a written constitution and which has a common law tradition. However, in the case of devolution and local government, there has not been a process of evolution designed to deal with problems as they arise, but rather a gradual centralisation (in the case of local government functions) together with asymmetric reform (in the case of devolution) that has resulted from political pressures and actions borne more from opportunism than from principle or an analysis of the economic costs and benefits.

No comparable country is as centralised as the UK when it comes to the distribution of functions and revenue-raising powers between central and local government. We also have a devolution settlement which gives wide-ranging powers to some parts of the UK and not others, and which separates decisions about spending from the consequences of those decisions in terms of the necessary levels of taxation.

Problems with the UK constitutional settlement

Devolution

The UK’s devolution settlement has created a situation in which large numbers of members of parliament vote on matters that do not concern their constituents. In other words, there is representation without taxation, rather like in the case of rotten and pocket boroughs before the 1832 Reform Act. It also happens that those nations of Britain that tend to be more supportive of higher levels of regulation and government spending have the greatest number of devolved powers. This creates an asymmetric bias in the UK parliament towards higher levels of government intervention. If the UK as a whole votes for a low-spending government, Scotland, Wales and Northern Ireland can still choose a high-spending government. On the other hand, if England votes for a low-spending government (as indicated by a majority of MPs being elected in England for a party that wishes to reduce government spending), it may well have a high-spending government imposed on it by electors in Scotland, Wales and Northern Ireland.

By any metric, the nations to which powers have been devolved have much higher levels of government spending than England. The non-English MPs have an incentive to try to maintain such levels of spending and to increase spending further if that spending will not be financed by their constituents. Of course, any MP has an incentive to try to ensure more spending on things that benefit their constituents that is financed by taxpayers in general (see, for example, Tullock 1976). However, the interests of the non-English MPs are strongly aligned around this particular objective. They all have a very strong interest in maintaining the current government spending settlement whereby additional spending outside England is financed by taxpayers in general (that is, mainly by English taxpayers). When such a large body of representatives has strongly aligned interests around a single objective, it is much more difficult to prevent it achieving its goals – this is particularly so if that group holds the balance of power in parliament. Indeed, throughout the last 30 years, we have seen a number of particular concessions to the Celtic nations of the UK, including promises that have been made by the current government not to reform the Barnett formula, which determines government spending in the UK nations.

These problems are further exacerbated by the fact that Scotland, Wales and Northern Ireland are over-represented in the UK parliament despite many of the decisions made by that parliament having no bearing on those nations. For example, in England, there are nearly 30 per cent more electors per parliamentary seat than there are in Wales. Thus, an extra impetus is given to the big government bias.

Overall, therefore, the devolution settlement creates unrepresentative government and is likely to create a bias towards big government.

Local government and fiscal centralisation

As measured by the proportion of revenue raised by sub-central government, the UK has the most centralised political system of all comparable countries. In the UK, just 5 per cent of revenue is raised by local government. The figures in other countries range from 13 per cent in France to 50 per cent in Canada.

Such a level of fiscal centralisation gives rise to a number of difficulties. The first is that the package of goods and services – in terms of both the amount of goods and services provided and the make-up of that package – cannot be easily varied according to local need. For example, it is highly likely that the form of assistance that should be given to unemployed people in Huntingdon would be very different from the form of assistance that needs to be given to the unemployed in Hackney in London. Preferences when it comes to education, the regulation of activities such as shopping, gambling or drinking, and so on, will also vary across the country.

Moreover, because the system is so centralised, local government cannot be disciplined by constituents moving between local government areas. It is much easier for people to move from, for example, Oxford to Banbury or from Bristol to Taunton than it is to leave the country altogether. The absence of what is described below as foot voting leads to three further problems. Firstly, an important discipline on government is lost, both in terms of providing higher-quality services and also in terms of providing services at the lowest possible cost in terms of taxation. Secondly, knowledge about the preferences of voters is less easily communicated to their representatives. Thirdly, there is likely to be a lack of experimentation and the copying and diffusion of good practice. Indeed, any differences between local provision in different areas is often heavily criticised by the media and such differences were named ‘postcode lotteries’ by the Blair governments. The other side of allowing differences, however, is that services can be better matched to local preferences and there is an incentive for services to be better everywhere even if there are differences in performance.

These theoretical problems with centralisation are confirmed by the evidence. In the limited situations where foot voting can be exercised, residents are indeed active. It is clear that local residents do move house – and pay a premium – in order to live in the catchment areas of better schools. The detailed empirical studies suggest that fiscal decentralisation leads to better economic outcomes as measured by factor productivity, investment, school performance and national income. Of course, many of the benefits of decentralisation, such as better public services or public services being better matched to the preferences of residents, will not be captured by statistical studies because national income statistics tend to measure the contribution of public services to national income by counting inputs rather than by assessing the value of outputs to residents.

One study discussed below, for example, finds that doubling the share of sub-central taxes or spending shares is likely to be associated with an increase in per capita GDP of around 3 per cent. The same author suggests that, if the UK raised the same proportion of tax revenue at the sub-national level as Sweden, it would increase national income by 4 per cent. The evidence can best be summed up by the Lyons report into local government financing, which concluded (Lyons 2007: Executive Summary 33):

Recent work comparing the UK with the USA and Europe has concluded that the lack of devolution and local discretion in the UK is a constraint on economic performance, particularly in the cities.

Interestingly, the academic evidence suggests that the UK has the worst of all possible circumstances – revenue raising is much more centralised than spending. The evidence suggests that this combination tends to lead to higher levels of government spending. This is not surprising given the lack of accountability that would exist within such a system. Furthermore, if local government is simply spending central government grants, it becomes a powerful lobby group lobbying for higher grants, rather than a part of government raising revenue to provide services valued by its citizens.

Both theory and evidence suggest that, with its high levels of revenue centralisation combined with moderate levels of spending centralisation, the UK is in an especially good position to benefit from reform. What should be done?

UK constitutional reform and decentralisation

Constitutional reform

This paper proposes a federal solution to the UK devolution dilemma. Scotland and the rest of the UK (RUK) would form two nations within a federal structure; alternatively, Scotland and any combination of England, Wales and Northern Ireland either together or separately could be the nati...

Table of contents

• The author
• Foreword
• Acknowledgement
• Summary
• 1. Introduction
• 2. Local government and devolution: the British constitutional settlement
• 3. The problems of fiscal centralisation and the benefits of decentralisation
• 4. International experience: the example of Spain
• 5. Dealing with the English question: half-baked solutions
• 6. A federal solution to the English problem
• 7. Further fiscal decentralisation: spending and regulatory responsibilities
• 8. Further fiscal decentralisation: revenue raising
• 9. Conclusion
• About the IEA