Federal Britain: The Case for Decentralisation
126
Federal Britain: The Case for Decentralisation
126eBook
Available on Compatible NOOK devices, the free NOOK App and in My Digital Library.
Related collections and offers
Overview
Product Details
| ISBN-13: | 9780255367158 |
|---|---|
| Publisher: | London Publishing Partnership |
| Publication date: | 11/06/2015 |
| Series: | Readings in Political Economy |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 126 |
| File size: | 734 KB |
About the Author
Ilya Somin is a law professor at George Mason University and author of Democracy and Political Ignorance: Why Smaller Government Is Smarter
Read an Excerpt
Federal Britain
The case for decentralisation
By Philip Booth
The Institute of Economic Affairs
Copyright © 2015 The Institute of Economic AffairsAll rights reserved.
ISBN: 978-0-255-36715-8
CHAPTER 1
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 nations within a federal structure. Which nations would be independent within the federal structure would be decided at the outset by the electorates of Scotland, Wales and Northern Ireland. For ease of exposition, it will be assumed that the nations within the federal structure are Scotland and RUK.
The federal government would have responsibility for a very small number of functions, such as defence, foreign affairs and the management of the existing debt. These would be financed by a specific federal tax. There would be a small federal executive and a small federal parliament that would meet not nearly as frequently as the current UK parliament. To prevent centralisation, which has been a huge difficulty in federal arrangements, such as the US, and in intergovernmental arrangements, such as the EU, unanimous agreement of all the nations within the federal structure as well as agreement of the federal parliament would be necessary for further powers to be passed up to the federal level. It would be the lower levels of government that would decide what was passed up to the higher levels, not the other way round.
This arrangement would remove all the anomalies and asymmetries within the current devolution settlement. It would also ensure that each level of government and each nation was entirely responsible for raising revenue for all the functions for which they were responsible. There would be strict rules in relation to borrowing at both the national and federal levels.
Decentralisation
The federal system would mean that the individual nations (Scotland and RUK) were responsible for other government functions such as health, education, welfare and most forms of regulation. This would encompass the lion's share of government spending. It is then further proposed that there is radical decentralisation within the nations that constitute the federal UK. Specifically, the following functions would become the responsibility of local levels of government in addition to their current functions:
• environmental policy
• working-age welfare
• education and health
• natural resource exploitation
• lifestyle regulation
• policing
• housing and planning
This list is not exhaustive. For example, some aspects of road transport that are not currently a local responsibility could become so. Also, one of these areas is currently already a local responsibility but is administered in such a way that proper accountability is impossible (policing). In the case of some of these policy areas, there would be complementary policies that involved even greater decentralisation. For example, with regard to education, parents would be financed directly and the local government role would be a residual one. Except for working-age welfare, which would be financed by government grant but administered by local government, all of these functions, together with existing local government functions, would be financed entirely by local revenue streams from some combination of the following taxes determined at local level:
• taxes modelled on the current council tax
• land value taxes
• taxes on business property
• natural resource levies
• consumption taxes
• tourist taxes
• (possibly) income taxes set at the local level but collected nationally
The relationship between revenue raising and spending would then be very clear.
Decentralisation would be combined with strict rules to ensure that local government debt was controlled and that local government was explicitly accountable for its own debt. Further decentralisation to lower levels of local government would be encouraged.
Overall, this is a radical programme of reform that both theory and evidence suggest is capable of transforming the political economy of Britain as well as producing much better economic outcomes. Other proposals, such as 'English votes for English laws' in the UK parliament or reducing the number of Scottish MPs either do not properly address the current problems or would have side effects that would make the overall constitutional settlement worse. Furthermore, despite the ad hoc proposals for decentralisation to some areas, such as Manchester, there have been no serious proposals for comprehensive decentralisation or for revenue-raising decentralisation by the current government. A reversal of the process of centralisation that has been going on for at least 80 years in the UK is urgently needed.
The principle that would be embedded in these reforms is that of subsidiarity. This is a concept much misused and misunderstood, especially in the EU. It has its roots in Catholic social teaching and can be described as follows:
it is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do.
Note that the principle argues that smaller organisations should be allowed to do what they can do, not what they are most efficient at doing — this implies, among other things, that the benefit of the doubt should be in the direction of decentralisation. This suggests that the decentralisation to local government proposed here should not necessarily be the end of the process.
The approach to federalism described here has the potential to embrace the principle of subsidiarity fully. Powers could only be moved upwards if the nations within the federal UK decided by unanimity that they could not perform the relevant function themselves. The EU would have much to gain from applying the principle of subsidiarity properly. The UK — which currently is hardly in a position to complain about centralisation within the EU — should lead the way.
CHAPTER 2LOCAL GOVERNMENT AND DEVOLUTION: THE BRITISH CONSTITUTIONAL SETTLEMENT
Devolution — the background
The UK has been characterised by various forms of devolution throughout its history. However, there was a step change in 1999, when the Scottish Parliament and Welsh Assembly were formed. Just before that, in 1998, devolved government returned to Northern Ireland. The powers that have been devolved to each of the nations are not the same, and the different nations have used them in different ways.
In Scotland, the following matters are devolved:
• health and social work
• education and training
• local government and housing
• justice and policing
• agriculture, forestry and fisheries
• the environment
• tourism, sport and heritage
• economic development and internal transport
Spending decisions, organisational issues and the passing of primary legislation in these areas have all been devolved. The devolved matters cover a large proportion of government activity, with the major exception of welfare. By comparison with spending powers, however, revenue-raising powers are limited. The original devolution settlement, and then the Scotland Act 2012, gave the Scottish government the power to vary income tax and also vary some other, minor taxes. However, revenue raising is essentially still a matter for the UK government.
(Continues...)
Excerpted from Federal Britain by Philip Booth. Copyright © 2015 The Institute of Economic Affairs. Excerpted by permission of The Institute of Economic Affairs.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.