The UK has one of the most centralised tax systems in the world, with only 28 per cent of revenue expenditure by local authorities funded by council tax. The remainder comes from central government grants and the business rates retention scheme.
By 2020 all revenue from business rates will be retained by local authorities and the Whitehall grant phased out.
There is overwhelming evidence that fiscal decentralisation increases public sector efficiency and while the business rates devolution is a step in the right direction, it does not go far enough.
More tax raising powers should be devolved to local authorities.
At the very least, council tax rates should no longer be capped and instead be determined by local voters in elections and referendums. The system of property valuations should also be rationalised, with a fixed regular cycle imposed to update the figures last introduced in 1993.
More ambitious reform could be a local income tax to replace a portion of national income tax, with local authorities setting individual rates to apply above the personal allowance. Larger authorities could also be given the power to introduce a local sales tax of up to five percent on goods and services already subject to VAT at the standard rate.
There is relatively little difference between the services provided by local authorities and the taxes they levy because so much of the spending involves fulfilling statutory obligations and taxes are capped. This high degree of centralisation at present means there is an absence of “foot voting” which is more effective in disciplining politicians than elections. Further devolution would therefore sharpen incentives for local authorities to improve services and lower taxes.