British governance needs to decentralise

By: Charles Amos, author of the Musing Individualist Substack


In Britain the financing and spending of government is heavily centralised. In 2022 local government raised just 4.84 per cent of total government revenue, a stark contrast to   Germany at 33.79 per cent, Switzerland at 41.30 per cent, and the United States at 32.50 per cent. English councils mostly rely upon council tax and business rates; indeed, these two sources made up 79 per cent of their revenue in 2019/20 (the TPA have gone into detail about the differing sources of local government funding in an illuminating blog). On the expenditure side of the ledger the role of local government is similarly small with only 19.71 per cent of total revenue being spent by them, contrasting to Germany’s 39.65 per cent, Switzerland’s 57.79 per cent and the US’s 40.64 per cent. 


This situation is unfortunate for three reasons: First, it leads to the poor allocation of public services, second, it reduces competition among local councils, and, third, it reduces the incentives of individuals to hold government to account. The solution is simple: radically de-centralise power,  with local government being responsible for most of the provision of public services, for example, education and healthcare, and only certain services such as national defence left to Whitehall. Crucially, local government must be granted the power to set the major taxes, i.e., income tax, national insurance and VAT, as indeed the TPA have called for in their Single Income Tax proposals


The poor allocation of public services occurs because centralised government imposes a uniform level of taxation and expenditure across the country. Holding the total revenue raised constant, this results in local areas which would prefer lower taxes and fewer services being made worse off because local councils have limited  power to reduce or increase taxes and spending. While local authorities can increase council tax, there is a cap of 5 per cent imposed for top-tier authorities, and this still only impacts half of the revenue raised by councils, with business rates and grant income dictated largely by Whitehall. Greater autonomy ensured by the devolution of tax powers to local councils, perhaps, to the district level, and full control over healthcare and education would improve upon this poor allocation. 


A uniform level of taxation and spending across the country also reduces the potential for local councils to compete for residents, limiting the benefits of efficiency gains. If Council A ran its healthcare with much waste this would have to be passed onto residents through higher taxes, meaning, potential residents would be put off from relocating there. Over time people would vote with their feet,  providing strong incentives for greater efficiency in local government. Should this model be doubted, it is worth pointing out that people regularly relocate to get into the catchment area for better schools, studies suggest a tenth of people are willing to pay up to £50,000 in higher house prices to do so, so why wouldn’t they for other services as well.


Centralised provision of public services also reduces the degree to which  taxpayers are likely to bother holding politicians to account.  As Philip Booth writes: ‘The larger the governmental unit, the smaller the chance of an individual elector influencing an election, so individuals have less incentive to be well informed’. Compared with a decentralised state, voters are less well informed, thus, they are less likely to contact politicians over broken promises, monitor the provision of public services, and go to public meetings to lambast them for corruption or wasted spending.


On top of the gains in accountability, there are estimates that GDP per capita could be boosted by 3 per cent if the tax and spending shares of subnational government are doubled. But there are drawbacks. Public goods such as policing, national defence and disease control cannot be fully devolved to local authorities and remain efficiently provided because of spillover effects. For example, Council A may provide excellent policing which reduces a lot of crime, but the reduction in crime spills over to Council B too. This spillover benefit would not be captured by the taxpayers of Council A though, hence, they would not pay for the excellent policing, even if the overall benefits of reduced crime to Council A and B were greater than the costs to Council A of the excellent policing. 


No system is perfect, but ours couldn’t be further from it. The British government is too centralised for its own good. Devolving both spending and financing to local councils would ensure a better allocation of public services, more competition between local authorities and a  greater level of  accountability from politicians to the people too. Although the exact nature of the division of service provision and tax powers between county, district and town councils needs discussion, the direction of travel should be clear: British government must decentralise. 



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