The Spending Plan policy 18: replace grants to local authorities with devolved taxes

Each day we are publishing a blog on one of the policies from our Spending Plan.
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The UK has one of the most centralised tax systems in the developed world.

In 2013–14, only 25 per cent of taxpayer funding for local authorities came from council tax with the balance coming from central government grants. To limit the extent to which central government collects taxes from individual areas and churns it though its bureaucracy only to return it to the areas from which it came, the 2020 Tax Commission proposed that at least 50 per cent of all tax funded expenditure by local authorities should be raised from local taxation.

Reducing central government grants as a percentage of local authority revenue expenditure by 4 percentage points each year from 2015–16 would make local authorities responsible for raising 50.7 per cent of their revenues by 2020–21. There is an abundance of empirical evidence showing that public sector efficiency increases with fiscal decentralisation.

An econometric study from the German CESifo Group (download the paper) looked at 21 OECD economies between 1970 and 2000 and concluded that:

1) Government efficiency increases with the degree of fiscal decentralisation. This result appears to be robust to a number of different specifications and fiscal decentralisation measures.

2) A 10 percentage point increase in local and regional governments’ share of total national tax revenue improves public sector efficiency by around 10 per cent.

The proposal would increase local government’s share of current receipts from 3.7 per cent to 7.5 per cent – a 3.8 percentage point increase. This in turn should lead to savings from greater efficiency worth £4.9 billion in 2019–20 which should be subtracted from the government’s grants to local authorities.

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