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Giving councils tax-raising powers will make town halls ‘more responsible’, report claims

Giving councils tax-raising powers will make town halls ‘more responsible’, report claims

🕔27.Mar 2015

Right wing think tank the Institute of Economic Affairs has criticised the Government’s English devolution efforts as flawed and selective, favouring chosen councils and regions against others.

The creation of an English Parliament and ‘English votes for English laws’ would see power split unequally whilst failing to decentralise fiscal responsibility and would undermine the potential economic benefits of greater devolution, according to the IEA’s Slicing up the Public Sector’ report.

The study suggests MPs’ time would be better spent concentrating on national issues following a decisive transfer of budgets and powers to all councils.

Unsurprisingly from the free-market IEA, the study challenges the 1980s rhetoric that local councils cannot be trusted to raise and spend money wisely.

The report claims that handing councils powers to raise their own taxes will make town halls more rather than less responsible because “people are generally more likely to spend their own money carefully than someone else’s”.

Providing local authorities with the power to raise and spend their own revenue would encourage them to make better use of taxpayers’ money, and moving decision making on policy areas such as health, welfare and the environment closer to those affected would dramatically improve accountability.

But the IEA stresses that care must be taken to ensure devolution does not create additional layers of burdensome regulation, undermining any potential economic gains.

The report makes the following proposals for devolution:

Taxation – Expecting local authorities to raise the revenue they spend would make voters more aware of how their money is being spent. This could be done through taxing incomes or revenues from natural resources. In order to protect individuals from excessive regional tax increases, any tax rise over a certain threshold should be approved by local voters.

Health – Devolving power over healthcare would mean local authorities would have greater freedom to innovate and respond to local conditions. Giving local authorities’ discretion over public health regulation would allow voters to live in areas that better match their lifestyle preferences.

Welfare – Providing local government with greater flexibility over welfare policy could significantly reduce welfare dependency in the UK. National government might still be required to provide funding for pensions due to the scale of unfunded spending commitments.

Borrowing – Although local authorities would be allowed to borrow in order to finance spending under certain conditions, Westminster would remain responsible for existing national debt, placing reasonable restrictions on regional borrowing.

Commenting on the research, Professor Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, said:

The UK has much to gain from devolution. Councils will be far more responsive to the needs of their voters if they have to raise taxation themselves and are responsible for the delivery of public services currently provided by central government.

The IEA makes the point that devolution at the moment is highly selective.

Combined Authorities such as Greater Manchester and South Yorkshire have been awarded limited devolved powers from Westminster, but other city regions continue to operate under the most centralised governance system in Europe.

The report states:

Unlike the current situation where devolution is selective, devolution should be symmetrical. All authorities to which power is devolved should have the same responsibilities.

This improves accountability for both national and local government. If devolution continues to be extended to areas where voters prefer a larger role for government, policy experimentation will be limited and the size of government will increase.

The ideal should remain that services such as schools are accountable to those who use them, rather than to local or national politicians. Broadly conceived competition powers should ensure that consumers are able to transact freely across local authority boundaries and consumers are not confined to local monopolies.

To obtain the benefits of devolution, tax-raising powers must be devolved alongside spending powers. Central and subnational government should have distinct sources of revenue. The evidence suggests that the decentralisation of spending alone reduces economic growth whereas the decentralisation of both spending and taxes increases economic growth.

It is reasonable to believe that local governments will be more responsible when they are required to raise taxes to fund their spending, rather than appealing to national government. People are generally more likely to spend their own money carefully than someone else’s and, while local government is not spending its own money, voters are aware that the money for projects that local government finances is coming from them and their neighbours, rather than a remote central treasury.

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