Blog

How and how not to devolve power

In all the sound and fury of the coming election, it’s important not to forget the areas where the parties agree. This includes support for much greater “localism” and devolution of power from central government – and not just to Scotland. One example is George Osborne’s support for an elected Manchester “super mayor”, a move strongly backed by Labour.

But the effect much greater devolution of central government power will have on fiscal policy and the prospects for economic growth has been barely discussed. The impact is likely to depend on whether the newly-empowered local authorities have to raise their own revenue, or are funded with a corrupting mixture of grants and bailouts from the centre; whether adequate precautions are taken to prevent regulatory barriers breaking up the British “single market”; and whether there are clear lines of accountability, rather than multiple, conflicting and opaque tiers of regulation.

Too often, devolution has been treated as being purely about questions of identity, with no implications for conventional economic issues, or as being an obviously “good” or “bad” thing. Too little attention is paid to the differences between the devolved institutions that help make Switzerland such an enduring success and those that make Brazil so dysfunctional.

The difference often comes down to horizontal versus vertical competition.

Horizontal competition is what we are used to between businesses in free markets: local authorities compete with each other to attract residents, taxpayers and investment by offering the best mix of low costs and quality services. Vertical competition has been characterised as more like a series of toll stations along a river: each authority competes to extract as much money as they can, knowing that the consequences in terms of reduced traffic will be spread across all the different tiers of government.

In short, it is dangerous to have revenue coming from the national taxpayer (in the form of centrally-allocated grants) but the spending determined locally. It is hard to think of a better way to encourage wasteful spending, and it means local politicians won’t have a proper incentive to support local economic development. Unsurprisingly, the international empirical evidence suggests that centralisation of tax raising is associated with lower economic growth.

The solution is to have as much local spending as possible paid for by local taxation. This could be achieved relatively easily in parts of Britain that are net contributors to the Exchequer, like the South East. In a country as diverse as the UK, of course, redistribution to poorer areas is likely to continue. However, funding for local authorities from taxpayers across the country should be dependent on a credible plan for recovery, and not used to support permanent dependence on bailouts from central government. Having to give up some of their autonomy in return for grants will also create a solid incentive for local politicians to support economic development, which will in turn give them more independence.

There is a great deal of talk about the supposed threat to British access to the European single market. The imminent threat to the British single market, meanwhile, is almost ignored. A heavily-devolved UK would run the risk of local authorities trying to game the regulatory rules by creating barriers to “outsiders”. This could involve overt protectionism, with taxes levied on businesses from outside the area, or a subtler process, perhaps through the enactment of regulatory standards that make it harder for national players to compete. Some equivalent of those EU rules which prohibit such short-sighted mercantilism is likely to be necessary.

There is also a risk of the same policy areas being regulated by two or more tiers of government. Two-tier regulation is problematic, as it encourages additional regulation by local authorities but not deregulation. And local and national regulations are likely to work together in ways that make the combination worse than if either were enacted separately. One example is when local governments pass regulations in order to manipulate national rules.

The decentralisation of Britain’s exceptionally centralised politics would offer enormous economic opportunities. Having local people pay for services through their local taxes would encourage more responsible spending. Localism also has a huge potential to produce and then spread beneficial innovations in government. An example in London is Wandsworth Council’s success in reducing the cost of public services and council tax, which has forced other boroughs to compete.

But it’s key that powers are devolved from central government in the right way. The impact of the design of devolution on economic policy should be central to our debate on the subject, not an afterthought.

 

Tom Packer is a co-author of the new IEA Discussion Paper 'Slicing up the public sector: A radical proposal for devolution'. This article first appeared in City AM.

Comments (0)

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

Previous blog posts

Search

Diego Zuluaga Laguna
25 March 2015
comments

In my previous post, I have argued that the case for ‘net neutrality’ regulation is based on a flawed understanding of the way innovation takes place, and of the role of economic...
Andrew Lilico
24 March 2015
comments

Dr Andrew Lilico, member of the IEA’s Academic Advisory Council, writes for CapX:   Paul Krugman once did something or other quite good on the economics of trade, winning him the Nobel...
Fernando Herrera-González
24 March 2015
comments

Economic theory is the science which tries to explain economic phenomena. Just as Newton observed an apple falling from a tree and started searching for an explanation to the phenomenon, which...
John Burton
23 March 2015
comments

The question of whether the BBC is institutionally biased to the left and/or anti-capitalism (not necessarily quite the same) might provoke, in some quarters, the counter-query ‘Is the Pope a...
Diego Zuluaga Laguna
20 March 2015
comments

For over two decades since its inception, the internet has remained largely free of state regulation and control. In the U.S., where the majority of global digital innovation has originated, the...
Kristian Niemietz
19 March 2015
2 comments

Given the proximity to the election, most commentators predicted a 'Budget of giveaways', full of populist gimmicks. Judged against that expectation, the actual Budget was relatively sensible...
Philip Booth
18 March 2015
2 comments

Whenever we approach a General Election or Budget, the competition for the daftest tax policy idea is always intense. The current front-runner is probably the proposal to largely exempt houses from...
Ryan Bourne
17 March 2015
comments

It's a well-known saying that “turkeys don’t vote for Christmas”. So calling for George Osborne to take to the despatch box tomorrow and announce that he’s abolishing...
Markus C. Kerber
16 March 2015
comments

In recent years, euroscepticism has been growing in the UK and elsewhere. This is largely due to concerns about a perceived overreach of EU institutions, coupled with insufficient accountability to...
Diego Zuluaga Laguna
13 March 2015
comments

A report from the House of Commons Environmental Audit Committee released today called for stricter environmental protections to be included in the free-trade deal currently being negotiated by the...
David Starkie
13 March 2015
comments

Government spending on infrastructure is a subject on which Keynesians and Neoclassicists tend to agree. The former are interested in the short-term stimulus effect, while the latter see it as a way...
Kristian Niemietz
12 March 2015
comments

Economists are a notoriously quarrelsome bunch, who disagree on almost everything. Ask three economists, and you’ll get four opinions. The reason is that in economics, empirical literature is...
Eamonn Butler
11 March 2015
comments

Policy people from across the political spectrum, and from public and private sectors, are mourning the death of Matthew Young, former Press Secretary to two Labour Prime Ministers, project leader...
Ryan Bourne
11 March 2015
1 comment

We should have called 2010 ‘The Phoney Election’. Right up until polling day, our wannabe political leaders were debating the desirability of £6 billion worth of ‘efficiency...
Ryan Bourne
10 March 2015
1 comment

The battle for the soul of the Conservative party post-election has already begun. This week, commentator and conservative activist Tim Montgomerie will officially launch his new agenda –...
David S. D'Amato
9 March 2015
comments

Earlier this month American Banker’s Mayra Rodríguez Valladares reported on what she regarded as “a bleak winter for financial reformers in the United States.” Hopeful for...
David Henderson
6 March 2015
1 comment

In two previous posts, I criticised a number of recent commentators in the Financial Times (FT) for routinely quoting figures that were much too low for the GDP of poorer countries. I made the point...
Mikko Arevuo
5 March 2015
4 comments

Conventional economics has it that businesses adjust their investment spending decisions according to changes in the cost of capital.  At low interest rates, more investment projects are...
Ryan Bourne
4 March 2015
10 comments

BBC director-general Lord Hall must have thought all his Christmases had come at once. For years, the corporation has been on the defensive about the future of the TV licence fee. Campaigners had...