The government should transfer responsibilities for spending and taxation to local authorities in order to increase long-term economic growth.
The decentralisation of spending and taxation responsibilities to local authorities would encourage greater efficiency within government and increased responsiveness to local needs. New research from the Institute of Economic Affairs suggests that fiscal decentralisation will also result in local governments being more accountable to the taxpayer. If the share of taxes given to local governments was increased from its current 5 per cent to 15 per cent, the UK would be up to £70 billion better off.
In A U-Turn on the Road to Serfdom ,  Grover Norquist suggests that drastic reforms are required to reverse the ever-increasing size of the state, a trend experienced in most western nations. The report proposes a reassessment of the scale of government to achieve a reduction in taxation and spending.
Recent spending patterns have caused western economies to suffer strains previously associated only with periods of wartime finance. Increasing expenditure on welfare benefits is detrimental to GDP and governments can no longer use taxation as a sole deficit reduction tool. The report argues that excessive taxation will further reduce efficiency. Reducing spending is a more effective way to reduce a deficit without negatively impacting economic growth.
• Western governments have overshot the optimum tax burden people are willing to endure. In an attempt to combat this problem, governments have reverted to measures such as running large deficits and quantitative easing. The resulting uncertainty that arises from these policies has deterred private investment.
• Increased public spending leads to a reduction in national output. Means-tested welfare benefits to people of a working age are the most damaging form of public expenditure - reducing the supply of labour available to the private sector and having a negative overall effect on potential GDP.
• Those who entered the labour force at the age of 15 in 1960 could have been close to 3.2 times better off as a 68-year-old, if government spending ratios had remained at their level in 1960.
• Governments can no longer reduce deficits through taxation alone. Taxes pose hidden as well as direct financial costs. Therefore, attempts to reduce deficits through increasing taxes will lead to lower growth, reduced output and possibly worsen the deficit in the long run.
• Competition between individual states in the US has resulted in government that is more responsive to local needs and has enabled methods of best practice to emerge, increasing efficiency and reducing spending.
• The success of fiscal decentralisation in the United States can be applied to the UK. In order to reduce the size of government, local authorities should be granted greater autonomy over both spending and taxation.
• Greater tax competition and accountability will result in considerable benefits to the taxpayer. Providers of public services will become more responsive to local preferences.
Commenting on the research, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
“We have seen the damage caused by staggering budget deficits and high levels of government spending. A movement towards fiscal decentralisation offers an opportunity to reduce the cost of government by re-evaluating the scope of publicly funded services. It also means the decision makers have far more insight into their local area and the possibility for policy experimentation will ultimately lead to the creation of best practices.”
Notes to editors:
To arrange an interview about the publication please contact: Camilla Goodwin, Communications Officer: firstname.lastname@example.org or 07821 971 443.
This report, A U-Turn on the Road to Serfdom