Austerity has not encouraged greater fiscal decentralisation. New OECD research shows that in many countries hard times have left sub-national levels of government unaffected, or even encouraged more centralisation of tax and spend
Big changes in relations between central and local government are going to have to wait for the good times to return, according to the latest OECD overview of sub-national fiscal trends; that is, taxing and spending below the level of the nation state. Remarkably, austerity and financial crisis have as yet had little effect on the balance of powers between the centre and regional and local authorities, with no strong trends in either a centralising direction nor in favour of increased powers for local and regional authorities.
However, in some countries central government has been willing to allow councils and regions more autonomy over spending, while giving them no extra space on revenue raising. The upshot is that a larger proportion of local spending depends on central grants.
What England has experienced as the 'Pickles formula' (associated with Communities Secretary Eric Pickles) is visible elsewhere. Since the crisis, in most countries local authorities have tended to balance their books by cutting spending rather than by increasing taxes. Overall, the financial position of local and regional authorities is reasonably stable – notwithstanding the Audit Commission’s recent gloomy predictions about the financial fate of many English councils.
The OECD report Fiscal Federalism 2014 says that with the exception of a few countries, including Canada and Spain, provinces and regions have kept their debt levels sustainable.
Like many OECD studies, this one offers invaluable comparative data but it is laced with a doctrinaire approach – notably in claiming market mechanisms (outsourcing and competition) would automatically cut costs and improve effectiveness. As the report admits, comparison is not always easy. Do Australian states, German Länder and English shire districts really belong together in the same category of ‘sub central government’?
Still, the report is a useful corrective to those who claim that England is overly centralist. On none of the OECD’s tables is England or Great Britain an outlier (the OECD does not count Scotland, Wales and Northern Ireland as ‘sub-national’). In other countries, including the Republic of Ireland, council spending is a smaller proportion of total public spending; in other countries councils raise smaller proportions of their spending from local taxation.
The OECD is broadly in favour of decentralisation, by which it means giving local and regional authorities more leeway to raise taxes and spend, and to compete with other local areas by cutting taxes. (Its neo-liberal ideological biases make it less sure about councils competing by raising the standard of public services.)
But the evidence for localism turns out to be mixed. Across the OECD countries, more decentralisation of taxing and spending is associated with higher GDP per capita, but only to a small extent. And the authors of the report acknowledge it could be that wealthier countries are more relaxed about local government autonomy, rather than councils’ freedom in some sense being responsible for higher income.
A conspicuous gap in the OECD analysis is the links between local government autonomy and income and wealth inequality. Can Sweden and Norway and other well-off countries afford to give their local authorities more power because demographic and regional gaps in income are relatively small?
The OECD acknowledges there is a problem with allowing councils and regional authorities to compete by cutting taxes, which is that they start out from different positions depending on their prosperity and income. The solution is ‘equalisation’ – schemes by which the central government levels up resources. But that, says OECD secretary general Angel Gurría, could encourage councils to make less effort to collect tax and promote economic growth in their area.
Another stumbling block in getting council finances shipshape is public and political resistance to deploying the one levy that is best suited to local government – taxation of property. It’s the principal basis for local government in most OECD countries yet seems to be stuck. Only in Canada and Australia and other countries that are effectively federal – where a large element of government is conducted by provinces or ‘states’ – has sub-national government ever had access to the much more dynamic sources of revenue in income or corporation tax.
David Walker is a writer and commentator on public policy and management
