Localism - Follow The Money

FRIDAY, OCTOBER 16, 2009

Localism - Follow The Money

Local decisions for local people

As we all understand by now, the UK has just about the most centralised system of government of any developed country. Our once proudly independent local councils have become little more than an arm of the state, with all kinds of dire consequences local services, local accountability, and the stewardship of taxpayers' money.

Now the Tories have pledged to reverse this. They pledged it again at last week's Conference.

To which we say hurrah!

Except of course, rhetoric is one thing - action is something else entirely. This morning, Steve Richards highlighted a key point:

"The problem with localism is that governments like to keep hold of the levers even if in theory they want to let go. As an added twist quite often the case for holding on to a lever or two is compelling...

How does central government give away powers when it is responsible for raising most of the money spent by local providers?"

Yes, when it comes to localism - as with everything else - we must follow the money. As long as local councils continue to depend on central government grants for the bulk of their cash, localism is never going to be more than a sham - probably an expensive one.

Now, it just so happens that Tyler is working on a paper for the TPA on precisely this issue. So he's been having a deeper delve into the figures.

First, relative to other developed economies we really are out on a limb in terms of fiscal centralisation. The following chart is taken from a recent OECD working paper, and it shows the variation in how local authorities raise their cash, as between local taxes and transfers (grants) from central government (click on image to enlarge):

As we can see, the UK is at the extreme end in terms of how reliant our local authorities are on central government grants - only Ireland, Greece and the Netherlands are (slightly) more extreme. Even in traditionally centralised states like France, local authorities raise much more of their own funds from local taxpayers, rather than relying on central government.

Second, it really wasn't like this in the past. Traditionally, our councils raised most of their own funds. Right up until the 1960s, their receipts from local taxes were roughly in line with their central government grants.

But as government got bigger, central government crushed local control. They massively boosted their grants to local councils, but only on condition that councils complied with Whitehall directives (recalcitrant councillors could even find themselves banged up). In the 80s, the Thatcher government introduced rate capping, directly limiting council's power to raise local tax. Finally, in 1990 local authorities lost their ability to tax local businesses altogether.

These measures transformed councils' funding mix. And they correspondingly transformed who got to call the shots:

So here we are, with more than 80% of our local councils' spending funded by Whitehall.

And unless Cam changes that, all his talk of localism is so much hot air.

We'll be watching this space very carefully.

PS Simon Jenkins can sometimes be very irritating. But his 2004 paper, Big Bang Localism, turns out to be a pretty good overview of the whole issue. Worth an hour or two.