Slicing up the public sector: A radical proposal for devolution

Large economic gains are to be had from greater devolutionSummary:The recent Scottish independence referendum opened up an important debate about the appropriate level of governance for all regions of the United Kingdom. However, many of the current proposals, such as English votes on English matters, city deals, and an 'English Parliament', are flawed.The UK is highly centralised and devolution combined with fiscal decentralisation could bring significant economic benefits. This can happen through several mechanisms: decisions will be taken closer to those they affect; there will be more policy experimentation; and there will be horizontal competition between jurisdictions.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.Westminster should remain sovereign, and powers devolved to local authorities should be clearly enumerated. Central government should remain responsible for foreign affairs and defence, major infrastructure projects, competition policy and migration.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.Devolution throughout the UK should be applied to the following areas of spending and regulation: welfare, environmental policy, health, housing and labour market policy. There is also scope to devolve significant other law-making powers relating to the control of purported localised externalities, particularly where local variation in preferences might be expected.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.Consumption taxes are likely to have limits as a source of local revenue in a densely populated country with permeable boundaries. Local authorities should have the power to levy taxes on income and duties on natural resources, subject to approval by voters and with restrictions on the structure to prevent manipulation of the tax base.Westminster should remain responsible for the existing national debt and place restrictions on new borrowing by local authorities. The Bank of England should not accept sub-national government debt as collateral for lending operations. Borrowing by local authorities should be allowed but only to smooth spending over the cycle and to pay for large projects.Devolution should not create additional layers of government, as proposed with the new English Parliament or regional assemblies. Instead, powers should be devolved to existing county and unitary authorities.