Paying for Localism

Charles Moore makes a good point in The Spectator:

The government is very proud of its commitment to localism, and has fought hard to get its controversial Localism Bill despite numerous objections in the House of Lords. Yet at the same time, it orders another annual freeze of council tax and everyone applauds. If localism is not locally paid for, it is only a game. It reminds one of people who love the ‘self-sufficiency’ of living in tents and foraging for food, but retreat to their comfortable homes whenever it rains.

I agree – the general principle ought to be that each level of government should itself raise the money it spends. When local authorities are just spending bodies, reliant for the most part of the largesse of the central government, they lack accountability. They also face skewed incentives – why should they economize when money is being handed to them by Whitehall? If anything, they’ll want to be as profligate as possible in attempt to justify a bigger grant the following year.

Financial autonomy, or at least something closer to it, would encourage greater fiscal responsibility and more rational policymaking. It ought to be a central part of any localism agenda worth the name. How exactly you do it is open to debate. Some favour greater reliance of property taxes, while others advocate a local sales tax. Personally, I think the best approach would be to cut every national income tax rate by six or seven percent, and then let councils set their own flat rate income tax.

The beauty of that approach is that it would introduce domestic tax competition where it is needed most. Councils who set lower taxes rates might attract more residents and see revenues rise, which would encourage other councils to follow their example or else risk losing out. At last, then, there might then be some countervailing pressure on income tax rates – which would be a very good thing indeed.