Matthew Sinclair is a Senior Consultant at Europe Economics. He is co-author of ‘Slicing up the public sector: A radical proposal for devolution’, published today by the IEA.
Whoever wins, further decentralisation of British politics seems likely after the election. The Government is proud of having given councils greater discretion over their spending and responsibility for their own finances. At the same time, if the SNP give Labour a proper pasting in Scotland it will only strengthen the hand of those arguing for an expansive interpretation of the pledges made in the heat of the referendum campaign. Other parts of the UK will want to match those freedoms.
It might seem like this is a topic best left until after the election. There are campaigns to be fought, seats to be won. But events could then move quickly, particularly if another coalition is formed, and constitutional changes often stick whether they work or not. It is worth us thinking now about priorities for a new devolution settlement, not in the white heat of the debate over a new Government’s programme. We need to do everything we can to avoid the authorities powers are devolved to becoming bailout junkies.
The first principle surely has to be that devolution cannot continue to be granted first and often last to those parts of the country least likely to vote for the Conservative Party. The Conservative vote share was 19 percentage points higher in those parts of the country without devolution in 2010. There is also a difference in opinions on the issues. Scottish voters are 7 percentage points less likely to tell a pollster that the government spends too much and therefore taxes us too much, for example. Ed Miliband’s proposals to decentralise powers next to the Northern cities seems like a crass extension of the current principle. The Conservatives accepting it might be admirably selfless but it has broader consequences.
Unbalanced devolution affects decision-making in Westminster. Subnational authorities can try new things and show everyone else the way. Windsor and Maidenhead’s adoption of spending transparency under the inspired leadership of David Burbage is a great example. And by showing that it was possible to cut Council Tax year after year, alongside others like Trafford and Hammersmith and Fulham and established low-tax authorities like Wandsworth and Westminster, they put the lie to the idea that councils had to hike people’s bills every year. At the moment, that freedom to innovate and set an example is in many areas of policy restricted to those most likely to believe that higher taxes and more government spending is the answer.
This is one example of a broader pattern: get devolution right and you can enjoy the flexibility and responsiveness of local government at its best, get it wrong and you could end up with perennial basket cases campaigning for endless bailouts.
Local authorities engaged in a friendly competition to offer the best mix of services and value for money to their residents is a great thing. Authorities engaged in an unseemly battle to take as much money as possible, staking their claim ahead of other tiers of government, is not good news. The cash-strapped taxpayer always ends up the victim.
Central government needs to ensure that it is using its still considerable weight to create the right incentives for subnational authorities to promote local prosperity, rather than relying on national bailouts. There is empirical evidence that councils funding their own spending is associated with stronger economic growth, as they then have more of an incentive to support economic growth rather than stand in its way.
Central government subsidies should therefore entail new restrictions on policy. Fiscal equalisation between regions should reflect a recovery plan, not a relationship of permanent fiscal dependence. After all, without regional transfers and centralised regulations locking regional inequality in place, there is no reason that we should accept that poorer regions have to remain poor. The North-South divide has flipped more than once before. The South was generally the richer half of the country before the Industrial Revolution, closer to the Continent and profiting from the wool trade and high agricultural productivity. Afterwards the North and the Midlands were richer, as the workshops of the world. Finally the decline of the staple industries in the early 20th century saw another reversal of fortunes, as the new industries and then later the growing service economy were concentrated in the South. The same thing has happened more recently in Germany.
There are other areas where we should be careful about how devolution is designed.
Central Government will continue to have a role in ensuring fair competition. Councils should not be allowed to stand in the way of mutually-beneficial rights to trade across municipal boundaries or exploit the power of the incumbent by funding political propaganda like Ken Livingstone’s ridiculous old newspaper.
We should avoid the creation of more tiers of government. They encourage voters to use elections at one tier (e.g. Europe) to pass a judgment at another (e.g. the UK). It also seems like a mistake to divide the attentions of English MPs, when they have such a vital function holding the UK Government to account along with other parliamentarians.
Thankfully the size of the units concerned seems to be one area when some flexibility is possible. Subnational governments vary enormously in size even in the most prosperous decentralised democracies, from the tiniest Swiss Cantons to the largest US States. The best way to avoid creating new institutions and let the right scale evolve over time seems to be devolving to county and unitary authorities and then creating some provision for referenda on mergers or secessions from those existing areas. There is more on the ‘hows’ and the ‘whys’ in a new publication that Tom Packer and I have written for the Institute of Economic Affairs. The key is that we think about all this before it is too late. An awful lot is at stake. Better government and greater prosperity across the UK is the most direct reward. However, Conservatives whose overriding passion is the defence of the Union should also remember that dysfunctional institutions and depressed regional economies will encourage those parts of the country that think they could do better alone to head for the exits.
Decentralising powers from Westminster can be an exciting opportunity, but only if we get it right.