3.4.5  Subsidiarity and Autonomy in Government Spend and Taxation

(This is an archived extract from the book Patterns of Power: Edition 2)

The subsidiarity of government spend and taxation affects both the autonomy and the prosperity of different parts of a country.  As described below, there are some economic advantages in pursuing a centralised national policy and there are other advantages in local autonomy.

A centralised approach should enable geographic distribution of service provision to be optimised, to reap the benefits of scale where possible.  It should also enable government spending and taxation revenue to be distributed more evenly, though imperfectly and bureaucratically:

·      Tax income is higher in wealthy areas – which would tend to have better than average services, such as education and policing, if each area were financially autonomous.  For greater equality between different areas of the country, the tax receipts have to be redistributed by bureaucrats – but the formulae they use can never be perfect.[1]

·      A national policy can arrange to locate some government functions to where there is a shortage of jobs,[2] and can use public funding to provide assistance to geographical areas which are currently experiencing economic difficulties.  Whilst such an approach is not without problems,[3] it may reduce inequality, unemployment, resentment and migratory pressures.  It is a policy which is applied by the EU, through its ‘structural funds’,[4] and is used within many individual countries – but its opponents might argue that it is a tactical political manipulation of government spending (, which might distribute resources less efficiently than markets.

·      The cost of central administration is a drag on the economy as a whole (3.2.3). 

If infrastructure and public services are locally managed it should be possible to make them more responsive to local needs and it might reduce bureaucracy, though politicians cannot be autonomous or accountable unless they control their own tax income.  There are problems:

·      For a service to be considered autonomous it would have to be able to control both its income and its spending, and without such autonomy it is difficult to fully incentivise good management practice.  A local council could be held accountable if it raised all its own taxes, but there are some services which have to be co-ordinated across wider areas and which have a national element – like the example of policing (2.8).  It is almost impossible, therefore, to get an alignment between the management of the activities that are spending public funds and the control of their income, which comes from taxation.

·      If all taxes were raised at the same level of subsidiarity as the spending, there would be a large disparity between rich and poor areas in the amount of tax they were able to raise.  It is therefore impossible to have financial autonomy at different levels of subsidiarity whilst also having equality of services in different parts of a country. 

The policy decisions on these questions are made in the Political Dimension (6.6.2), which is appropriate because they have a considerable political impact.  From an economic perspective there is no universal rule to determine which approach would deliver the best value for money, and in any case it is difficult to make a cost comparison of proposed alternative arrangements because it is impossible to make accurate models of economic behaviour.

Groups of countries like the EU have problems in subsidiarity of government spend and taxation which are similar to those which apply within individual countries.  They have an added complication, though, that countries have different cultures and they wish to retain some independence.  Redistribution of wealth between countries is politically contentious and it has the same economic problems as centralised national control of spend and taxation: imperfect formulae and costly administration. 

Currency union between countries is even more difficult.  The Eurozone, for example, was set up by several countries to create a common currency – the euro – to remove the exchange-rate fluctuations that had created uncertainty in the trading relationships between them.  Each country continues to be responsible for its own macroeconomic management, but the common currency prevents governments from using inflation to solve the problems of running a fiscal deficit (  Each government has to manage its fiscal deficit by introducing austerity packages – either raising taxes or cutting spending – and these are much more visible than inflation; they caused political strains in the 2010 Eurozone crisis.[5]  The Eurozone benefits, of relative economic stability, come with a loss of members’ political autonomy: they can no longer be fiscally irresponsible.

The political desire for autonomy has led to separatist pressures within several countries, including Britain, Belgium and Spain for example.  Partition, though, would inevitably come at an economic cost to at least one of the new countries:

·      One part or the other would inevitably be worse off for natural resources.

·      The affordability of public services would be different in the two parts.

·      Partition increases the total cost of government: every department has to be duplicated.

There would be more jobs for politicians after the split, but not all of the people would benefit economically as individuals even though their new countries would have more autonomy. 

© PatternsofPower.org, 2014

[1] The UK uses the ‘Barnett formula’ for distribution of most government funding.  The July 2008 IPPR report Fair Shares?, which was available in April 2014 at http://www.astrid-online.it/il-sistema1/Studi-e-ri/Archivio-22/IPPR_fair-shares_union_07_08.pdf said:

“A progressive funding system should place a particular emphasis on equity or fairness. Our original analysis, comparing the distribution of spending to two measures of need: levels of economic performance (GVA per head) and levels of poverty (households below 60 per cent median income levels), finds the current distribution of spending is neither equitable nor fair. There is no clear relationship between spending and our chosen measures of need.”

[2] The United Kingdom Passport Agency is located in South Wales, which had lost a lot of jobs in coal-mining.  This is an example of locating central government functions in an area which needed the work.

[3] The Economist published an article on regional policy in March 2011, under the heading Enterprise Zones, quoting Henry Overman of the London School of Economics as saying that "The evidence for success is mixed at best."  The article was available in April 2014 at http://www.economist.com/node/18443529.

[4] The EU Structural Funds regulations 2007-2013 were available in April 2014 at http://ec.europa.eu/regional_policy/sources/docoffic/official/regulation/newregl0713_en.htm; (this is an archived webpage).

[5] Reuters reported protests in Greece, Italy, Portugal, Slovenia and Spain in an article entitled Euro zone govt austerity plans stir protests, which was published on 8 June 2010, and was available in April 2014 at http://in.reuters.com/article/idINIndia-49137220100608