compared to other countries. This is shown in Figure 4,8 which clearly indicates that
Scandinavia, Switzerland and New Zealand possess the greatest degree of fiscal autonomy.
Even when grants and tax sharing are treated as equivalent, most EU countries provide
greater autonomy to their sub-central governments than the UK does.
Finally, the UK relies less than others on non-tax revenues (13%). These are mainly fees and
charges on consumers for local and state government services. In this the UK is ranked lower,
not only compared to federal States, but also compared with less-fiscally-devolved unitary
states, such as Norway (17%). It is worth noting that devolution in the UK does allow the
devolved authorities some margin to increase this reliance on non-tax revenues.
The Optimal Degree of Fiscal Autonomy: What Does Economic Theory Say?
The theory of fiscal federalism provides the following arguments for greater fiscal autonomy
(Gramlich, 1984). First, it induces greater responsibility on local politicians. A reliance on
central grants allows local politicians to lobby central governments for grants and might lead
to allocation decisions that have little to do with economic efficiency. Second, a reliance on
grants places little pressure on local administrators and politicians to manage local
government spending efficiently: it is not apparent, at the margin, that an additional pound
spent in local services will be equal to the benefit of an equivalent reduction in taxation.
Is there evidence that sub-national governments behave inefficiently when they are in receipt
of central grants? Some indirect evidence comes from the USA, where a considerable body of
empirical evidence suggests that non-matching government grants have a much more
powerful impact on local spending than increases in local income (Gramlich, 1977, Courant
8 Unfortunately the data on tax sharing are not available for all countries (OECD, 1999), and therefore Figure 4
has a smaller number of OECD countries than Figure 3. In addition, whilst Figure 3 presents the most recent
data available in the relevant IMF publication, Figure 4 is restricted to presenting data for 1995 for consistency
with the available OECD data. It is also worth noting that in Figure 4 Spain’s figures seemcomparatively low
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