Fiscal federalism and Fiscal Autonomy: Lessons for the UK from other Industrialised Countries



A more likely candidate is the greater use of local income taxes, a principle already embraced
to a limited extent in the tartan tax. Currently a number of European countries have granted
autonomy to their sub-central governments to set rates of personal income taxation. For
example, in Belgium, income tax surcharges are used; in Denmark, Finland and Sweden,
Italy and Switzerland regional/local government can set personal income tax rates; and in
Spain, a more asymmetric system exists with some proportion of personal income taxation
returned to the region of origin.

The Scandinavian experience is particularly instructive. In Denmark, the two tiers of sub-
central government, counties and municipalities, account for about 60% of total spending.
Own taxation constitutes a large share of total revenues for the counties and municipalities (in
1995 this was 82 and 76% respectively), only a small amount comes from shared taxation
(see European Communities 2001) or block grants. However, block grants are used to enable
some degree of horizontal equalisation. Whilst there are no formal limits to the size of local
income taxes, in a small country the effective freedom to vary personal income taxation is
limited by factor mobility. In addition, Denmark has operated a system of close budgetary co-
operation between central and local government, through the Ministry of Finance. There were
annual negotiations, involving a joint assessment of the budgetary requirements of sub-
central governments, based on no changes in tax rates. However, in 1998 a new four-year
agreement was put in place. Thus, in theory the system combines a degree of local self-
determination, with a considerable degree of co-ordination and bargaining, which tends to
limit the changes to local tax rates.

Whilst the Danish system provides an interesting model, which has received widespread
attention (Russell Barter, 2000, STUC, 2001), it does have some weaknesses. The problems
with the Danish system are two-fold. First, the process of budget cooperation is not binding

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