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



on local authorities. From 1999-2001 actual income tax rate increases were about 1.5%
(Daugaard, 2002) and since 1986 ‘unplanned’ tax rate increases have amounted to 4%,
leading to a severe loss of credibility for the central government’s fiscal control. The surge in
public consumption expenditure has been largely in areas such as childcare and care of the
elderly (Daugaard, 2002). A second problem is that the small size of some of the
municipalities (their average population is 19,000 inhabitants) means that economies of scale
in the provision of services cannot be exploited. Furthermore, some municipalities lack the
professional administrative structures to carry out a wide range of public functions, ranging
from the administration of social security benefits through to environmental protection.
Overall, the problems in the Danish system are attributable to an excessive degree of
autonomy rather than to problems in the operation of a local income tax system. Many of the
issues highlighted in recent reviews of the Danish public sector have pointed to problems of
size of sub-central government and the assignment of expenditure functions.

Finland has a similar system of autonomous income taxation for municipalities (tax rates in
the municipalities in 1998 were between 15-20%) combined with a degree of co-ordination.
There is close co-operation between municipalities on a regional basis to organise joint
welfare provision (especially in the areas of health and education). Municipalities can also
levy capital taxation on net wealth and real property taxes. In Sweden, own taxes constitute
about 55% of municipality revenues and 70% of county revenues. However, in the early
1990s much stronger central control was exerted on local government: a cap was imposed on
tax rates between 1991-93 and from 1997 central government took a 50% share of any
increase in tax revenue. As in the Danish case, excessive fiscal autonomy can be seen as a
problem in terms of overall budgetary control, especially when the sub-central jurisdictions
are small in size resulting in less effective control over expenditure.

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