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

• The use of central grants as part of a horizontal equalisation scheme has to pay regard to
both expenditure needs and fiscal capacity of local government. In general, the OECD has
seen both greater movement towards fiscal autonomy, and a move towards the
assessment of local needs in determining grants. More transparent formula-based grant
allocations are also likely to increase fiscal transparency.

What lessons emerge from the UK’s perspective? A major criticism of the UK’s current
arrangements for devolved public finance is that they do not deliver either the benefits of
accountability derived from assigning greater fiscal autonomy to the sub-central tiers of
government, or the benefit of ensuring common levels of access to public services across the
UK. In facing the trade-off between fiscal autonomy and equity, the UK has chosen a
historical solution and political expediency. There are two potential dangers in not reforming
the current arrangements for devolved financing. The first is that the electorate will begin to
lose interest in the devolution process and electoral participation will continue to decline,
instead of reinvigorating the local democratic process. The second is that pressures will
develop to reform the system, and that regional tensions will emerge, especially once regional
assemblies begin to be set up in England. This is exactly what has happened in some other
countries (e.g. Italy, Spain) to date. Cross-country experience suggests that there may be
considerable benefits to the UK (and Scotland) in confronting the issue of fiscal autonomy
and inter-regional solidarity sooner rather than later.

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