IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Abstract: This article points to the highly centralized nature of the British tax system. A first section shows how all tax law derives from Parliament, the “onlie begetter” of legally enforceable instruments. It is suggested that this system is not democratically accountable at sub-national levels of government. Reforms of the Thatcher era have resulted in the privatization of many public services, leading to the stabilization of State expenditure as a proportion of GDP.
However, at the same time, both tax revenue and expenditure have become increasingly centralized. Public service tasks are determined and financed by central government, and local government is for the most part merely the agent through which government policy is realized. The creation of the Scottish and Welsh Assemblies does not alter this overall assessment. Given the high level of centralization, taxes are uniform throughout the country and there is no scope for meaningful regional fiscal competition. Since regional economic development in Britain is notoriously uneven, the author notes that fiscal uniformity does not lead to economic convergence. A final section is devoted to showing why this is not surprising and why fiscal harmonisation at a European level would be a source of growing, not reduced, disparities.