The Fiscal Implications of Levelling Up & UK Governance Devolution

Key Findings

• The UK fiscal system is unlike any other country.
• The paper explains the features of the UK fiscal system in the light of the international evidence on comparator countries.
• The UK has the most centralised governance system of any large modern economy and at the heart of this over-centralisation is a very curious central-sub-central fiscal system.
• The UK fiscal system is uniquely ill-designed and ill-equipped to foster and facilitate devolution – it automatically and inherently militates against devolution.
• Real Levelling Up requires a fundamental overhaul of the whole UK fiscal system, and this also implies the establishment of meso-level governance institutions, which occupy the governance space between local and antional government – as is the case in other federal or unitary states.

The UK today exhibits one of the world’s most centralised governance systems while at the same time also exhibiting amongst the highest interregional productivity and income inequalities of any industrialised country. It is this combination of centralised governance and unbalanced productivity growth which has given rise to the Levelling Up agenda, because centralised policy making has so far largely undermined efforts to foster appropriate structural changes to the UK’s city and regional economies, especially in England. These realities are at odds with the patterns evident in most other advanced economies, and especially in contrast to other large and industrialised countries, where governance systems tend to be much more decentralised and devolved and interregional productivity imbalances consequently are much lower. There is now a large OECD-wide literature that points to the fact that decentralised sub-central governance systems are largely conducive to stronger and more balanced interregional growth and development processes and less economic dominance by any particular city-region than are highly centralised governance systems. In the light of this literature, the UK appears to be an extreme outlier, and there is now a large body of evidence that the UK’s governance system itself partly accounts for the UK’s regional imbalances. Indeed, it is this link between governance centralisation and regional imbalances which underpins that argument that the UK’s over-centralised or hyper-centralised system needs to be significantly devolved to levels akin to competitor countries in order to foster stronger and more inclusive productivity growth.

The problems of centralisation are reflected sharply in the make-up of the UK central-sub-central fiscal system. Fiscal systems underpin governance systems and the paricular design of the UK central-sub-central fiscal system militates against devolution and decentralisation. Moreover, the current UK fiscal system is uniquely ill-designed and ill-equipped to foster or facilitate Levelling Up. As such, in order to understand the long-term economic challenges that any sub-central government reforms face when trying to promote more balanced economic development via an agenda such as Levelling Up, it is therefore essential to consider the likely financial and fiscal issues faced by any devolution-related reforms to the UK relationships between central and sub-central government. The reason is that the changes in these fiscal relationships may either narrow or exacerbate interregional inequalities depending on their form and implementation, as well as the current functioning of the UK sub-central fiscal system. It is therefore important to set the UK central-sub-central governance features in the context of the OECD-wide experience of central-sub-central government financial and fiscal relationships. This allows us to better understand the nature and financial performance of the UK governance system and to identify the opportunities and challenges associated with any potential reforms in Levelling Up. This is exactly the aim and intention of this NIESR Occasional Paper.

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