26
Examination of witnesses
Dr Sean Dougherty, Dr Sandra León, Dr Johanna Schnabel and Professor Alain Trannoy.
Q41 The Chair: Welcome to this evidence session in our Lords Economic Affairs Committee’s inquiry into fiscal devolution in England. In today’s session we are delighted that we are going to hear from four experts on this issue with international case study expertise: Dr Sean Dougherty, senior adviser at the OECD; Dr Sandra León, a research scientist at the Institute of Public Goods and Policies at the Spanish National Research Council; Dr Johanna Schnabel, a researcher at the Freie Universität in Berlin; and Professor Alain Trannoy, research director at the School for Advanced Studies in the Social Sciences. We are really grateful for your time. We are going to take a transcript of the session and will pass it on to you soon afterwards so that you can make any factual corrections.
Let me start with a general question, and perhaps I will start by directing this at Sean from the OECD. What exactly is the evidence for fiscal devolution’s tendency to actually produce positive economic outcomes to support economic growth? How confident can we be that fiscal devolution results in better economic outcomes and higher levels of growth?
Dr Sean Dougherty: It is a pleasure to be here, and that is a very important, fundamental question. I would have to say that it is not usually the main motivation for decentralisation. Decentralisation is often more motivated by political devolution of responsibility to the appropriate level of government in accordance with even democratic principles. That said, it can definitely support growth; it does not automatically cause it per se. A well-designed system with an appropriate degree of decentralisation and alignment of responsibilities, resources and support can also support good-quality public service delivery, public investment, responsiveness and regional development.
The causal evidence is interesting. We have some, specifically in the area of healthcare, where we find that an appropriate degree of decentralisation can help to promote lower costs and higher quality. But an excess degree of decentralisation—and I really mean excess—can sometimes lead to fragmentation of responsibilities and worse outcomes.
Just to be a little more concrete—I will try to be brief here—some countries find really quite balanced roles. Switzerland, Canada and the Nordic countries are often cited. Quite clearly, an appropriate degree of decentralisation, where revenue responsibilities are appropriately decentralised at the right level of government where the service delivery takes place, can often lead to really high-quality outcomes in terms of service delivery and high-quality value of services.
Dr Sandra León: When we ask general questions about what fiscal devolution does in terms of economic growth, we really cannot talk about fiscal devolution per se or decentralisation more generally; we need to think about the specific design. I am sure most of my colleagues would agree that it is very important that local or regional governments are not highly dependent on transfers in order to contain their spending.
There are several studies showing that governments that are highly dependent on transfers to finance the services that they have been allocated are more likely to make decisions that result in deficit or overspending. There is evidence of that association, and therefore it might have an impact on economic growth. The problem is that if we think about how decentralisation and devolution were done in the 1980s and 1990s, most of the designs were highly dependent on transfers. That has been a problem because it basically creates fiscal illusion; citizens struggle to monitor spending when money comes from external sources, which might create disincentives to economic development.
The problem is that local taxes are highly unpopular. Even when people know that they might help to control spending, they are highly unpopular. That is why, under certain conditions, governments might prefer to be financed through transfer from a higher level of government.
Dr Johanna Schnabel: I am not going to contradict what has been said. I would like to just add that several studies, mostly done by political economists, show that fiscal decentralisation, devolution, whatever you want to call it, can help economic growth. What these studies do is take large samples of quantitative analysis that effectively show a correlation between decentralisation, devolution and economic growth.
What they do not show is what fiscal devolution needs to look like, what powers need to be transferred and how it needs to be put in action to achieve this result. That touches upon some of the aspects that have been said; it all depends on how it is done and what is transferred. What powers are transferred, what money is transferred and how is that money transferred? That is only one side of the story; the other side is that local or regional governments need to have the institutional capacity to use those powers.
An important part of the story is capacity building, setting up those institutions and making sure that they work, they have the staff, knowledge and resources they need and they have enough scope to actually do something. The final point that I find very important is that there must also be leadership and a willingness to assume responsibility to make this work in practice.
Professor Alain Trannoy: Things depend on local political preferences, and they can change. “Not in my backyard” is often a position taken by local politicians. I observe nowadays that in many territories in France, there is a strong headwind against growth and public infrastructure even when this can be considered green investment.
I have two particular examples. In the Toulouse region, local left-wing political parties opposed the construction of the HSL train between Bordeaux and Toulouse to keep people flying, even though it would reduce carbon emissions. In the Marseille region where I live, the proposed high-voltage power line—in a part of Marseille’s Rhône river that will supply electricity to Marseille’s EV industry and help save jobs—is being opposed by local officials because it will cross natural areas. In my opinion, shared responsibility between the central state and local governments will impede anti-growth movements that will block good projects for growth and the green transition.
Q42 Baroness Wolf of Dulwich: I would like to shift slightly from the growth question to one about devolution, legitimacy and accountability, which is very much part of the debate here. I would like to ask you about how far, in your experience and your observations, fiscal devolution actually increases legitimacy and promotes accountability, and how far, at least under certain circumstances, there is a tendency in practice for central government always to bail local government out so that in fact the accountability is there on paper but less in practice. Maybe I could start with Dr Léon and Professor Trannoy because you both live in countries that have made some quite major changes.
Dr Sandra León: This is a great question. Actually, the Spanish case is a very good one because we have asymmetric devolution so it has allowed us to explore under what conditions, and what types of decentralisation or devolution, accountability has been higher or lower. For instance, I have explored that issue comparing the Basque Country and Navarra, which have fiscal autonomy, and therefore people in the Basque Country and Navarra are more capable of assigning responsibilities to the regional level of government than in other regions in which devolution was more blurred. On the one hand, the central government had powers over the most important taxes, whereas there were high levels of spending decentralisation.
If you compare the Basque Country and Navarra with the other regions, what you see is that accountability works much better in the Basque Country and Navarra, meaning that the economic outcomes of those regions are more important to understand the electoral results of incumbents. There is certainly an association between how you design decentralisation or devolution, how people are able to assign responsibilities between different levels of government—what we call clarity of responsibilities—and ultimately how electoral accountability works in the sense of how much the electoral fate of incumbents at the regional level depends on the economic results. In this case I was referring to economic outcomes, but you can also think about other types of policy outcomes. It is very important to understand how you design devolution because the more clarity of responsibility you have, the better for regional accountability.
Professor Alain Trannoy: In France, devolution is important for the municipality and for the mayor. In fact, there have been surveys of the French population and 69% of the French people surveyed said that they trust their mayor. It is the highest rate among all elected officials, far ahead of Members of Parliament on only 42%, and far ahead of the president of the department or the president of the region. The stress is placed primarily on expected quality and honesty, 61%, and the ability to keep one’s promises, 50%. So I can say that trust is an increasing function of the importance of devolution, since we have four layers of local government in France.
Regarding the bailout system—the bailout mechanism—it is important to note that local government in France must respect a kind of golden rule. The local government budget is divided into two sections: the operating section and the capital section. The balance of the operating section must be positive. This means that borrowing to finance operating expenses is prohibited and local government may borrow only for the investment section.
If a local government is unable to pass its budget on time, passes a budget in bad faith or runs a deficit, it is placed automatically under state supervision. Since 1982—the beginning of the devolution period in France—it has happened for two departments and four municipalities, and very recently for Aix-Marseille intermunicipal co-operation bodies.
Q43 Lord Reid of Cardowan: Dr León, you have both expertise and experience of comparative international devolution and specific experience, not only in Spain but obviously inside the UK. My first question is about the comparative element, quite simply about the rate of change of devolution. In your experience, how have countries gone about implementing fiscal devolution? Has it been an incremental tendency or what we could crudely call a big bang, a major development, or somewhere in between? Do you have a view about which is more successful?
Dr Sandra León: The most common way to address fiscal devolution reforms has been the gradual way, with gradualism. Spain stands out as a country—it compares to Belgium but not to any other country—because of the speed and depth of devolution. Despite being a country that has implemented devolution very quickly, it went through the gradual way. Why? Because our constitution and basic financing law would not give many concrete details about how to organise regional financing.
We had to go the gradual way in the sense that that way allowed us—I am answering the question on which is the best way to go. Gradualism is important because it allows the system to adapt to changes. In the case of Spain, that was very important because devolution was an ongoing process and was asymmetric. That allowed us to adapt the regional financing system to the changes that were taking place, and it allowed us to improve the way we were calculating needs and the formula to allocate resources. That formula has become better over time, as it has in other countries as well.
On the other hand, I would warn about unbounded gradualism in the sense that the fact that we had an open-ended system for a long time basically instilled the idea that it was always possible to change the system and to politically renegotiate the conditions of regional financing. It was always in the same direction because regions were highly dependent on transfers. They were also highly convinced that they could always lobby the central government, particularly those regions that were politically more powerful and had more leverage. They could always try to renegotiate the regional financing and ask the Government to transfer more resources.
As in any regional financing model we have had, there was always the rule that no region could lose resources with respect to the previous system. That obviously created an incentive for ongoing renegotiation. As I mentioned before, gradualism is good for different reasons but it has to be bounded so that regional governments do not have the idea or temptation to renegotiate the conditions continuously with an open-ended system.
Lord Reid of Cardowan: The unbounded demand for constant increases in power is not an unknown phenomenon in the United Kingdom either. You have considerable experience there and particular oversight of devolution in Scotland. Now that we are talking in this committee about England, what would you recommend for England? Presumably, from your remarks, you would recommend a gradualist approach—or is that a misinterpretation?
Dr Sandra León: I would recommend a gradual approach in the sense that that would allow time to provide and hone the formula that is used. Now you are basically using a block grant formula; that should be changed to a formula that corresponds more systematically with the formulas that are used in other parts of the world. In that sense, it needs time to hone the formula and find the best way to calculate the needs of each, in the case of England. It is also very important that the equalisation components of the system are clear from the very beginning. That may be something you want to touch upon later, but the equalisation formula and the decision about how much horizontal inequality the system is willing to accept is a political decision, not a technical one.
Countries have decided on different types of equalisation systems. Australia and Germany provide two different examples. In Spain, we are not an example of that. My advice would be to decide upon and clarify that which is politically very sensitive at the very beginning so that it is not contingent upon different political alignments in the future; you can basically try to block or protect it from a future renegotiation. Once it is established, I would try to have a technical body that supervises the improvements that need to be introduced in the allocation formula over time.
Lord Reid of Cardowan: Is the problem with a gradualist or incremental approach to this that you are almost certainly—in many cases—building in future demands politically for an increase in it? I know you say, “Make it clear at the beginning; this is all you’re getting”, but the world does not work like that. The world works in a way where you are given an inch and you want another inch. Is that not a central problem of starting by making it known that this is a gradualist approach, that you are almost building in an expectation that there will be further demands and concessions?
Dr Sandra León: You can decide to transfer resources in a way that is more independent of that demand. I am going to give you an example. At the very beginning, transfers in Spain were calculated without taking into account the fiscal effort by regional governments. They would not have any type of incentive to use the taxing powers that were limited, on the other hand, but they did not have an incentive to use them. Later on, that formula for the way transfers were calculated was changed so that they would be given transfers. Imagine that they needed 10 units to finance their services. Through their taxation and their revenues, they could generate five. That meant that they needed the other five units from the central government.
They changed how they were calculating those transfers, calculating on average a normative sort of taxing effort by the regional governments. In that sense, in a way they were trying to contain the incentives or the temptation by regional governments to just wait for transfers to be received so they were not using their taxing powers. Central government was not compensating for those unused revenues. That changed the formula and that was an important step in preventing some negative incentives. But we are talking about politics here. You said, “Well, that’s a common demand”. Political, statewide parties play a very important role in how decentralised structures work, meaning that they have representation in all the territories, and that has been a very important condition or characteristic of the Spanish decentralisation process.
When statewide parties control and have representation in the different parts of the territories, it is a good force to contain demands. Demands are contained politically because unless you decentralise and be serious about borrowing powers—now, for instance, regions in the UK have very limited borrowing powers—and unless you are capable of enforcing hard budget constraints through high decentralisation of revenues and taxation, you still have political parties to contain those sorts of temptations. That happened in the past when the system in Spain was not so much decentralised in taxation. Political parties played that important role of containing fiscally irresponsible behaviour.
Q44 Lord Newby: You have been talking about a gradual approach, Dr León. I would like to just ask very quickly about the concept of an asymmetric approach, which some places do a lot more than others. How successful has that been in Spain and would you recommend it if we were to go for more fiscal devolution in England?
Dr Sandra León: That is a very good question. There was a question that we were asked: how do we deal with regional imbalances? How do we deal with systems that have a very front-runner region, as is the case in the UK? Of course, that context—connected to asymmetries, in this case economic asymmetry—increases the trade-off in the equalisation formula and transfers.
In Spain, we opted for a system that was asymmetric in the sense that, although we have Madrid, Catalonia and the Basque Country that are front-runner regions from the point of view of economic development, those regions were treated differently and that created a problem. If you have a system in which regions are very imbalanced economically, you may opt for a system that is asymmetric. We did that, but it is a double-edged sword because the Basque Country and Navarra had some fiscal privileges coming from the 19th century and we decided that they were going to keep those privileges and would have full fiscal autonomy.
The problem with that asymmetry was that the better-off regions were complaining, which created a very important regional grievance—particularly important in Catalonia—that has represented an engine of ongoing fiscal demands to the point that some unresolved fiscal demands resulted in the referendum of 2017 and the constitutional crisis. At the very beginning, you may think, “Well, we have these asymmetries in regional development between regions that might represent a way to sort out these economic imbalances between regions”, but that might also be politically difficult to deal with as the system evolves and develops.
That was the case in Spain, so I do not think we are a good example on that because the Basque Country and Navarra do not contribute to fiscal equalisation transfers. That is also a reason why the rest of the regions are complaining. The way we design those asymmetries actually ended up deepening regional grievances, and that has been an important source of instability in our system.
Q45 Lord Razzall: I am going to ask what I think is the most fundamental question in this inquiry; it was not suggested by me. Can fiscal devolution be successful in the absence of meaningful revenue-raising powers? There are people here—not in this room so far—who argue that without meaningful revenue-raising powers, fiscal devolution simply leaves people as policy takers rather than policy makers.
Dr Sean Dougherty: At the OECD, we have really done a lot of benchmarking of how taxes are devolved and how tax assignment and autonomy are defined. True tax sharing and assignment can also lead to a good allocation of responsibilities in a country such as Germany. It is often best complemented by real revenue-raising powers at the subnational and local level where there is control over the tax base and over the definition of particular rates and where they can be adjusted in co-operation with political feedback through the democratic process and through the quality of service delivery and outcomes.
We make a pretty strong distinction about and put a pretty strong emphasis in many countries, when we give advice, on trying to really define clearly. In fact, we have an ongoing project that has actually reconsidered the degree of autonomy that localities are given. Here we would actually give quite a lot of support for the Spanish approach, where there is quite a lot of meaningful and transparent understanding about the degree of subnational autonomy of revenue-raising powers. The other extreme is where there is excessive autonomy for spending, which we consider to be quite an irresponsible approach that needs to be relatively well balanced, where the revenues need to be well aligned with the expenditure responsibilities. The Nordics are a particularly good case of that.
Lord Razzall: I understand your response, but how does the centre stop the fiscally devolved regions showing irresponsibility on expenditure under this structure, even if you give them the revenue-raising powers? Ultimately, the Treasury argument would be that Treasury will always have to bail them out.
Dr Sean Dougherty: It is easier in more of a structurally federalist-type system where there is genuine autonomy. In a more centralised system, it raises some complications. There are real consequences and examples of where localities are allowed to go bankrupt, for instance, and where there is actually skin in the game, complemented with a belt and suspenders approach.
There was mention earlier of fiscal rules and the importance of those. Also important are expenditure rules that are well enforced and have meaningful mechanisms so that localities that perhaps have politically irresponsible leadership do not get too far out of hand. The political process should deal with that to some extent. Of course, central government does not necessarily need to release all levers of control and supervision.
Lord Razzall: From what you said, would you think that Spain is the best model of fiscal and revenue devolution?
Dr Sean Dougherty: We do not necessarily rank them so clearly but I would say it is a pretty good example, as well as dealing with the complexities of asymmetry, which you have already raised but are fundamental to some questions that the UK will probably face as it further devolves responsibilities across its different nations and regions.
Lord Razzall: Dr Schnabel, do you agree with that?
Dr Johanna Schnabel: With Spain being the best example? I am not entirely sure, but I would maybe like to take the opportunity to point out a few trade-offs that exist here. You asked about revenue-raising powers and then bailouts, and in a way they are interrelated. The more fiscal powers you give to local or regional governments, the more they are responsible for their expenditures and the more credibly central government can refuse to bail them out, for instance.
The prime example here would be Canada. There is a fascinating account of the former Finance Minister of Saskatchewan, I think, who travelled with her fellow Ministers to New York to negotiate with their creditors there. There was a more lenient approach for Saskatchewan when it ran into financial trouble. They did not travel to Ottawa, the Canadian capital; they travelled to New York where they got their money from. Canada has extremely credible, hard budget constraints because the Canadian provinces have very high fiscal powers—they raise significant taxes—which makes them more responsible for these taxes.
The more regional and local governments depend on central government transfers—however they are designed—the more difficult it becomes for central government to refuse their bailouts because they cannot adjust their revenues. For instance, that is something we see in Germany, which was just mentioned as a good example. Germany is also a bad example in some regards because the lender, the regions in Germany, receive a fixed share of the joint revenues of taxes but they cannot adjust it.
A Land, a German region, has very little scope to increase its revenues—or to reduce its revenues if it wants to attract investments—because it depends on a joint decision in which central government plays an important role as well. As a consequence, because it cannot adjust its revenues, it means that it is more difficult for central government to refuse a bailout because of this limited scope. This is a very important trade-off to take into consideration.
Lord Razzall: That is a very good point—thank you. Dr León, you have been praised as the best place.
Dr Sandra León: I want to comment on Dr Schnabel’s point. There are several components here. One is revenue-raising capacity taxing autonomy, which is important for higher budget constraints. Another is borrowing capacity. In Spain, regional governments have increasingly gained taxing powers; they control 50% of the income tax, for instance.
After the economic crisis of 2008, their borrowing capacity became highly dependent on the central government. That has not quite changed over time; they have remained dependent on it, which is good in the sense that the central government controls their borrowing, but on the other hand it limits their autonomy, of course.
Q46 Lord Petitgas: Dr Schnabel, I just want to go back to your point about having more power and therefore more responsibility and accountability. What do you think is the right level of tax revenue power awarded to the region in proportion to its spending? Do you think it is the 50%, 40% or 30% level? What do you think is where it starts to bite?
Dr Johanna Schnabel: I am afraid I am going to have to disappoint you. I cannot give you a definite number because ultimately—a very important point for this whole conversation—fiscal devolution is a political choice. It needs to be negotiated and to address a whole range of different preferences. There are a few aspects to consider. We have been talking a lot about fiscal devolution, which effectively means either the allocation of tax authority or the transfer of revenue to be spent. The question is what this should be spent on. The other important part of the story is policy devolution and the allocation of policy powers, and in a way that needs to go hand in hand.
The number you asked me to give depends on the number you would ask me to give in terms of the policy responsibilities. I do not think that is a discussion in England, as far as I know, but if you were to have significant policy responsibilities that potentially involve legislation and legislative powers, then my recommendation would also be to give high tax authority. If powers are more limited, fiscal devolution can also be more limited.
One situation I would recommend avoiding is transferring significant policy responsibilities to lower tiers of government while maintaining significant revenue powers at central level because to some extent that creates a democratic deficit. One level of government raises the money and the other level—over which that first level does not have much control; it has some, of course, but never full control—is responsible for those expenditures. That is also something that needs to be aligned. The central government raises the money but regional and local governments spend most of it. A way of resolving this tension is for central government to attach very strong conditions and reporting requirements to the money and transfers, which can be a very effective tool to address other issues but often creates a significant administrative burden for regional and local governments, which I would also advise against.
Q47 Lord Prentis of Leeds: My question is for Alain Trannoy to begin with and then maybe other people on the panel. It is about equalisation payments. Many countries with devolved governments have equalisation payments—for example, Canada, Germany and Switzerland. I am sure there is something in place for Spain.
Some equalisation payments are not seen as being very healthy; they may be seen as a penalty imposed on those governments that are doing very well. They may be seen as subsidies for those governments that have made poor choices. My question is fairly simple, but we need to find out if we are going to move forward on it. Do you believe that any country has a particularly good way of dealing with the issue of equalisation?
Professor Alain Trannoy: As far as I know, for France the trade-off between equity and efficiency—one of the most questioned in economics—has not been studied in that matter. I can say a few words about equalisation in France. Equalisation of means between municipalities is expressed in the law and even in the constitution. This is obtained first through vertical redistribution, namely transfer from the central government to municipalities and intermunicipal co-operation bodies, and secondly through horizontal equalisation funds, which combine levies on rich municipalities and transfers to poor ones.
It turns out that the unique transfer to municipalities for the operational section includes a per capita flat rate component that increases with the size of the local authority’s population and a component inversely proportional to each authority’s tax capacity. Overall, the two effects offset each other and the global effect is basically symmetrical. The most efficient tools by far are the horizontal equalisation funds. It happens that in total the Gini—an inequality index of tax capacity—among municipalities is reduced by a third. The Gini before equalisation is 0.19 and it drops to 0.13, so it is reduced by a third after performing this horizontal equalisation.
I do not know many studies about that. My intuition is that this equalisation performs a rather well-fashioned equity norm, but in terms of efficiency it is not so important. Of course, it is a transfer from rich, dynamic, more urban regions to more rural areas. If you believe—it is my belief—that so far and maybe in the future, growth takes place mainly in big cities and metropolises, that means that maybe it can impede growth at the national level because you transfer money from the most dynamic region to the less dynamic region. That is maybe another way to formulate your question.
Lord Prentis of Leeds: Dr Sandra León, this is a related question but how do you actually trade off the benefits of rewarding growth innovation with the benefits of supporting less well-off regions?
Dr Sandra León: That is an important question and is connected to the political issue of how much inequality we want in the system. As I said before, there is no technical answer to that; that is a political decision. When we decide about interpersonal redistribution, interregional redistribution is also a political issue. In Spain, the system has operated under the rule. It has not been disclosed as such because it is a very controversial issue, but it has operated with full equalisation. That means that if you need 100 units to provide healthcare, social services and education, the competencies that you have been allocated, and you can generate 50 units through your revenues and taxing powers, the system will completely cover the 50 remaining units.
In the last reform of the regional financing system in 2009, the regional governments agreed on partial equalisation. That was demanded by Catalonia, which was highly controversial, but eventually they reached an agreement that they will equalise spending only on education, social services and healthcare, which is basically 75% of the spending of regional governments. That was the political agreement, but in practice the formula, which is highly complex, eventually operated again under full equalisation.
I said that this is a problem: in Spain there has not been a clear, open debate on how much interregional redistribution we want. Why? Because it is highly controversial. Richer regions such as Madrid and Catalonia want to keep more of their own revenues, and even though in the last reform we agreed to partial equalisation, the system eventually does not operate bound by that limited equalisation; it is full equalisation.
Dr Sean Dougherty: I just want to mention one or two cases that are interesting to complement the Spanish example that was just described. Maybe the most interesting one is Australia, which in principle had nearly full equalisation for a long time, but in fact went to more limited equalisation not that long ago and is discussing whether it should go back again. That can also demonstrate the complexities of the incentive issues where Western Australia was most affected by the equalisation practices.
I would be interested to hear from our German colleague because sometimes Germany is also cited as a relatively complete equalisation process. I do not know whether that creates some incentive problems, but I know that there are often quite long discussions. There was also mention of the complexity of the formulas, which can reduce the transparency of the system but also reduce the possibility of gaming it. A lot of incentive issues are embedded in these systems, but slightly incomplete equalisation is definitely a broad ambition that many countries find is something they aspire to.
Lord Prentis of Leeds: I am going to put you on the spot. Going back to the original question, do you know of any country that has a particularly good way of dealing with the issue of equalisation?
Dr Sean Dougherty: Australia is frequently mentioned and I would often argue it. It is also the largest in terms of the scale of equalisation, so it is not necessarily an easy model for most countries because there may not be a political consensus that that degree of equalisation, in terms of the amount of revenues, is really warranted. At the far other extreme you have my own country, the United States, where in principle we have no equalisation but in practice there is actually a decent degree of equalisation of school financing. Disparities as measured by poverty rates across different counties in the US are topped up by the federal Government in many cases, so that is an interesting approach at the other extreme.
Switzerland is what I would probably lean towards. Germany often looks to Switzerland to improve its own model, and it has some interesting balance of giving relatively strong revenue-raising powers combined with a pretty strong equalisation approach at the same time.
The Chair: Dr Schnabel, do you want to come in on the German experience?
Dr Johanna Schnabel: Yes, absolutely, and I can only confirm what has been said. Australia is an example to look at. If you want full or nearly full equalisation, Germany would be the other example to look at because about 95% of equalisation is achieved after all the different equalisation mechanisms come into play.
Switzerland would be the other model I would look at. What I find very interesting about Switzerland is that it achieves much less equalisation, but it has a general equalisation plus a few funds that are mostly funded by the central government that compensate for disadvantaged conditions. For instance, the mountainous regions receive special equalisation funding to compensate for the fact that providing public services in the mountains is more costly. In a way, the Swiss approach—as with everything Switzerland does—is potentially more complex and more focused on consensus but also a bit more attuned to the different requirements.
I would like to take the opportunity to just draw your attention to a few decisions that need to be made when you design an equalisation system. The first issue—as has been pointed out—is the difference between what we would call explicit and implicit equalisation. You can have an explicit so-called equalisation system that seeks to redistribute money, which is what Switzerland, Australia and Germany have. Or you can have implicit equalisation, which is what the US has and Latin American countries use too, which is where there is an equalising component built into the more specific targeted transfers that are provided. It makes it less visible but still redistributes and gives central government a say in what the equalisation money is used for, which is not the case in the explicit equalisation systems where the transfers are unconditional and can be used for whatever regions want.
The second choice is between making vertical or horizontal transfers: transfers from central government that take taxes from one part of the country and put them in different parts of the country; or, as used to exist in Germany—and is still the case to some extent in Switzerland—regions transferring money to each other. An argument that is often put forward for moving from horizontal to vertical transfers is that the vertical transfers would put regions less against each other. I do not think that is true because in Germany, having moved from a horizontal model to a largely vertical model, we still know that it is Bavaria that pays mostly into that system. Canada has always had a vertical model and it is still very clear which are the “have” and the “have not” provinces, as they are called. So I do not think that makes that much of a difference.
The third point—something I would actually also put as a recommendation—would be to codify the system: not to have it as a political programme decided by central government, depending on its specific priorities and spending agenda, but to make it an institutionalised programme that survives different Governments. That is important because it makes it reliable to regional and local governments, who will depend on this funding to some extent.
Q48 Lord Burns: I am just looking for some more clarity about this question of the trade-off between revenue-raising powers and equalisation. It seems to me that if you have devolved revenue-raising powers without equalisation, this runs the risk of poor regions with lower tax capacity simply becoming worse off relative to others. If you have equalisation, does that not cancel out the incentive effects of revenue-raising powers, which you were saying at the outset is a very important part of fiscal devolution?
Dr Sean Dougherty: As several other panellists mentioned, this issue of partial versus full equalisation is directly aimed at this point. Full equalisation in principle takes away that incentive, which is exactly the point of your critique there. As was mentioned, in the Spanish case 75% of the services are covered by these various types of transfers, and that is a kind of partial equalisation. Of course, you then have other extremes where you may have implicit equalisation just for very specific services, such as in the US, just topping up poor districts’ education funding. There is this whole spectrum of possibilities where you have very strong incentives but perhaps combined with very strong inequity—as in the US—or you have very low inequity but worse incentives, which you might see in Germany or even possibly Australia, depending on the exact moments and phase of equalisation reform.
Dr Sandra León: As I mentioned before, it is very important to design that so that you do not simply transfer to the poor regions regardless of their fiscal effort. For instance, in Spain they are expected to receive transfers provided they implement a minimum level of fiscal effort. As I said before, that is a way to prevent them from just waiting for the transfers without exerting their fiscal powers. The formula is calculating and taking into account the revenues on average they might get using the taxing powers they have been given.
Q49 Lord Carrington of Fulham: The other side of the equalisation question is how you manage the devolution politically and how the regions that have had the devolved power manage themselves. Some are going to do it well and some are going to do it badly. Some are going to prosper because they are run well and some are going to fail because they are run badly. How do the bad regions learn from the good regions?
A lot of the reason why some areas are run badly is political rather than economic, and it is the political choices that may be anti-business, anti-development, whatever. How do you actually get different regions to say, “We need to follow best practice and learn from the mistakes we have made and what other places have done, which would have been different for us”? Can that be done region to region, or does it have to be imposed from the centre?
Dr Sean Dougherty: I am happy to address this point. It is quite a serious one and it is important to think about it from the way you posed it, which is that going from a relatively centralised system with not so much autonomy to something quite different involves a whole range of possible learning, credibility, and really hardening those budget constraints. We have worked a lot with Brazil—the only non-OECD member that is a full member of our programme—which has experienced quite difficult problems with some states and localities really losing control.
Sometimes the best enforcement is a bit of a hard hammer, let us say, showing real consequences. There may even be a very stringent loss of autonomy, loss of political control or perhaps even loss of political autonomy. There might be some credible consequences if they pass a certain lack of responsibility by a certain standard, giving some responsibility to perhaps less political actors—such as fiscal councils—to help manage that supervision and give them guidance. If there are really serious consequences, it would be to help determine those consequences where they would not be just because a left or right-wing government was elected, but rather on the fiscal outcomes and whether there is actual real irresponsibility there.
Lord Carrington of Fulham: Professor Trannoy, what is the French experience on this?
Professor Alain Trannoy: I do not think that the autonomy at the regional level, for example, is sufficiently strong to offer a divergent path and a different experience for, let us say, an imitation game. There is also an important aspect, which is the fact that there is a huge diversity in France between the very rich regions such as Paris and Lyon and other regions, for example in the Parisian Basin, which are quite poor. In some sense, the Paris region has no competitor so it cannot learn from other regions. I do not know of any really distinctive patterns that have been followed by other regions.
Lord Carrington of Fulham: Do you think that the political difference between the French regions—some of which are run by right-wing local governments and some by, say, communist local governments—causes economic differences that regionalism and fiscal devolution cannot cope with?
Professor Alain Trannoy: In fact, that region has no tax capacity so they receive the revenue only through transfer by the central government. They have no leeway on the revenue side. The question that you raise is maybe more important in the French context for municipalities and inter-municipal co-operation bodies where you find a different experience. For example, the Paris municipality increased its property tax rates by 85% during the last mandate. It is 50% for Strasbourg, 30% for Marseille and 30% for Nice, while in other big cities—such as Nantes and Rennes—it has not been increased.
There is no political divide, as you can imagine, meaning that only left-wing government increases taxes. For example, Nice was a centre-right government and Strasbourg had the Ecologists. We have different experiences here but it is true that we can see imitation effects between municipalities and inter-municipal co-operation bodies. It is true that we can see that people are following success; there are divergent strategies and people learn at that level.
As I mentioned, France is specific. It is not at the regional level that you have more leeway and freedom; it is at the municipal level. It is as if France thinks that what matters is towns, cities—a metropolis and a region that can transform growth and the life of people. Regional growth is more for the networking effect but maybe because France is quite a vast territory, some cluster effects at the regional level are only true in the Paris region, the north, Lyon and Marseille. It is also important that devolution copes with the economic geography of the country. It is an important factor that can explain why different countries choose different models.
Q50 Baroness Penn: Professor Trannoy, just to pick up on what you said about the importance of devolution coping with the economic geography of different countries, do you see fiscal devolution playing out differently in countries with a single dominant region or municipality—France/Paris—compared to countries with multiple strong economic regions or municipalities?
Professor Alain Trannoy: If we take the example of France, the Paris region represents 25% of the French GDP. We are quite close to the British or English model. In fact, there is a specific horizontal equalisation fund for the Paris regions that redistributes resources from Paris city to deprived areas. It turned out that in the past years, the application of the rule of “not one size fits all”, which has been theorised as asymmetric devolution, is now slowly transforming the French-style garden, where we see the beginning of a consolidation operation in this fragmented landscape.
For example, Alsace has now merged the two departments in the Alsace region. It now has specific competencies due to the fact that it is a border region, and it is the same for Corsica. The city of Paris has now merged the municipality competence with the department competence, and it is also true for the Lyon metropolis, which absorbs its departments.
Outside these two examples of Paris and Lyon—the two biggest cities—we are now inventing metropolises which are municipal blocks. Municipal blocks are municipalities plus the inter-municipal co-operation bodies which, if they exceed a threshold of 400,000 inhabitants, have broader competencies than municipal blocks with lower populations. They can even have larger, broader competencies with the agreement of the department of the central state.
It is really the question of giving more competencies when, in fact, there is the issue at stake of whether it is more important for the city to act as a motor and an engine for growth at the regional and maybe national level. The geographical landscape may be a basic reason to have an adaptation of a global scheme. I think it is what you have in mind. If I look at what they intend with devolution for England, I see that there are some differences depending on the possibility of growth of the region. It is really embedded in urban economics and the basic fact that you have economics of agglomeration.
Baroness Penn: We both have the question of the dominance of London within our economic geography, and the question for areas of the minimum size or agglomeration of a few different economies that you would need to make this effective. Does anyone else have a perspective on having a dominant player within your devolution political geography, the minimum size, or the need to agglomerate to reach viability? No? We can move on.
The Chair: It was good to have a question that stumps the experts.
Q51 Lord Liddle: I would like to ask you about the federalism question, and it will probably go very much to Johanna to start with. How much difference does having a federal constitution make to what we are talking about today?
Dr Johanna Schnabel: It makes a huge difference, and I can go on about this topic for hours and hours so you might have to interrupt me because it is something that is also very often misunderstood. There has been a bit of a debate among the federalism scholar community as to what federalism actually is. I wrote a paper on that, which is a reason why I hope I can offer some insights on that but I must tell you that not everybody agrees with it.
In a way, when we talk about devolution or decentralisation, it is inspired by what federalism is about, namely giving powers to local and regional governments. Federalism has that as a feature but it is not what federalism is essentially about. What federalism is about is a community of different regional governments that form a country with a central Government. Federalism originally came from the US, Switzerland and so on, but had formerly independent units that joined forces and united to have a central Government to decide on some aspects of shared concerns.
There are other types of federal systems that have developed in different ways, but the fundamental feature is still that federalism is not a process that is decided by a central government. Decentralisation, devolution—what you have in France, the UK and other unitary countries—is something that has been decided by central government. Central government transfers power to local and regional governments, which also means that at any point in time it can take those powers back.
In a federal system, it cannot. Allocation of powers or the status of regional governments can only be changed by agreement of the two orders of government because they make up the country. One reason I do not think Spain is a full federation is the terminology. In Spain you talk about “this state” and people think of central Government in Madrid. The US is even more complicated, because they call regional governments states. In Germany, if you talk about the state, the state is the central government in Berlin and the governments of the Länder constitute that state.
That is another important point, because in a federal system, the two orders of government have their own legitimacy and share sovereignty; federalism very much relies on a written constitution. If you were to make the UK a federation, the first thing you would need to have is a codified constitution. Another important point to consider here is that federalism exists not because of economic efficiency but mostly—especially nowadays—because there are regional identities that want to be acknowledged and protected, and they demand that. That is also why Spain has been moving towards a federation.
I do not see that as a given in England. I would say a federal architecture might work for the UK in terms of accommodating demands in Scotland, Wales and potentially Northern Ireland. To my mind, England does not have a federal mindset; it does not require federalism. This being said, I still think it is useful to learn from federal states where—because of this partnership between the two orders of government—there is much more negotiation going on, including when it comes to transferring powers, and this is something that decentralised countries can also learn from. I hope that made sense but I am happy to elaborate if there are any further questions.
Dr Sean Dougherty: Just to emphasise what Johanna said in the case of Germany, we have also done some studies of federal countries compared with unitary countries in terms of intergovernmental conflict. In fact, it is very useful to have a written constitution to allocate powers and make them more credible. At the same time, it can also provoke a very high degree of legal conflict, even in the courts. Some countries have a large number of intergovernmental disputes, Brazil being an extreme outlier but the US not being so far behind in terms of the seriousness of some types of disputes.
It is true that there is a bit more fungibility in the unitary system and it is a little harder to establish real legal credibility. At the same time, some of our own syntheses are cross-country examples. What we would say is most important is just the clarity with which responsibilities, resources and autonomy are assigned. That can move over time and there can be a road map. As someone also mentioned, giving strong legal support and codification that spans particular administrations and changes of political alignment is also important to give credibility to what is local, what is regional, what type of autonomy, what the consequences are of fiscal irresponsibility—and clarifying that perhaps insolvency regimes might be necessary. We have written some work on this: what they might look like and what kinds of powers you might lose, giving the same thing with the credible fiscal rules and what happens if they are violated, and showing that violations result in consequences.
Lord Liddle: Is Britain not rather like Spain in the sense that an asymmetrical arrangement has developed?
Dr Sandra León: Spain and Great Britain share some commonalities. First, they are decentralised countries. Spain was a centralised country that implemented devolution and, as Johanna said, is gradually becoming a more federal country, although that is debated in the literature. The second condition is that it is an asymmetric country. Something that is currently very different between the two countries is that Spain developed a very thick structure of intergovernmental councils, and that is something in which the UK—particularly England—is lagging behind. That is a very important part of greasing the wheels of a devolved state. If you do not have that, you are not counting on mechanisms to resolve conflict, to decide on deficit, the monitoring of deficit, borrowing, co-funded policy projects, et cetera. That is something in which the UK should progress more systematically; it is very important in order to prevent conflict in Spain.
Actually, in Spain, in the moments in which the central government has been more reluctant to convene, this interterritorial conflict has increased and it has ended up in the constitutional court. You do not want to have that experience because that is very inefficient, and it is why we set up intergovernmental councils to resolve inter-regional or central versus regional conflict. Those councils worked well in order to prevent certain disagreements from making it to the constitutional court.
Lord Liddle: That is very interesting because that is very underdeveloped here.
Q52 Baroness Wolf of Dulwich: Could I follow up just briefly? It really comes from what I think I am hearing everybody say, particularly here. Clearly, England is not a federal state; it has almost none of the characteristics of a place that would naturally be a federal state. I seem to hear from you all that for devolution to be something that actually can realise any of its potential, it has to be genuinely credible. There has to be clear mechanisms, rather than, “Oh, well, this week I’ll give them this, and next week I’ll take it back”. Is that correct? Dr Schnabel, I can see you nodding. Even in the case of France, for example, Professor Trannoy, you were saying that there is the greatest trust in the mayors, which is actually a very long-standing part of French life. I have no idea if it is in the constitution. Just briefly, is this inference correct?
Dr Johanna Schnabel: Is that for me?
Baroness Wolf of Dulwich: Perhaps Dr Schnabel or indeed Dr Doherty. Something you said right at the beginning was that if it is going to increase legitimacy and accountability and fulfil any of its potential—whether it is the mechanisms that you were talking about, Dr León, in Spain, or other mechanisms—there must be something other than just, “Okay, we’ll give you this, but maybe next week we’ll give you something else”.
Dr Johanna Schnabel: You are completely right and that is at least the message I would confirm: there needs to be some credible commitment and it needs to be longer term. I just do not think that would work in a truly federal constitution when it comes to England—also, for the mere fact that in a federation, the regions are constituent units; they are political, they are mini-countries, if you like. We would not even know what those mini-countries would be in England, or what a reasonable constituent unit in England would be. There must be other mechanisms through which this credibility can be put in place, and I will leave that to legal experts to decide.
Another important aspect is that federalism and decentralisation are highly dynamic systems, in that readjustment is necessary every once in a while. There are new policy challenges, a crisis happens, public demands and political parties change, and so it is important to have mechanisms for adjustment. We might touch upon that later as well, but as Sandra said about intergovernmental councils, they are of huge significance and they make devolution or federalism work, so they are hugely important in that regard.
Potentially, depending on how codified devolution is, the courts also play an important role and they are not necessarily a bad thing. It is also important to have them sometimes to uphold that commitment and to put the central government in place. Sandra, you might want to elaborate on that because that has happened a few times in Spain: the constitutional court said that this is the power of the autonomous communities and central government needs to hold back, and in so doing upheld the division of powers; that is a hugely helpful mechanism.
Professor Alain Trannoy: If I am taking the example of France again, it is interesting to see that at the starting point there was a big push in 1922. At that time, it was really driven by a political and philosophical ambition; it really reflected a desire to bring decision-making closer to the citizen and to grant local authority genuine autonomy. Because France is a centralised state, there is a backlash; in some sense there is a boomerang effect, not from the state but the deep central state, the senior civil servants. They continue to assert their will to control the action of decentralised bodies by issuing excessive norms.
Since I see England as a centralised state, there can be some form of instability, and instability has been in France since 2010. There have been six laws trying to refine the decentralised system, which means that there is some instability between the central state and the different layers of local governments but also in the political game between the different layers, in particular, for example, between departments and regions. Sarkozy was for the elimination of departments and Macron favours departments, so you have up and down in the relative role of the local governments, and that is a bad aspect—this instability and insecurity—in the system.
Dr Sandra León: There is something that Professor Johanna Schnabel said that is very important. Once you decentralise, the system does not remain static and devolved systems and decentralised systems always need to find a balance between two forces: the centripetal forces, such as two powerful central governments, and the centrifugal forces, which are two powerful regional governments. The risk for England is the first one—the centripetal forces that remain there and do not allow decentralisation to accomplish some of the benefits that are assigned to decentralisation of policies and fiscal resources.
Q53 Lord Butler of Brockwell: Leading on from that, given the risk of what you call fissiparous tendencies in the United Kingdom, what do you think are the lessons we can learn from other countries, in the UK, where we are not going to have a federal structure? What is the best form of relationship between the different levels of government in order to make the best of devolution? In particular, taking examples from other countries where there is a difference between the political beliefs of the central government and of a particular lower level of government, of the sort that Lord Carrington referred to, how are these most likely to be avoided in Britain, or if they cannot be avoided, can they be resolved? Shall I start with Dr Schnabel? I am not going to encourage you to say we ought to have a federal structure.
Dr Johanna Schnabel: I do not think I would meet up with this encouragement. There may be one thing we should also mention that is to some extent stronger in a federal system, but still the case in a decentralised or devolved system, which is that once you create lower tiers of government and set up political institutions that are directly elected, those institutions have legitimacy. They are not just an outsourced branch of the central government; they are separate institutions.
It is obviously a much more demanding task but the first thing is to change the mindset in such a way that they are acknowledged as having their own legitimacy. Once you have done that, you need to think about how to collaborate and set up a system where a central government and those lower tiers of government discuss aspects of joint concern. Sandra León mentioned the intergovernmental councils in Spain.
I can only emphasise that, again, this is hugely important, and that is what every decentralised federal system has developed. There is a lot of potential to learn, because some work quite well while others do not work that well. If you want to look at examples that work well, not to promote my own country too much but Germany has done a fairly good job in that regard, as has Switzerland.
I would say Spain still has a bit of a way to go, as have Australia and Canada, and I will tell you why. The reason is that in Australia, Canada and Spain, these councils are vertical institutions, vertical bodies, where the central government plays a very strong role. In Canada and Australia, they are often—not in all cases—used as a tool to promote a central government agenda.
If the central government needs the states or provinces to play along on a particular issue, it calls for a meeting. If it does not, even if the provinces or states have something to discuss, a meeting might not be held. This is absolutely something to avoid, while of course we need to acknowledge that there are situations in which the central government might want to steer the process a bit more.
For this system to work, it is important that the lower tiers of governments—local and regional governments—are seen to some extent as partners, and that there is some kind of institutionalised structure where meetings are held on a regular, scheduled basis, not just when the central government wants it. What works quite well is if they are structured in such a way that they have an organisational support, so that there is actual collaboration whereby you meet to define joint priorities, there is time to follow up on those, turn them into more specific proposals, and then adopt those, monitor their implementation, go back to the table and have another meeting in a year’s time to discuss, process and see if any adjustment is possible. That is something I found in my own research to work quite well. As I said, that means the central government cannot be the main actor in the room. Of course it is an important actor; that is definitely the case.
What also works quite well is a system where there is a generalist peak council that takes over some strategic leadership and has more focused councils that feed into that system. That is something I have also found to work quite well. Another mechanism that you might want to look into that I have found to exist in some federal countries but also in several decentralised countries—including the Netherlands—is some form of consultation requirement whereby any kind of central government action that has an impact on local and regional governments needs to go into consultation with them so they can at least voice their opinion, or might even have veto powers and need to consent to this going forward. As I said earlier, this also does justice to the fact that they are now institutions with their own legitimacy that are responsible and make a difference in people’s lives. That means that they should also be included in certain central government decisions that affect them.
Lord Butler of Brockwell: Would it help to synchronise central and local government elections, so that the danger of their having different political complexions is minimised?
Dr Johanna Schnabel: That is a very good question.
Dr Sandra León: What happens when there are concurrent elections is what we call contamination of electoral arenas. For local autonomy to be beneficial, those local officials need to be evaluated, credited or punished in elections for the responsibilities they have developed over the mandate. If national elections happen at the same time, you are basically bringing in a different dimension of politics that might blur the responsibility of local governments. People might not eventually connect those local responsibilities or local outcomes. They may vote in a way more aligned with national political conditions. In order to protect local autonomy and accountability, I would recommend separating them.
Dr Sean Dougherty: I would agree with the example of Spain and my colleagues’ comments there. I do not think there is a particularly good advantage to synchronising elections. There is an important question of term limits and how that affects incentives. To be honest, the evidence there is also not fully resolved. The key point is to have credible punishment and good transparency of outcomes so that voters are well-informed. That can be augmented by credible fiscal councils that either have multi-level responsibility or even more regional responsibility that can help to put the outcomes to the public and make it clear whether they used the precious revenues that have been collected in a high-value way.
Professor Alain Trannoy: I fully agree with the argument of Sandra and Sean, but we will not forbid voters from expressing their disagreement with the policy followed by the national state by penalising a candidate from the party that is in power and whose representatives are in the local government. It happens everywhere but I fully agree that it is not a good idea to merge the date for all elections, local, global and national.
Q54 Lord Reid of Cardowan: It is a comment more than a question, and it perhaps shows how contrary the British are, but there is no doubt in my mind that whenever you hold the regional or Scottish elections, the biggest influence on voter behaviour is the conduct of the British Government and how they are perceived. I am just coming back to what Dr Sandra said: that somehow if you separate them, you will get a vote that is based on accountability of the local government. In fact, in Britain you will find that the vote at any given stage is highly reflective of the perception of the electorate of the higher government of the time.
Dr Johanna Schnabel: If I may respond to that, I will keep it very quick. The more decentralisation/devolution progresses, the less strong this effect is. In case it is of interest, there is a whole literature on second-order elections that says that actually, lower elections at regional and local tiers are not necessarily second-order elections to national elections. It depends on a range of factors, but it also depends on how decentralised the country is.
Lord Reid of Cardowan: I can assure you that after 25 years in Britain, the core relationship between voting in devolved elections and the perception of the UK Government is getting stronger.
Q55 Baroness Wheatcroft: I am sweeping up here. You have been fantastically helpful. You told us a great deal about what has worked and indeed what has not worked in various systems. First, I would really like to know if you can tell us about any mistakes that have been commonly made that the UK might easily avoid. Secondly, I was much struck by Dr León’s comment that you have to set very clear boundaries as to what it is you are going to be doing fairly early on. Do you have to spell out quite what you are trying to achieve with equalisation? Because it comes in many forms.
Dr Sandra León: That is an important debate for a devolved country. How much inter-regional inequality can the system hold? I would like to go back—because it is connected to this comment—to something that has been said before, which is, what can we do? We are not going to become a federal country. There are two important things that you can do as a decentralised country; Sean, Johanna and Alain have mentioned that before. One is to clarify the powers that you devolve and make them highly visible for citizens. The citizens need to know who is responsible for what, and that is something you can certainly improve in the system.
For instance, it was commented before that it has been 25 years since devolution took place in Scotland. If you ask Scottish people what is the most responsible level of government for certain policies, I am sure that they still have not quite learned the level of responsibilities of the regional government. That is something that citizens learned over time in Spain, for instance. It is very important to try to clarify the spheres of competence of each level of government. That is certainly something you can improve in the system you have so far.
Secondly, as I said before, there are intergovernmental councils. For a country that is leaning towards more informal regulations, it is very important to try to at least establish some informal but regular meetings between different representatives from different regions. In that sense, of course, England would have to have the level of competencies as much as possible that other regions have received so far. Vertical connections, vertical meetings, supported—when possible—by technical bodies, regular meetings, informal connections between the different levels of government, and horizontal connections between different regions: these not only nurture the devolved mindset that a system needs in order to make the most out of devolution. They are also really important for the functioning of the system, for co-operation in different policies, and for the benefits of learning from each other that have been described so frequently as one of the advantages of devolution. That is something that you can certainly improve with the system you have.
I remember a few years ago, I went to a similar committee, the Scottish Affairs Committee, to provide evidence on intergovernmental relations. I am afraid that not much progress has been made in that regard so far. That is something you can certainly improve and that will set England and the UK more generally on the decentralisation path and structure that is needed to make the most out of that political system.
Baroness Wheatcroft: Does anybody have anything to add to that—mistakes that could or should be avoided?
Professor Alain Trannoy: If I may, I would say that after 40 years of experience of devolution in France, after what can be said to be a good start, devolution in France looks like an unfinished project. It has produced indisputable results. I did not mention this previously but it is very important that we have a good international spillover effect horizontally and vertically between different layers, greater proximity to citizens and enhanced capacity for local action. But the global system remains unpaid by over-regulation, which may be a specificity of France, and there is a lack of clarity in the domain of competencies between the different layers.
I would like to mention that there is a trade-off between the wish to internalise spillovers, which means that there will be co-funding from different layers horizontally or vertically, and the domain of competence of the different layers. The more you have a good international spillover, the less you will have a transparent clarity of the domain of competence of the different layers. It is a very basic difficulty in devolution.
Dr Sean Dougherty: I might just add one comment. I fully agree with the previous comments, especially the importance of well-aligning and being extremely clear about which level of government is responsible for what and not having too much overlap. I agree that it is important to have some positive spillovers, but there is the issue of not having multiple Governments responsible for the same service delivery where there is no clear assignment of responsibilities, and the question of whether the outcomes are good or bad. Especially in the process of devolving responsibilities, it is necessary to ensure that there are adequate resources. Those can be own resources, but it needs to be clear where the resources are coming from. Local governments are obliged to raise resources for education or transportation, and here are the levers available; or you assign a revenue stream to that service and it also gets devolved in an appropriate way. Some of the worst outcomes are when responsibilities get devolved without appropriate capacity to raise resources and fund those services adequately.
Dr Johanna Schnabel: Maybe I will use the opportunity to conclude by briefly addressing the issue of allocation of powers. I would also like to come briefly back to the question of legitimacy, and then finally mistakes to avoid. About the allocation of powers, I could not agree more with what the other speakers have said. At the same time it is also important to keep in mind that it is not easy to clearly allocate powers.
Germany and Switzerland both try to disentangle powers, only for them to become entangled again after any reform attempt. The modern world is hugely complex and that makes it very complex to allocate powers. An important question here is to think in terms of where the clarity is. Is it in areas, functions or funding? If so, which functions? It is a huge challenge and it is obviously highly political.
On legitimacy and encouragement, there is a lot of research that needs to be done to better understand what people want when it comes to devolution. There are several surveys that show that people actually quite like, support and trust regional government. Trust is not only in central government; regional governments can gain trust, which is a very important factor to consider.
At the same time, we did a survey experiment a few years ago with colleagues here in Germany, in which we were able to disentangle whether people believe in a certain government as a very principled belief or whether they want policy to perform well. It probably will not come as a surprise, but what people want is government to perform well, whatever government that is. They want policy to solve problems, whether or not the central government is responsible for it. Showing that you can deliver is key to making devolution work.
Finally, on things to avoid, one aspect I want to draw attention to that has come up a few times now during the conversation is central government grants to regional or local governments, which is the alternative to, or probably a complement to, taxing authority. Even if you give tax authority to regional governments, there will probably be some form in which central government will also provide grants. An issue that I have observed in other countries is that this funding is often short-term. It gives regional governments four-year funding and then they are left with the services or projects and have to fund them out of their own pocket.
As I said earlier, they very often come with a very strong administrative burden. There are often very complex reporting requirements that actually narrow the scope of what they can do, because they need to direct resources to fulfilling these requirements and meeting the conditions, rather than using the money to actually improve service delivery or innovate. That is something to avoid. It is important that central government funding is predictable and not too constraining.
Baroness Wheatcroft: Thank you. That is a very strong message.
The Chair: Thank you all very much. We have hit our two hours, which we were aiming for. Thank you so much for your comments, for sticking to time and for answering the questions so comprehensively. We are very grateful for all your time. With that, I can declare the meeting closed.
