local government finance

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The income raised by elected local government. It includes local taxation, national grant subventions, local government service user charges, loan capital funding, and private financial partnerships. Variations are commonly rooted in the historical development of the role of local government in the political system, and agendas for reform are generally bound up with prescriptions for that role.

Historically, local taxation has been a principal source of finance where local independence against state formation is strongest, an appropriate local resource base exists, and services provided have been considered to be primarily of local interest. Both the United Kingdom and the United States reflect this pattern, with even the level of local taxation in the United Kingdom being left in local hands until rate‐capping was introduced in 1984. Where the concept of the nation‐state is stronger, as in France, national grants have been much more important than local taxation, and in the Third World the lack of local resource bases leaves localities highly dependent on central funding. The expansion of local government responsibilities across North America and Europe in the twentieth century as part of increased state intervention nevertheless necessitated increased central funding both to supplement local fiscal bases under severe pressure, and to reflect the national importance of the services that local government has undertaken. Even so, there remain huge variations between states, with local taxation as a proportion of total tax revenue among European states varying in 2005 from over 30 per cent in Sweden and Denmark to less than 5 per cent in the UK, Netherlands, Ireland, and Greece.

Equally, fiscal stress across many states has necessitated central government requiring local government to raise more of its income from user charges and through financial partnerships with private sector bodies. In the majority of Western states local government draws its local finance from a variety of sources and levies taxes on both taxpayers and service users. Only in some Scandinavian countries and the UK is there a continued reliance on one predominant form of local taxation. In Scandinavian countries this involves the usage of a local income tax; in the UK this has commonly involved the use of a property tax, formerly the local rates based on housing rateable value, and currently the council tax. Briefly, in the 1980s, the UK experimented with a flat rate personal tax, the community charge (or poll tax), but this received a hostile public reaction and was abandoned. In 2008 the Scottish Government proposed a local income tax just for Scotland.

On the assumption that he who pays the piper calls the tune, many analysts have concluded that regulation of capital funding and increased central revenue funding have inevitably meant increased central control since the 1970s. Some view this benignly as a necessary feature of public service improvement. Others criticize it for its erosion of local democracy and policy flexibility. Similarly, whilst advocates of marketization and private sector finance at the local level emphasize the stimulus this gives to long‐term investment in services, critics complain that it essentially involves the public mortgaging its assets to the influence of corporate business and creates uncertainty over public service priorities. Such arguments reflect differing perspectives on the competing values of local government as rational–efficient bodies or arenas for political participation.


Subjects: Politics.

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