Andrew Paterson
Senior Counsellor, OECD Centre for Entrepreneurship, SMEs, Regions and Cities
Antti Moisio
Senior Economist– OECD Centre for Entrepreneurship, SMEs, Regions and Cities
Growth has been weak since the global financial crisis, and public services have been stretched thin. Part of the solution to this bind may lie in reforming local taxes.
Across the OECD, subnational governments power growth. They are responsible for over 50% of total public investment and hold key levers over housing, transport, planning and economic development.1 Yet, in the UK, local governments have few incentives to use these powers in pursuit of growth. New business and housing developments add costs for local authorities. Meanwhile, few of the proceeds of growth are retained locally.
Few incentives for growth
Local taxes only account for 19% of total local government revenue in the UK, significantly lower than the OECD unitary country average of 33.6%.1 Instead, the UK’s local authorities are heavily dependent on central government grants and subsidies. Worse, local tax revenues they do retain are reliant on a small number of property taxes only indirectly linked to growth.
Broadening the local tax base would sharpen incentives for local authorities to invest in (and permit) growth. It could also help strengthen local public finances at a time when it is needed most. Recent price rises and service demands, alongside higher interest rates, are adding to the burden of servicing local debt which has grown by nearly 50% between 2014–23.2
Local taxes only account
for 19% of total local
government revenue in the UK.
Local government initiatives
It could also improve local government accountability and innovation. Local governments with control over their own revenues are often more responsive to their communities’ needs and better equipped to address them.3
In Sweden and Finland, where municipalities self-fund a significant share of their expenditure, innovation in social care and environmental services has been notable. Switzerland offers an even bolder template for reform, where 60.5% of local government revenues are raised locally through progressive income taxes, with freedom for municipalities to choose tax rate levels.4
Limits and maintaining balance
Of course, there are limits. Strong economic hubs like London would generate higher tax returns than less affluent areas, posing a threat to efforts to narrow the gap between regions. To mitigate this, the core of existing fiscal equalisation mechanisms should be retained alongside — rather than be replaced by — new powers to raise revenues and continued efforts to improve local financial skills and capacity.
For more OECD work on Subnational finance: https://www.oecd.org/en/topics/policy-issues/subnational-finance-and-investment.html
[1] OECD. 2024. Subnational governments structure and finance, OECD, Paris.
[2] GOV.UK. 2012. Department for Levelling Up, Housing and Communities (DLUHC), Live tables on local government finance.
[3] OECD. 2019. Making Decentralisation Work: A Handbook for Policy-Makers, OECD Multi-level Governance Studies, OECD Publishing, Paris.
[4] OECD/UCLG. 2022. 2022 Country Profiles of the World Observatory on Subnational Government Finance and Investment.
