Scotland Finance

Five international lessons for Scottish local government finance


Image: Scott O'Neill via istock

Marking the launch of a research project on the State of Local Government Finance in Scotland, LGIU and Solace hosted a roundtable discussion with senior Officers in Scottish local government to present five applicable local government finance lessons from LGIU’s international research.

Building on our international work on comparing systems of local government finance, this article focuses on five international lessons on local government finance from a recent roundtable on local government finance in Scotland hosted with Solace.

The context

LGIU’s work with members around the UK, Ireland and Australia shows that financing local government fairly, effectively, and economically is one of the most challenging and contentious issues in local government.

Therefore, in 2023, LGIU’s Local Democracy Research Centre launched two major projects on local government finance.

  1. A series, in collaboration with the University of Northumbria, of whole-system analyses of local government finance in different countries worldwide, starting with England, Italy, Japan, and Germany.
  2. A State of Local Government Finance report involving surveys of senior council officials in England and Scotland, to understand the capacity local governments have to deliver their essential services, the pressures faced by their staff, and the truth behind the spending decisions councils have to make.

Lesson 1: Constitutionally defined roles

Structures matter. Research in Germany, Italy and Japan, found having constitutionally defined roles for local government provides a solid foundation for a relationship between central and local government, which fulfils somewhat dampened hope of “no surprises” in the Verity House Agreement.

The positioning of local government in wider governance is also key. In Germany, constitutionally guaranteed financial autonomy provides the “right of municipalities to a source of tax revenues based upon economic ability and the right to establish the rates at which these sources shall be taxed” (German Basic Law).

Lesson 2: Revenue-raising and spending options

As debates over the freezing of council tax show, local government in Scotland is severely restrained in its ability to raise revenue to the extent that councils receive over 70% of their funding from the Scottish Government.

While debates over the Visitor Levy for councils, a levy which would not benefit all 32 equally, infer a willingness on the part of Scottish Government to consider alternative streams for revenue raising, lessons from Germany and Italy show the need to think bigger.

  • In Germany, municipalities benefit from local business profit tax and property taxes, and can set a multiplier from a minimum level.
  • In Italy, funding streams include property tax, vehicle tax, and charges on waste, water, and street cleaning.
  • In Ireland, homeowners are subject to a local property tax, which is both self-assessed and re-valuated to mean local authorities retain the full funds collected.

Lesson 3: The bottom-up approach

In Germany, the principle of subsidiarity means that everything should be done at the most local level and is only passed up to the next tier of government if it cannot be achieved at a more local level.

Sympathy for subsidiarity in Scotland is visible through the “local by default, national by agreement” maxim of the Verity House Agreement. However, as the council Tax freeze decision showed, without constitutional protection or institutional mechanisms, this approach can be disregarded.

Lesson 4: Territorial Equalisation

From Germany to Japan, the territorial equalisation of funds is a statutory requirement and is defined through mechanisms and funds to represent a needs-based approach.

However, in Scotland, territorial equalisation is simply left to the discretion of Ministers in Scottish or UK Governments, resulting in the current hap-hazard system wherein regional inequalities are assessed through competitive bids, and not a needs-based approach.

Lesson 5: Central-local communication

Formalised networks for local government and central government to convey priorities and communicate decision-making are fundamental for an effective system of local government finance.

In Italy, there is a standing conference which serves to maintain contact, build trust, and work through policy challenges jointly.

Comprising representatives from Italian municipalities and the central government, the standing conference is designed to safeguard local government interests and autonomy. It also allows local governments to raise issues and negotiate with central government to find consensus around finance and administration.

Key takeaways

Researching international systems of local government finance dispels the notion that the current set-up in Scotland is the only game in town. More importantly, it shows that systems can be reformed and international lessons can provide route maps.

For instance, the five lessons demonstrate how Italy is increasingly held up as a recent exemplar of local government financial autonomy and local government financial resilience. However, Italy’s relatively recent journey began at a starting point not dissimilar to Scotland in the early 2000s. Importantly, Italy’s journey towards resilient and autonomous systems of local government finance offers another key lesson relevant to Scotland. While the principles of the Verity House Agreement offer a foundation for progress, the ambition for local government in Scotland has to prioritise the entrenchment, or creation of, institutions and mechanisms to secure principles of subsidiarity and the independence of local government.

At the end of the day, our next article shows the importance of quantifying and constructing an evidence base on local government from which to articulate narratives and change.

Click below to check out our slides from the Scotland finance workshop! If you are interested in finding out more about local government finance, make sure you register here for our virtual event on our report launch for the state of local government finance in Scotland on December 13th, 10am!


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