Links Between The Finance and Non Financ

Links Between the Finance and
Non-finance Elements of
Local Government:
A Literature Review
Mark Kleinman
Paul Burton
Jacqui Croft
School for Policy Studies, University of Bristol
Tony Travers
London School of Economics
November 2002
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Acknowledgements
We should like to thank all those who helped in carrying out this review, in particular:
Jane Dennis and Jo Abbott of the Cochrane Developmental, Psychosocial and Learning
Problems Group at the School for Policy Studies, University of Bristol;
Paul McCafferty and David Purdy of the Local and Regional Government Research Unit at
the Office of the Deputy Prime Minister.
The views expressed are those of the authors alone and do not necessarily reflect the views of
Government.
CONTENTS
EXECUTIVE SUMMARY 5
CHAPTER 1 11
Introduction
CHAPTER 2 15
Finance, accountability and local democracy
2.1. Issues and assumptions 15
2.2. Evidence on turnout and participation 19
2.3. Centralism and localism: what can we learn from the literature 28
on ‘local public finance’?
2.4. Balance of funding, balance of control 32
2.5. Fiscal equalisation and territorial equality 33
2.6. Hypothecated funding 38
2.7. Electoral cycle effects 39
2.8. Policy learning: the UK in comparative context 40
CHAPTER 3 43
Funding and service standards
3.1. Does more money mean more outputs and better outcomes? 43
3.2. Taxpayers, choices and services 52
CHAPTER 4 56
Performance related funding
CHAPTER 5 61
Funding and partnership working
CHAPTER 6 67
Conclusions
APPENDIX 1: 72
Methodology
APPENDIX 2: 76
Search strategies
BIBLIOGRAPHY 79
Executive summary
Background and approach

In November 2001, the then Department of Transport, Local Government and the Regions
commissioned the School for Policy Studies (SPS) at the University of Bristol to carry out a
review of the literature on the links between the finance and non-finance aspects of local
government.
The review had two main objectives:
• To shed light on a set of key questions and hypotheses concerning the relationships
between local government finance, service delivery and local democracy;
• To propose possible ways in which the hypotheses might be tested further through
research in the local government context.
The review covers English language literature identified through the systematic
interrogation of relevant databases as well through less formal means.
The nature of the literature

The review found that much of the research and literature on local government is highly
specialised and typically focuses on individual aspects of local government work and
structures. These aspects can be classified as: finance, democracy and political structures on
the one hand; and service delivery and management structures on the other. Relatively
little research has been undertaken on the connections between these broad areas and there
has been little work on the relationship between finance, service delivery and democracy.
Hence, financing local government is often treated as a technical subject, examined

separately from content questions such as service delivery, performance and management
on the one hand, and also from broader questions of participation, democracy and
accountability on the other.
It is also important to recognise the importance of context in comparing results from studies
carried out in different settings, and in considering the scope for transferring policy success.
What happens in one setting depends on the existence of underlying causal mechanisms
and a specific set of contingent variables. In this review it was important that we were
aware of any local, national or regional factors that might explain particular outcomes and
exercise caution in any attempt to read-off from one case what might happen in another
setting.
5
Links Between the Finance and Non-Finance Elements of Local Government
Overall, the UK rather stands out among other advanced industrial countries with
developed welfare states because of its combination of centralised funding, unitary state
organisation based on Parliamentary sovereignty and the lack of constitutional autonomy
for sub-national government. For these reasons, many of the problems and issues of public
finance and local government in the UK are not so readily apparent elsewhere. Likewise,
the constitutional, legislative and policy concerns of local government in other countries
are sometimes of less relevance in the UK.
Findings
FINANCE, ACCOUNTABILITY AND DEMOCRACY
There is a public debate in Britain at present about the magnitude and consequences of
political disengagement and a possible crisis of local democracy. However, this debate
includes very little reference to the role and significance of public finance in local
government.
The most important aspect of the relationship between public finance and local democracy
concerns variations in patterns of spending and in the quality of services provided.
Spending by local authorities varies because of differences in local needs, different costs of
provision and differences in the efficiency with which services can be provided.
Central government grant regimes in principle take account of, and compensate for,
differences in needs and costs, but not for variations in efficiency. Arguments are more
finely balanced as to whether or not the centre should allow, let alone compensate for,
different political choices made locally about the range and quality of services provided.
This goes to the heart of the political debate about decentralisation, local choice and local
accountability. Enhancing local democracy and encouraging greater participation in local
decision making are important policy goals, but they are not the only ones and in some
respects they run counter to the goal of providing equal access to services regardless of
locality (the so-called ‘postcode lottery’). However, some of the literature suggests that the
capacity to make significant local choices about levels of local taxation and about the range
and quality of local services is essential to the revitalisation of local political engagement
and broader processes of devolution.
Much of the theoretical literature in this field derives from the work of Tiebout in which it
is claimed that, overall, greater allocative efficiency is achieved through decentralised
systems in which municipalities or jurisdictions ‘compete’ for households by offering
different bundles of taxes and services. In a ‘Tiebout world’ this is all to the good:
individuals have different preferences for particular tax/service bundles and local
democratic systems reflect this; with perfect labour and housing mobility, dissatisfied
citizens simply move to another jurisdiction to maximise their preferences.
However, even if it were possible to move towards such a ‘Tiebout world’, it is likely that
residential sorting in line with these household preferences would lead to inequalities and a
degree of segregation that runs counter to many current policy goals of social integration
and neighbourhood balance. Nevertheless, this literature does support what appears to be
an important element of the 2001 local government White Paper (CM 5237) – a shift from
uniformity to greater diversity, while retaining in broad terms the existing system of
equalisation embodied in devices such as SSAs and the RSG.
6
Executive summary
There is little evidence one way or another on the relationship between democratic
engagement and the balance of funding in support of local government. While public
knowledge of the reality of local government finance (including the balance of funding and
the balance of control) remains poor and patchy, it is difficult to establish clear causal links
with political behaviour. Although there is some evidence to support the current belief in
the efficacy of measures to make registration and voting more convenient, longer run trends
in turnout are more strongly correlated with perceptions of the trustworthiness and capacity
of local government.
There is much scope for further research in this area. There would be benefits in more
comparative research among European Union countries to map their different approaches
to balancing the costs and benefits of raising different proportions of revenue locally.
Similarly, comparative research on patterns of local variation and the pursuit of minimum
service standards within and between member states would be worthwhile. There is also a
need for research looking at the broader inter-relationships between funding, powers,
constitutional position and measures of democratic accountability in a limited range of
mainly European countries.
Within the UK, it should be possible to use data contained in the ‘balanced scorecards’ to
be compiled by the Audit Commission following comprehensive performance assessments,
to examine the relationship between performance, greater financial freedoms and
democratic engagement initiatives. More specifically, it might be helpful to explore the
effect of changes in the balance of control and the balance of funding using intensive and
deliberative methods such as focus groups or citizens’ juries and also to use techniques of
‘experimental economics’ to investigate the behaviour of small groups of individuals
presented with various tax, service and outcome scenarios.
FUNDING AND SERVICE STANDARDS
Performance monitoring and management are now established as important techniques in

the pursuit of higher service standards. While the focus of attention has shifted from the
control of inputs to the achievement of outcomes, there remain significant problems in the
measurement of inputs, outputs and outcomes. New analytical techniques show promise but
these measurement problems continue to impede the construction of reliable estimates of
efficiency and productivity for many public services.
In some fields, such as education, there is evidence that the level of funding does affect
outputs and quality of service. But so do other things and institutional and organisational
reform can also lead to efficiency gains. The financing mechanisms for local government
also have an effect on efficiency. There is some limited evidence to suggest that raising
spending from local taxes – and maybe from local charges – rather than from central grants
can promote greater efficiency.
It is important to exercise caution when generalising from the experience of a few case studies,
but studies of performance in particular local government settings point to the significance of
institutional and cultural factors. It is likely that matters of finance and funding on the one
hand, and management and organisation on the other, are not fully separable but interact in
producing positive synergies or negative externalities in relation to overall performance.
There is evidence that local public service providers must work hard to increase public
awareness of who is responsible for providing local services and of the costs of providing
7
them. Set alongside the provision of comparative performance data, this may well increase
the likelihood that the public will be willing and able to make more informed and effective
contributions to local political debates about funding and service quality.
The introduction of local Public Service Agreements (LPSAs) provides an opportunity to

develop a mix of intensive qualitative studies of what drives service improvements as well
as more extensive and comparative studies of the relationship between inputs (funding) and
institutional (process) factors in determining outputs and outcomes.
PERFORMANCE RELATED FUNDING AND PARTNERSHIP WORKING
Most research on performance monitoring and management focuses on the links between
incentives and outputs or outcomes at the level of the individual. There is little systematic
research on the links between performance and funding at the organisational level. The
impending long-term evaluation of the modernisation agenda in local government will
yield valuable quantitative evidence on the impact of performance measurement and
management in local government.
Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) are the two
potential approaches to Frontier Analysis, a form of data analysis which only recently has
come to the fore as tools for evaluating efficiency in public service delivery. However, while
techniques such as DEA and SFA show promise, they have been criticised in some of their
applications. There is still no consensus on how best to measure the performance of local
authorities and then aggregate individual results into rankings that make a useful
contribution to public debate.
There is also scope for further research into the relationship between process and outcome
in regard to performance-related funding, especially in exploring the extent to which
performance targets can be manipulated and the effect of this on the perceived legitimacy
of broader performance management regimes.
Problems of measurement and definition are also apparent in research on the relationship
between funding and partnership working. For example, the scope for accurately calculating
the magnitude of any benefits of partnership, such as lower costs or less regulation, is
limited as different partners typically bring different types of resource that cannot always be
aggregated.
Much research relies on a small number of case studies and adopts a normative rather than
analytical approach and there is need for more rigorous, comparative and extensive studies
of the precise costs and benefits of partnership working in different fields of local
governance.
There is, however, some evidence that partnership working can reduce the regulatory
burden especially where there is a relatively high degree of trust between partners. Likewise,
there is evidence that the need to compete for funds has a positive impact on stimulating
partnership formation. More generally though, evidence on the significance of funding in
partnership working is more equivocal. While there are signs that partnerships formed to
bid for competitively allocated funds do not survive the failure to secure funds, other
evidence points to the importance of non-financial elements in ensuring the success of
partnerships.
8
Executive summary
It is clear that in the move from traditional systems of local government to more diffuse
forms of governance, partnerships between statutory and non-statutory bodies and between
public service organisations and commercial providers will continue to be important. It is
also clear that some of the broader factors of trust, transparency and accountability that
have been identified as vital components in the reinvigoration of democratic local
government are even more significant in the evolving systems of local governance.
Overall conclusions
Overall, this review has highlighted the importance of finance as a key tool of public policy.
The allocation and management of public finance is possibly the most important aspect of
the relationship between central and local government. This holds whether the
constitutional and political context is at the federal or unitary ends of the spectrum.
However, much research in this broad field is highly specialised and does not effectively
explore the links between the financial and non-financial aspects of local government even
when the significance of these links is recognised and acknowledged. There is, therefore, a
need for more research on the trade-offs that exist between different broad policy goals,
such as the need to manage local public expenditure and the desire to stimulate greater
local political engagement.
Until debates about these trade-offs are properly supported by good quality and relevant
research evidence, there is a danger that they will be prey to the influence of fashionable
viewpoints that have no strong evidence base or that take insufficient account of
contextual factors in advocating the adoption of practices that seem to work well
elsewhere.
There is scope for a variety of research studies ranging from deliberative panels and small
group ‘experiments’ through qualitative case studies to more extensive research that allows
rigorous statistical analysis of the experience of different local authorities. By producing a
range of studies using different methodologies, the research for evidence-based policy-
making in this area can be enhanced.
9
CHAPTER 1
Introduction
Much of the research and literature on local government is highly specialised and often
focuses on individual aspects of local government work and structures. These broad
specialised areas might for convenience be classified as: finance, democracy and political
structures on the one hand; and service delivery and management structures on the other.
Relatively little research has been undertaken on the connections and relationships
between these broad areas. In particular, there has been little work on the inter-relationship
between finance, service delivery and democracy.
Hence, financing local government is often treated as a technical subject, examined

separately both from content questions such as service delivery, performance and
management efficiency on the one hand, and also from broader questions of participation,
democracy and accountability on the other. Similarly, little of the research on issues
relating to democracy and participation – voter turnout, civic involvement, social capital,
etc. – explicitly considers the role of local government finance in relation to these
variables.
This research project was commissioned to fill this gap, by mapping and exploring a series
of relationships and inter-connections across finance, service delivery and democracy, and
furthermore, to specify future research projects that could test further the hypotheses
generated. The span of the research was therefore extremely broad, as discussed in
Appendix 1. Moreover, in relation to most of the questions and issues specified in the
research brief, and following directly from the nature of the project, there was not a large
and directly relevant literature to draw on and evaluate. Rather, what we have done is to
marshal the available evidence, draw substantive conclusions where this is possible, but also
draw out inferences and implications where substantive conclusions are more difficult and
suggest future avenues for research. Throughout, we have sought to frame our findings in
the light of current policy debates about the future of local government finance in
particular, and central-local relations more generally.
It is well known that the balance between central and local funding of local services in
Britain has shifted decisively towards central funding in the last 20 years, so that more than
three-quarters of local finance effectively now comprises central government grant. This is
often seen as being inimical to local democracy and held to be a key cause of reduced voter
turnout in local elections and of a decline in other forms of democratic participation (Rao,
2000).
We will examine the evidence base for this claim later in this report. At this stage,
however, it is important to point out that, whatever the actual relationship between
finance arrangements and local democracy, encouraging local democracy is not the only
goal of public policy, but rather one of several. These policy goals may conflict – that is,
there will be trade-off between promoting local democracy and participation, and other
public policy goals – particularly equal access to services and the establishment of national
11
minima in standards of service provision. In the UK, there has always been a strong
commitment to the notion of fiscal equalisation across areas, and the maintenance of
genuine national minima for services – that is, to the principle of territorial equity. The
greater the commitment to fiscal equalisation and equal provision, the greater the risk,
ceteris paribus, to local autonomy. Thus, trade-offs between competing desirable policy goals
will always exist.
Because of this, government ministers in the UK tend to be held responsible for ensuring a
national standard of provision of services that are mainly delivered by local authorities.
This is a long-standing characteristic of central-local relations in the UK. It has been given
added salience by the aim of the present government not just to ensure good standards in
public service, but specifically, to bring all areas up to common standards of, for example,
educational achievements, health services and even freedom from crime. This is to be
achieved through mechanisms such as Public Service Agreements and benchmarking of
performance. The goal is to remove some of the spatial variations in service delivery and to
end the so-called ‘postcode lottery’: ‘the assumption is that wherever people live, they have
a right to expect a minimum (or average) public service outcome’ (Travers, 2001).
The Government has signalled, in the 2001 local government White Paper Strong Local
Leadership – Quality Public Services, a desire to move away from excessive centralism and in
particular to ‘remove unnecessary controls which stifle local innovation’ (TSO 2001, p. 9).
The White Paper goes on to say that:
‘By removing restrictions and requirements on planning, spending and decision-

making and providing new powers to trade and charge, we will free up councils to
innovate and deliver tangible improvements in the quality of services and effective
community leadership…There will be more financial freedom within a basic
framework underpinned by sound financial management and prudent decision-
making.’ (p. 11).
The Government carries on in the White Paper to discuss general changes affecting all
councils and some possible ‘additional freedoms’ available to ‘high performers’. These
additional freedoms will include ‘less ring-fencing…more discretion over best value
reviews, a much lighter touch inspection regime and the widest freedom to trade across
their services.’
At the same time, the White Paper rejects the view that the balance of funding is the most
significant aspect of the current system:
‘It is often argued that this balance between national and local taxes has an adverse
impact on local authorities’ autonomy, but there is little hard evidence for or against
this view, and there is no consensus on how the balance might be shifted…We do not
consider there are any quick or easy ways of securing a major shift in the balance of
funding, particularly given the need to respect the views of taxpayers and to ensure
that financial reform does not become a distraction from the delivery agenda.’ (p. 53).
The Government draws an important distinction between the balance of funding and the
balance of control and clearly argues the view that the balance of control is ‘a more serious
and urgent issue than the balance of funding’. That is, local authorities should be in a
position to respond both to national and to local priorities, and a ‘good’ local government
finance system should enable them to do so.
12
Introduction
In this context, we consider in Chapter 2 of this report, a series of questions about the
relationships between finance, democracy and accountability including:
• What evidence is there to support the view that centralised funding undermines local
democracy, accountability and participation?
• What evidence, including the comparative evidence, is there on the finance-related

determinants of electoral turnout and other indicators of democratic participation?
• More generally, what are the policy implications of the extensive literature on ‘local
public finance’ for the balance between centralism and localism? What are the
theoretical arguments and empirical evidence, for and against greater local control
and/or greater local funding?
• The Government, in its White Paper Strong Local Leadership – Quality Public Services
(2001), draws a distinction between the balance of control and the balance of funding.
Can this distinction be maintained in practice and what are the implications for doing so?
• What is the relationship between fiscal equalisation and local democracy/

accountability? Are there useful lessons to be learned from comparative evidence?
• What implications does greater or less hypothecation have for local democracy and
accountability?
• How important are ‘electoral cycle’ effects?
• What further lessons might be learned from looking at the UK system of local
government finance and its relationship to democracy and participation in a
comparative context?
In Chapter 3, we go on to look at the relationship between funding and service standards.

Our starting point here is the vexed question of the relationship between funding levels on
the one hand and service standards and provision on the other – or to put it more generally,
the relationship between inputs and outputs and more crucially the relation of these to
outcomes. For example, does more money mean more outputs and better outcomes? Or, are
outputs and performance driven by other factors than just the volume or value of inputs?
In particular, we are concerned with the significance of context, particularly the level of
social and economic disadvantage, in explaining the relationship between inputs, outputs
and outcomes. It is at least possible in theory for one area to receive more funding and
achieve worse outcomes than another area without this necessarily implying any
inefficiency or wastage in the first authority. It may be the case that the level of difficulty in
achieving specified outputs and expected outcomes is correspondingly high. Equally, of
course, this may not be the case.
Related to this are a series of questions about citizen/consumer choice. So far, we have
mentioned the relationship between central and local funding, and between central and
local control without unpacking the notion of ‘local choice’. In practice, of course, local
decision-making is a contested terrain; different groups and individuals will have different
preferences both about the level of expenditure they would like to see, and the uses to
which expenditure is put. In the second part of this chapter, we will consider questions
about taxpayers, choices and services and evaluate the current evidence.
13
Hence, in Chapter 3, we consider the following questions:
• What is the relationship between inputs on the one hand and outputs/outcomes on the
other?
• What is the relationship between need, performance, cost and context?
• What is the evidence that additional funding improves performance/outputs/outcomes?
• For which services are citizens prepared to pay, and for which services are they not
prepared to pay?
• What is the level of turnout in referenda on spending levels and priorities?
• Which groups are over- and under- represented in referenda and other forms of
democratic participation?
In Chapters 4 and 5 the issues are somewhat more straightforward and the available
evidence more focused. In Chapter 4, we consider the extent to which performance related
funding produces measurable improvements in performance. We survey relevant evidence
from the private sector on the use and effectiveness of performance related funding, as well
as considering the UK and overseas evidence on public sector performance and incentives.
For Chapter 5, the growing significance of new systems of local governance, in which the
local authority is only one (albeit an important) player is very relevant, not least because it
can blur the boundaries of financial responsibility and accountability in the eyes of the
public. Nevertheless, local partnerships that are focused on specific issues or areas are now
responsible for substantial streams of expenditure and Local Strategic Partnerships also
influence the distribution of local expenditure. Key issues here include the sustainability
and long-term survival of partnerships in the absence of specific grant funding as well as the
transparency of systems of accountability.
In Chapter 6 we draw some general and specific conclusions from our research for the
relationship between the finance and non-finance aspects of local government. Based on
our assessment of gaps and weaknesses in the research base, we set out some possible
avenues for further research throughout the report.
Further details on the methodology and search strategies are given in the Appendices.
14
CHAPTER 2
Finance, accountability and
local democracy
2.1 Issues and assumptions

There is a widespread perception amongst both commentators and the general public that
the present system of local government finance is difficult for the public to understand and
hence is one of the important reasons for weak state of local democracy, as seen for example
in low turnouts in local elections. This is not, of course, to say that these perceptions are
necessarily true. However, the following quotations illustrate the perception:
‘there is certainly scope for allowing local government much greater flexibility than it
has at present. Most of all this flexibility needs to be financial. At present 80% of local
government funding comes from central government and the scope for local
innovation is severely limited. To increase spending by just 1% councils need to
increase the council tax by 5%. Similarly, the proportion of local spending ring-fenced
by central government has grown from 4.5% of budgets to 14.5% since 1997.’
(Guardian Leader 30.4.02)
‘[The] high dependence on grant – and the high levels of gearing that this creates for
local taxes when budgeting at a different level from that assumed by the Government –
are serious impediments to the reinvigoration of local democracy…As practitioners,
SCT believe that the local electorate is responsive to local tax levels when they are
seen as (a) significant and (b) within local control. The development of local
government finance over the last ten years has been such as to undermine both
perceptions. Consequently, the ‘rate-setting’ decision…commands far less attention in
the local media, and produces less interest in local people when it comes to local
elections.’ (Society of County Treasurers, 1998)
‘The majority of witnesses considered that the present situation, where local
government determines only about 25% of its own revenue is incompatible with local
democracy…Most witnesses took issue with the government’s assertion that the balance
of funding was irrelevant to local government’s freedom to act for the local community.
They argued that central government’s power over local authorities derived from
holding the financial purse strings. Most felt the much-heralded financial freedoms for
high-performing authorities were not significant…We have been convinced by those
witnesses, including MORI with their wealth of polling evidence, who told us that,
until local authorities have more responsibility, many local electors will be indifferent to
local elections.’(Commission on Local Governance, 2002, pp. 45-49)
In Section 2.2 below, we will look in more detail at the issues and evidence around
democratic participation. But a more general point is that, although enhancing local
democracy and democratic participation is an important goal of public policy in general, it
15
is not the only one. Other public policy goals may well conflict. In other words, in policy
terms there will be a trade-off between local democracy and other public policy goals. In
particular, there is a trade-off between increased decentralisation of control and/or of
funding on the one hand, and the principles of equal access to services in all parts of the
country and the maintenance of national minima. Even more broadly, recent policy has
sought to establish the principle of equal provision and quality of services everywhere
(removing the so-called ‘postcode lottery’). Enhancing local autonomy and providing
territorial equity are both desirable policy goals – but they can and will conflict.
Almost 10 years ago, the Audit Commission (1993) argued that any sensible central-local
grant system should:
• Be simple and comprehensible;
• Give stable results year on year;
• Be based on reliable data;
• Not create perverse incentives;
• Ignore efficiency variations;
• Enable similar rates of local tax be levied for a given level of spending;
• Produce allocation of resources widely regarded as ‘fair’;
• Protect local autonomy and promote local accountability while being consistent with
Government spending priorities;
• Be founded on a consultation process.
This is a good list of objectives, but once again, we have to recognise that many of these
worthy goals will conflict. So for example, simple and comprehensible systems may not
produce outcomes regarded by the public at large as ‘fair’:
‘the view that the [revenue grant distribution] system should be made simpler is
pernicious…attempts to make the system fairer tend to make the system more
complicated. Simplicity and fairness are therefore opposed and moves towards
simplicity are for this reason not an unmitigated benefit.’ (Watt, 2000, p. 215).
Current government policy is not just to provide national minima, or even to ensure ‘good’
standards in public service everywhere, but specifically to bring all areas up to common
standards of, for example, educational achievement, health services and even freedom from
crime. This is to be achieved through mechanisms such as Public Service Agreements,
Comprehensive Performance Assessments, intervention and the benchmarking of
performance. At the same time, government is committed to reducing the volume of
individual targets which local authorities must meet and individual strategies which they
must adopt.
As the 2001 local government White Paper makes clear, spending can vary across local
authorities for three main reasons:
16
a) Efficiency and effectiveness differences – reflecting forms of local organisation and

management;
b) Factors beyond the control of the local authority – some of which relate to variations
in need, others variations in costs;
c) Local political decisions – which should in theory reflect the views of local citizens.
These are three very different reasons, which have very different policy implications. The
first in the above list is the easiest deal with in principle – although perhaps the most
difficult in practice. Quite simply, funding mechanisms should not compensate for
inefficiency – except as a short-term measure and to avoid distress. Indeed, funding
mechanisms should have incentives to encourage increased efficiency. But what sort of
efficiency are we referring to? In economic analysis, the term ‘efficiency’ can refer both to
technical and to allocative efficiency.
Technical efficiency (or X-efficiency) refers to maximising outputs (ideally outcomes) per
input. Improving technical efficiency is about reducing waste, duplication and poor
management so as to maximise the productive potential of a given range of inputs.
Allocative efficiency (or Pareto optimality) is about obtaining the optimum distribution of
inputs across competing uses, so as to derive a series of outputs which most closely matches
the collective preferences of those consuming the goods or services. So, while technical
efficiency is about (say) obtaining the maximum number of council house repairs given the
size of the workforce and the repairs budget, allocative efficiency also includes the question
of whether the repairs budget is too big or too small in relation to other parts of the local
authority budget. Even at the level of technical efficiency, there are problems: ‘the evidence
is currently inadequate to distinguish managerial inefficiency from the sheer difficulty of
the task of providing services in cities.’ (Bramley, 2002, p. 4).
If we define efficiency as allocative efficiency, then there will be a role for central
government in determining, or at least affecting the allocation of spending across service
areas, as well as determining overall spending totals and instituting mechanisms to increase
efficiency. This gets to the heart of one of the key questions of local democracy. The hard
question is not ‘to what extent should local governments be free to take sensible decisions
reflecting the views of their electorates?’ but rather ‘to what extent should local
government be free to take ‘incorrect’ decisions, which do not maximize the welfare of their
local electorates?’ One answer to this, of course, is to say that the appropriate response is to
rely on local electoral politics – electing other representatives next time – rather than on
central interference. However, if most funding is central in origin, then inefficient local
decision-making will not necessarily translate into higher taxes and hence stimulate an
electoral reaction locally.
The second factor in explaining local spending variation – genuine differences in needs and
resources – should be compensated for, and this is the key principle of the UK equalisation
system. However, compensating for genuine differences in needs, coupled with the fact that
the distribution of those in greatest need is very unequal across local authorities, means that
central government gets ever more involved, in ever more detail at local level.
Decentralisation can provide a solution to this latter problem, but at the risk of creating
fiscal stress for the more deprived authorities:
‘Local government is inevitably heavily involved in provision of a redistributive

character and reflecting this in grant distribution through appropriate indicators and
17
techniques remains a key challenge. This involvement also reinforces the pressures for
central control over service levels. Selective migration processes continue to reinforce
the concentration of ‘needy’ groups within cities…in Britain fiscal stress has been
averted for the cities, but by a process of ever-more draconian central control…A fiscal
straightjacket has replaced fiscal stress, and cities are in a dependency relationship with
government. The challenge for the future is to find ways out of this straitjacket.’
(Bramley, 2002, p. 5).
The third factor is the aspect that is weakest in the current system, and, according to some
at least, a major reason for low levels of political participation. So, in principle, one would
wish to allow as great a freedom as possible for local political wishes to be expressed. But
clearly, at some point this would conflict with national policy – eg in regard to national
minima, or to some ‘reasonableness’ test, or in terms of broader equity or citizenship
considerations.
In the rest of this chapter we look at the relationship between local government finance on
the one hand and issues of democracy, participation and accountability on the other, under
the following headings:
• Evidence on turnout and other forms of participation – what are the finance and non-
finance factors? (Section 2.2);
• What can we learn from the literature on ‘local public finance’? (2.3);
• The balance of funding and the balance of control (2.4);
• Fiscal equalisation and territorial equity (2.5);
• Hypothecation (2.6);
• Electoral cycle effects (2.7);
• Comparative evidence (2.8).
Findings are summarised at the end of each section.
FINDINGS FROM SECTION 2.1:
• Enhancing local democracy and increasing participation are ‘good things’ but are not the only
goals of policy. There are trade-offs between competing ‘good things’ that policy would like to
achieve.
• In particular, there is a trade-off between greater decentralisation (local control) and equal
access to services. Decentralisation in part means accepting greater inequalities and diversity.
• Devolution implies greater acceptance of geographical differences in taxation, spending,

services and choices across the UK. The experience of devolution to Scotland, Wales, London
and (in the future possibly) the English regions will have consequences for local government.
18
• Spending varies across areas because of:
i. differences in efficiency;
ii. differences in needs and costs;
iii. different political choices;
• In principle, the grant system should compensate for differences in needs and costs but not for
efficiency variations. In practice, it may not be possible to achieve this differentiation and
hence the scope for local accountability might be compromised. There are strong arguments in
favour of encouraging different political choices but also arguments against (eg equal access).
2.2 Evidence on turnout and participation

KEY QUESTIONS:
• What is the evidence on turnout and other measures of democratic participation in Britain?
• How does Britain compare with other countries?
• Is there any evidence that the balance of funding affects democratic participation measured
through turnout or in other ways?
• Is there any evidence linking the form or finance of local government with measures of citizen
satisfaction?
• Are there links to wider issues such as lack of faith and trust; new forms of political
participation such as single issue politics?
TURNOUT
We begin by reviewing the more general literature on political participation and electoral
turnout in order to provide some context for the more specific questions about the
relationship between balance of funding and participation.
Turnout in local elections in Britain between 1973 and 2000 is shown in Table 1.
In the 2002 local elections there was an improvement of 4% in turnout (Local Government
Association, 2002). There were substantial rises in turnout in areas which adopted all-
postal voting as an experiment. Overall, turnout improved by 28% in these areas. Other
experiments – such as online and electronic voting – had little effect on turnout.
Low and declining turnout are not new phenomena, nor are they confined to the UK.
Nevertheless, democratic participation levels appear to be worse in Britain than in other
European countries. The IDEA database of voting in national elections in 163 countries
ranks Britain in 65th place with only France and the USA occupying a lower ranking
among the usual comparator countries.
19
Table 1 Overall turnout at local elections in Britain, 1973 – 2000
Year London English English English English Welsh Welsh Scottish Scottish English
Mets Counties Distr (w) Distr (p) Counties Districts Regions Districts Unitaries
1973 33.4 42.6 39.6 39.2
1974 36.4 50.6 51.4
1975 32.7
1976 38.1 44.7 44.4
1977 42.3 44.7
1978 43.1 37.2 42.4 47.8
1979 74.7 72.1 73.5 76.9
1980 36.3 38.9 45.7
1981 43.7 48.6
1982 43.9 38.8 41.8 42.9
1983 42 45 45.6 46.3
1984 39.8 40.2 44.4
1985 41.6 45.2
1986 45.4 39.9 41.9 45.6
1987 44.7 48.8 50.6 51.4
1988 40.1 41.5 45.5
1989 39.2 44.2
1990 48.1 46.2 48.6 45.9
1991 40.8 48.2 46.2 53.4
1992 32.5 37.8 41.4
1993 37.2 38.8
1994 46 38.9 42.6 45.1
1995 33.8 41.9 39.2 48.8 44.9 39.7
1996 30.5 37.2 34.6
1997 73.2 69.7
1998 34.6 24.8 30.8 27.8
1999 26.1 35.8 32.5 49.7 59.4 31.5
2000 26.0 32.2* 28.5
Notes: Figures for 1995 and 1999 in both Scotland and Wales refer to turnout at the unitary council elections.
Turnout data for English Districts have been separately calculated for authorities that use ‘whole council’ (w) and
‘partial’ (p) elections; *= all shire district councils.
Reliable data for Welsh local authorities are unavailable for the earlier years
Source: LGCnet (2002)
Turnout at sub-national elections in Britain is the lowest in the European Union, at around
35% compared with approximately 80% in Italy, Austria and Sweden (Table 2).
20
Table 2 Average turnout at sub-national elections within the European Union
Mean (%)
Country Before 1995 After 1995 Change (%)
Luxembourg 93 92 –1
Italy 85 80 –5
Austria 82 79 –3
Sweden 85 79 –6
Denmark 80 72 –8
Spain 65 72 7
Germany 72 70 –2
Portugal 60 62 2
France 68 59 –9
Ireland 60 50 –10
Netherlands 54 47 –7
Great Britain 40 35 –5
Belgium 93 — —
Mean 72.1 66.3
Range 53 57
Source: Department of the Environment, Transport and the Regions (2000, Ch. 4)
The DETR study of turnout concludes:
‘Turnout in sub-national elections appears to be in general decline. Few countries show

an increase in participation in recent years…this phenomenon is widespread. In short,
the problem is not solely a function of the British context but those wider factors,
associated with a reduced sense of civic responsibility, are also at work.’ (Department of
the Environment, Transport and the Regions, 2000, Ch. 4).
This is a common view: that declining civic responsibility (‘bowling alone’ to use Putnam’s
parlance) explains falling turnout. However, Franklin et al (2001) look at voter turnout in
national elections and argue that voter turnout differs cross-nationally not because
countries or people differ but because the salience of the election varies:
‘turnout variations occur because elections differ, not because countries differ; and
certainly not because people differ…what matters…is differences in the ways in which
citizens are affected by the electoral experience at different times and in different
countries.’ (Franklin et al., 2001).
According to this view, it is the characteristics of citizens and the salience of elections that
are the drivers of variation. Their model explains the slight decline in turnout that has
recently occurred in advanced democracies in terms of reduced competitiveness of
elections, and hence lower importance to voters. This study was based on national elections
in different countries. It may be relevant to local turnout also – but can we read across to
sub-national elections?
21
At local level, Rallings and Thrasher (1994 & 2000) have identified the following factors as
having a positive influence on turnout, although it should be noted that local tax and
spending levels were not considered in their analysis:
• Marginality of the seat at the last election;
• Smaller electorates;
• Multiple member wards;
• Number of parties contesting elections;
• Partisanship of ward;
• Stability of population.
The experience of the 2002 local elections provides little evidence of any strong correlation
between participation initiatives or election practices and voter turnout, although postal
voting clearly has the potential to stimulate small but significant increases (Electoral
Commission, 2002). In general terms, poor turnout is held to reflect wider social attitudes
more than significant inadequacies in the mechanics of registration and in voting processes,
although social attitudes include the important perception of the salience and significance
of elections themselves. Franklin et al’s (2001) study noted the long term decline in average
turnout in national elections in the post-war years, punctuated only by elections in the
1950s and 1960s that determined the establishment of welfare states in many countries.
They conclude that elections in the last years of the 20th century clearly lacked the key
ingredients needed to stimulate high turnout: a favourable institutional setting (eg the
degree of proportionality in voting systems, the degree of compulsion, the type of legislature
and so on) and a higher level of electoral competitiveness.
Regarding registration, the young and the poor are most likely to avoid registering, and this
holds for many other countries too. Does the public believe that voting makes a difference
and hence is worthwhile? Although some sense of civic duty or obligation to vote remains,
especially among older people, voting in local elections does not appear to be seen by many
as the most effective way of expressing political preferences. Rao (2000, p. 117) suggests a
tripartite division among voters in local elections: the assiduous voter, the assiduous non-
voter; those who vote when they can. It is likely that any campaign to increase voting
should target the last of these categories to be most effective.
BALANCE OF FUNDING AND TURNOUT
As the quote from the Commission on Local Governance in Section 2.1 suggests, the
argument that the current system of local government finance undermines local political
participation receives some support from poll evidence. For example, MORI’s telephone
research for the Commission on Local Governance looked at changes that might make
people more inclined to vote in local elections, as well as attitudes to local elections more
generally. Table 3 below shows the main results, which are summarised in the following,
‘There is a clear pattern here, with issues to do with the provision of information and
the scope of the council to make decisions which have a local impact, being given the
highest rating as likely to increase turnout. This is followed in importance by other
22
issues to do with involvement in local decision-making; holding local referenda and

greater involvement in council decisions between elections.’ (Dungey, 2002: p.8)
Table 3 Factors most likely to improve turnout in local elections
Net
‘More likely
to vote’
59% More information being provided about the candidates and their views
58% Councils having more scope to make decisions about what happens
locally
50% Having more information from the council about the election and how to vote
48% Having more opportunity to participate in council decisions between local
elections
48% Councils having more scope to set taxes and charges locally and
decide how the money is spent
47% Councils to hold referendums about important local issues on the same day
as local elections
38% Being allowed to vote using the Internet from home or work
31% Everyone to vote by post
29% A different voting system based on proportional representation
20% Being allowed to vote using a mobile phone
18% Elections to include the direct election of a mayor to run the council (instead
of a leader chosen by the councillors).
Note: Most relevant factors for this review highlighted in bold

Source: Dungey, 2002, Table 2, p.7
Hence, this survey evidence provides some empirical evidence to support the view that low
turnout – and by implication low levels of participation in local electoral politics generally
– is driven in part by factors relating to local authorities’ financing and responsibilities as
well as by institutional factors of local democracy or the mechanics of voting. However, it is
important to put these factors in perspective. The study also found demographic factors
(Table 4) to be highly relevant:
‘When we examine who says they have or have not recently voted in local elections,
age is the most significant factor. Of the youngest age group, 16-24, only 22% report
having voted locally in the last four years; of course many of this age group would have
been too young at the relevant election. But only 51% of the next age group, 25-34, say
they have voted recently, compared with 84% of those age 65 plus.’ (Dungey, 2002,
p.11).
23
Table 4 Age and voting in local elections
Age Voted % Did not vote %

16-24 22 78
25-34 51 48
35-44 68 32
45-54 75 24
55-64 79 20
65 plus 84 15
Source: Dungey, 2002, Table 4, p.11
Age is thus one of the most influential demographic factors affecting voting. Indeed,
Putnam goes so far as to claim that ‘the single most important cause of our current plight is
a pervasive and continuing generational decline in almost all forms of civic engagement’
(Putnam, 2001, p.404).
Assessing the relative strength of these different factors – those relating to the powers and
funding of local councils on the one hand, and more general demographic, social and
economic factors on the other would require a more detailed piece of research. But this
example shows the importance of placing research findings in their wider context.
Democratic renewal is a key aspect of the Government’s broad-based programme of

modernisation, and is held to be necessary for a number of reasons:
• Continued evidence of low and declining turnout in local (and indeed national and
European) elections;
• Reported loss of faith and lack of trust among the public at large in the institutions of
government; and
• The desire in government to stimulate a new type of political system in which the best
elements of direct and representative democracy are combined.
We found very little literature, if any, which attempts to measure the impact of funding
levels, systems or changes on either measured outcomes or perceptions of local democracy.
However, there is an extensive literature that tries to understand voting behaviour and
other forms of political participation from an economic perspective. For example, Downs
(1957) in his classic Economic Theory of Democracy argued that voters have little incentive
to vote because they cannot expect to have any impact on the outcome. So the costs of
voting (queues, bad weather) outweigh any benefit (Hardin, 1999). This specific example
can be taken to be one example of the general problem of the ‘logic of collective action’.
(Olsen, 1965).
In the same book, Downs developed the ‘median voter model’ whereby in theory a
candidate for office must take a policy position at the median of a normal distribution of
voters, otherwise someone who does will outflank him or her. There is a large theoretical
literature here, but most, if not all, essentially looks at the problem from the other
direction. That is, it deals with the question: ‘can we explain the observed patterns of
24
expenditure and taxation locally in terms of a median-voter or other politico-economic

model?’ – rather than, ‘is there any link between the system of finance or pattern of
expenditure and the observed political variables?’
CITIZEN DEMANDS AND SATISFACTION LEVELS
Political participation is one method by which citizens seek to have their demands and
needs met. Is there a relationship between local government form and finance on the one
hand and citizen satisfaction levels on the other? There is a literature on whether larger or
smaller (or consolidated versus fragmented) local government systems are better at meeting
citizens’ demands, at least as measured by satisfaction surveys. Dowding et al (1994)
conclude: ‘it is difficult to draw conclusions concerning the impact of city size on citizen
satisfaction levels.’
Ostrom’s studies of police expenditures in consolidated and fragmented communities in the

U.S. (quoted in Dowding et al., 1994) showed that satisfaction is greater in smaller than
larger jurisdictions. But this may simply reflect the better personal relationships with the
police in smaller places. These findings are supported by Marans and Rogers (1975). But
Lowery and Lyons (various studies) find mixed results on dissatisfaction when they compare
consolidated and fragmented jurisdictions with no clear pattern.
In Europe, a study by Derksen (1988) of Holland, finds that size is a trivial factor for
administrative capacity. Derksen notes that ‘the importance of size for the administrative
capacity of local authorities is apparently very small…In cases where size and performance
are correlated, the correlation is not always positive.’ (ibid. p. 43) and:
‘amalgamation of local authorities does not necessarily improve the administrative

capacity of local government…for many years, the arguments for municipal
amalgamation in the Netherlands were invalid, because the argument for
amalgamation was mainly based on the supposed positive relationship between size and
administrative capacity.’ (ibid. p. 45).
Similarly, Newton (1982) argues that size is largely irrelevant to functional effectiveness
and democracy:
‘any conclusion about the relationship between size, effectiveness and democracy must
be tentative because in spite of an ample supply of commonsense knowledge about the
subject there is relatively little hard information. Nevertheless, the evidence to hand
points to two general tendencies. First, local authorities of different sizes, whether
urban or rural, do not differ by more than a small amount, if they differ at all, on many
measures of functional effectiveness and democracy…Second, so far as size does make a
difference, large units seem to have something of an advantage in some respects: they
are better able to provide a range of specialized facilities which are beyond the capacity
of most smaller units…Moreover, an equalization of resources and services between
areas demands authorities which are large enough to include both the rich and poor
neighbourhoods within their boundaries, as well as a redistribution of resources at the
national level.’ (ibid. p. 205).
25
EVIDENCE OF LACK OF FAITH AND TRUST
Although subject to increasing empirical as well as theoretical criticism, Putnam’s work on

social capital points to evidence of a widespread decline in trust and faith in a range of local
institutions, both social and political. Survey evidence also points to public faith in
politicians (national as well as local) remaining low (see Rao, 2000; Turner, 1999; Bromley,
Curtice and Seyd, 2001). Parties are experiencing growing difficulties in finding candidates
to stand in local elections and in retaining local councillors once elected. The overall
profile of councillors remains biased, with older white men continuing to be over-
represented and few younger, female and black people entering local politics (Brown, Jones
& Mackay, 1999).
Popular identification with area or place remains important in stimulating political

participation (Young et al, 1996) although this may be a proxy for length of residence in an
area. Identification tends to be strongest for smaller areas, in other words runs counter to
the pressure to plan at larger spatial scales to maximise strategic potential. More broadly, a
disjunction exists between the most efficient spatial scale for government jurisdictions in
relation to economic activity (‘functional urban regions’) and the spatial scale with which
citizens and voters can identify (Kleinman, 2002). For example, attempts at setting up
metropolitan governments in Amsterdam and in Rotterdam failed, despite the economic
benefits and political agreement amongst the relevant parties. They failed because, in
referenda, the voters rejected the proposals. Local people preferred the city they knew
however economically obsolete its boundary now was. Local governance is not just about
efficiency and competitiveness but is also a question of identity and representation. In
short, political and personal factors can trump economic and financial ones.
NEW FORMS OF POLITICAL ENGAGEMENT AND PARTICIPATION
Although turnout in local elections is taken as an important measure of political

participation, it is not the only one. Parry et al. (1992) define political participation as
‘taking part directly or indirectly in the processes of formulation, passage and
implementation of policy’. There is burgeoning literature describing possible ways of
engaging the public in (relatively) novel forms of discussion and dialogue about local policy
issues (for example Lowndes et al., 1998).
An interesting strand of work from the field of health policy (in Canada, but applied also in
England, see Abelson et al., 1995) has measured the inclination of different groups of people
to engage in different forms of policy debate – ranging from strategic thinking to detailed
decision-making. The evidence does not point to widespread enthusiasm for more
engagement in some of the more challenging arenas of policy, such as budget setting and
service prioritisations. It also suggests that most ‘ordinary’ members of the public (in
contrast to local politicians of various sorts) are reasonably aware of their own ignorance on
many matters of local governance and the financing of local services.
There are some limited signs of greater public involvement in budget setting and of
initiatives for engaging the public in making financially informed service choices, although
these are more typically in the field of health policy where health trade-off exercises are
sometimes used to discriminate between services. In the Brazilian State of Rio Grande do
Sul, the capital city of Porto Alegre has run a participatory budget exercise for over a
decade in which regional, sub-regional and thematic meetings scrutinise previous
expenditure, agree current priorities and allocate funds for new projects. Interestingly,
26
councillors are elected after this process and plans are then negotiated with officials and
the Executive Council. This process is felt to be a good way of avoiding corruption,
involving citizens in key decision-making and achieving an efficient allocation of resources
(Best Practices and Local Leadership Programme, 2002).
Referenda on financial issues such as the setting of council tax levels are not always popular
with the electorate. In Bristol, for example, a survey of their Citizens’ Panel about a
referendum held in early 2001 on the council tax found mixed views about its value and
appropriateness (Bristol City Council, 2001). While turnout was slightly higher (at almost
41%) than the average for city council elections, the profile of respondents did not vary
significantly and a clear majority voted to freeze the level of council tax at its present level.
Just over half (51%) felt there should be another referendum on the same subject in the
future and younger people (16–18 year olds) were most supportive of this idea, even though
they had participated least of all the age groups. Because of the particular outcome, it is
perhaps unlikely that a referendum will be held on the budget in the foreseeable future and
indeed the Council declined to hold a referendum on its proposals for a new constitution at
the end of 2001.
In Milton Keynes, a referendum was held on the council’s spending plans in February 1999
and also achieved a higher than normal turnout in comparison with turnout in local
elections. In this case, a proposed increase (of 9.8%) received the biggest share of the vote
and the process was held to demonstrate that the public are willing to get more involved in
significant local decisions, even if they relate to areas felt to be as complex as local
government finance (Snelson, 2001).
Research commissioned for ODPM (Stoker et al., 2002) concludes that public ‘consultation
over budget and finance matters is likely to become more important in the future as the
public becomes more demanding’ (p. 1) and although difficult to achieve, is not impossible
in practice.
• While adjustments to the mechanics of registration and voting are likely to have a marginal
effect on turnout (and postal voting is the most significant development of this type), more
substantial increases are unlikely to be seen until and unless the public sees that the bodies to
which they are electing representatives become more significant (ie more powerful and
responsible and meaningful in their lives) and for elections to become more competitive.
• Responsibility for the raising and spending of local taxes is seen by the public as an important
aspect of the significance of local government, although public knowledge of the balance of
responsibility for raising taxes and spending public funds is typically poor. However, other
more widespread notions of trust in public institutions also influence public perceptions of the
significance of local government.
• There is limited and conflicting evidence on the influence of local government structure and
finance on the satisfaction levels of citizens and on their perceptions of the efficiency of local
government.
• There is a need for more research on factors affecting citizen satisfaction and participation and
the relative strength of finance factors within this.
27
2.3 Centralism and localism: what can we learn

from the literature on ‘local public finance’?
KEY QUESTIONS:
• What are the policy implications of the literature on ‘local public finance’ for the balance
between centralism and localism?
• On what grounds is ‘localism’ advocated in this literature, and how relevant is it to the UK?
• What are the theoretical arguments and empirical evidence for and against greater local control
and/or funding?
There is a very large literature, both theoretical and empirical, which looks at issues of local
public finance. Standard market failure arguments (the existence of externalities or
indivisibilities, imperfect information, and the ‘public goods’ argument) together with
equity concerns about distribution, provide a ground for government intervention.
However, this does not necessarily imply any specific role for local government. Starting
from the distinction between the resource allocation, distribution and stabilisation (macro-
economic) functions of public finance, the fiscal federalism literature (Oates, 1972; Cullis
and Jones, 1998) examines the normative question of the assignment of policy functions to
levels of government.
In general, it is argued that redistribution should be reserved to central government, while

local governments provide public services in line with local preferences. Local governments
should provide locally consumed goods and services, because they are better placed than
central government to meet local tastes and resources. As Oates (1994, p. 129) puts it: ‘It is
in the tailoring of outputs of local public goods to the particular tastes and circumstances of
different jurisdictions that the real gains of decentralization are to be realized’.
So, questions of redistribution, or fairness, should be left to central governments – the

central state is both the appropriate and the most effective locus for these decisions.
However, as Bramley (2002) points out, in practice much of local government activity in
Britain is redistributive. This:
‘may be reconciled with the economic theory to some extent, insofar as the benefits of
redistributive services are in part external or public goods (Bramley and Smart, 1993;
Culyer, 1983; Pauly, 1973). But redistributive services have implications for:
– Amount of local discretion over the standards of services involved, which is likely
to be more strictly limited, as is the case with Housing Benefit and to an increasing
extent with education;
– Funding sources, where progressive redistributive rather than benefit-related taxes

may be favoured, as well as a much higher reliance on central grants or transfers.’
(Bramley, 2002, p. 35)
Nevertheless, in much of the academic literature on public finance, there is a general

presumption in favour both of local control/choices and local taxation/financing. One large
sub-strand of the literature derives from Tiebout’s classic paper on residential location in
28
relation to differing tax/service ‘bundles’ offered by competing administrative jurisdictions

(Tiebout, 1956). Here, it is argued that choice is maximised by having a large number of
independent municipalities that charge different levels of tax and provide different levels of
services. The large number of municipalities, combined with high levels of mobility, in
effect mimic the processes of a market in which individual consumer decisions lead to
allocatively efficient (Pareto-optimal) outcomes. Consumer choice is then maximised as
households ‘vote with their feet’ to secure the level of tax and expenditure which meets
their preferences:
‘Just as the consumer may be visualized as walking to a private market to buy his goods,
the prices of which are set, we place him in the position of walking to a community
where the prices (taxes) of community services are set. Both trips take the consumer to
market…Spatial mobility provides the local-public-good counterpart to the private
market’s shopping trip.’ (Tiebout, 1956, p. 422)
Hence, this is not only an argument for local funding and local control based on principles of
maximising consumer choice, but also for providing efficient resource allocation. What it
does not deal with, of course, are the distributional consequences – not only will there be
large disparities in provision, and in tax levels, but there will also be social, economic and
almost certainly ‘racialised’ segregation. Moreover, in the absence of central equalisation,
poor areas will have both low services and high taxation. To the extent that distributional
issues are considered at all, it is implied or explicitly stated that central government
redistribution mechanisms will deal with the distributional consequences.
While the ‘Tiebout’ literature is often highly abstract, there are also many empirical studies.
Dowding et al (1994) review more than 200 articles and books testing the assumptions and
implications from Tiebout models. They conclude that many of the predictions of the
Tiebout model are met in practice, although the evidence is often inconclusive:
• Mixed but marginal support for the proposition that the more jurisdictions there are the
greater the satisfaction levels for some, though not all, locally provided public goods;
• Wealthy households move to avoid redistributive taxes;
• Both taxes and services affect locational decisions;
• Migration seems to be affected by differences in tax/service packages, but the evidence

is not conclusive.
A standard interpretation of the Tiebout model is that tax-induced migration makes local
redistributive policies difficult to implement. If voters are asked to contribute too much,
they will simply vote with their feet. For example, a (purely abstract) model by (Epple and
Romer, 1991) does indeed demonstrate that local redistribution induces population ‘sorting’
with the poorest households located in the communities that provide the most
redistribution. However, the authors point out that while the threat of out-migration is
relevant, significant local redistribution is nevertheless feasible. Interestingly, housing
tenure emerges as a key variable in this model – the greater the level of home ownership,
the less scope for redistribution:
‘The amount of redistribution turns out to be relatively modest in the empirically most
relevant cases because anticipated capital losses by homeowners deter them form
voting for high grant levels per household’ (Epple and Romer, 1991, p. 855).
29
Much of this literature assumes two separate levels – central (often Federal) and local.
Adding in inter-governmental grants, between the tiers of government, as in the UK, adds
to the complexity of the system, and adds greatly to the difficulties of understanding the
incentives within the system, either for local government or for local taxpayer/consumers.
Many different sorts of grant are possible, of course. Grants can be matching, block,
targeted, ring-fenced, general, hypothecated etc. Each type of grant will have different
effects. In general, the effect of inter-tier grants will be to mask the relationship between
what the voter/taxpayer is paying for and the services (outputs) they receive, thus making
the attainment of efficient outcomes less likely. To the extent that this relationship is
attenuated, it offends against one or more of the principles of good government: viz.
transparency and accountability. There will also be ‘flypaper effects’ in which lump-sum
inter-governmental grants given for redistributive purposes do not in fact reach all their
intended targets, but rather ‘stick where they hit’.
In general, the centre can influence local spending (Meadows, 1987) by:
• Setting targets;
• Imposing policies on how the funds are spent (hypothecation);
• Increase in local accountability through tapering grants, so additional expenditure falls

locally (gearing);
• Reassignment of responsibilities (eg centralisation).
In the US, with its large number of competing jurisdictions, lack of equalisation and weaker
redistributive mechanisms, the Tiebout approach has greater resonance and ‘continues to
exert a magnetic influence’ (Bramley, 2002, p. 5). This type of approach has limited
applicability to the UK because of:
(i) the commitment to equalisation/redistribution;
(ii) the unitary not federal nature of the system; and
(iii) the pervasiveness of inter-governmental grants.
Nevertheless, John et al. (1995), using data on moving households in four London
boroughs, find evidence that taxation cost considerations do form part of the decision-
making when considering moves and that, therefore, households were behaving ‘Tiebout
rationally’. Newton (1997) in a critique of this article raises some difficulties with this,
arguing that the test is not rigorous and that the Tieboutian reasons were minor
considerations for most of the small number who move. Amongst other things, he raises the
issue of movement within tax jurisdictions for better services such as schools and also
criticises the lack of consideration of those who do not move at all. Responding to this,
Dowding and John (1997) argue that the relevant question is not the ranking of reasons for
house moves, but rather, given that people primarily move for housing-related, job-related
and family-related reasons: ‘do tax-service levels affect enough households’ choice of
destination jurisdiction to generate a market analogue?’
There is a literature that is concerned with the linkages between local finance and local
democracy. But almost universally it is concerned with linkages in the opposite direction to
the one we are interested in here. That is, the focus of most of these studies is on the effect
30
of political variables – types of institutions, voting systems, form of taxation (poll tax versus
property tax, for example) – on the levels of taxation and services rather than the impact of
types of funding on political outcomes and processes. For example, a study of 26 Swiss
cantons and 134 localities (a ‘natural laboratory’ because of wide range of practices) shows
that mandatory referenda on fiscal issues at both levels have a dampening effect on
expenditure and revenue (Feld and Kirchgassner, 2001).
While the abstract world of economic modelling suggests some ideal-type solutions, in
practice the reality of local government finance is far messier – partly because of the
diversity of population and the inequalities across groups:
‘An ideal system of public finance in a homogeneous country would probably be based
on neo-classical public finance plus some concessions to public choice analysis. Macro-
economic and redistributive policies as well as the provision of national public goods
would lie with central government, constitutionally limited in scale and scope. The
provision of all other goods and services would be assigned to sub-central and local
jurisdictions of optimal size, with their own taxes and decision-taking mechanism in
order to minimize spillovers. The population at the various levels would become more
and more homogeneous with regard to their preferences for a given bundle of services
at a tax price, and the competition among the sub-central jurisdictions would ensure
efficiency and the control of politicians and bureaucracies.
If we leave this happy world of relative homogeneity and turn to a fragmented society
such a system can no longer be the first-best solution, because the functional objectives
to be attained effectively become more numerous and thus necessarily contradictory.
The state not only has to provide public goods and, eventually, some redistribution
among individuals with reasonable efficiency, but it also has to address additional
questions such as territorial integrity, internal peace, survival of identifiable group, and
distribution among diverse groups.’ (Stauffer, 2001, p. 213)
• Standard public finance theory suggests that redistribution should be left to central government
(whether unitary or federal) while public services are most appropriately provided and financed
at local level (and should reflect local political choices). But in practice, in the UK, much local
government expenditure is redistributive.
• Furthermore, ‘Tiebout’ models strongly imply that greater allocative efficiency results from a
decentralised system where there are many ‘competing’ local jurisdictions, offering different
bundles of taxes and services. Households shop around to find the area where the tax/service
bundle most closely matches their preferences. In practice, the world does not behave like this;
even if it did, Tiebout sorting would also lead to inequalities across areas and (probably)
social, economic and ethnic segregation. In the absence of fiscal equalisation, vicious and
virtuous circles of tax rates and services would be created.
• There is little evidence one way or the other on the relationship from balance of funding to
democratic participation. There is, however, a literature on the opposite direction of causality
– ie the effect of political variables (voting systems, taxation systems) on levels of expenditure.
This suggests that more local control is likely to be associated with lower levels of expenditure.
31
2.4 Balance of funding, balance of control

KEY QUESTION:
• What is the evidence relating to the Government’s contentions that (i) the balance of control
and the balance of funding can be distinguished; and (ii) that the balance of control is the more
important issue for local democracy and participation than the balance of funding?
In the 2001 local government White Paper it is argued that one can distinguish the balance
of control from the balance of funding:
‘we have concluded that the balance of funding and the balance of control are separate
issues…in the Government’s view, the balance of control is a more serious and urgent
issue than the balance of funding’
The Government argues that a balance must be struck between the national priority for the
delivery of better services and the ability of local communities
‘to see some action on local priorities…It is therefore an important aim of a good local
government system that it allows local authorities to meet both national and local
priorities.’
The implication of this is that in a system with a given level of central funding, there can
still be a range of scenarios at local level as to how the money might be spent, ranging from
full fungibility – that is full discretion over spending allocation – to full hypothecation.
This is logical, but it can at least be questioned whether in practice the issues can be
cleanly separated in this way. In practice, determination of overall spending levels,
allocation of spending across services and the relative weight given to local political control
will interact strongly.
At one extreme, central/local relations can be considered as a principal/agent model, where

local government simply acts as the agent for central authorities (Kleinman, 2002;
Glennerster, 1992). In practice, local government finance in the UK seeks to maintain a
balance between different and potentially conflicting goals. Hence the key question is: if
there was greater local control over spending, even in the absence of any change in the
balance of funding between central and local sources, would there be any effect on local
political participation and other measures of democratic health?
In general, the literature does not separate the balance of control from the balance of
spending. Normally, it is assumed that the two functions go together – ie that greater
reliance on own (local) resources implies greater control over both the volume of spending
and the allocation of spending across services. With inter-tier transfers, there are greater
possibilities for the centre to influence the local through both the level of funding and the
type of grant.
However, other systems combine set levels of funding from the upper tier of government
(often Federal) with policy freedom at the lower tier level, in terms of the object of funding,
the form of service delivery or the ability to add to upper tier funding with local tax
resources. For example, in Germany, social housing is funded through subsidies from federal
and state governments (Kleinman 1996). But the states can determine the type of subsidy
and the balance of spending between tenures; moreover the municipalities can add their
32
own subsidies. This example would seem to support the 2001 local government White
Paper argument about focusing the debate on the balance of control rather than the
balance of funding. However, as the German example shows, context matters. That is, in
considering the effect of different funding systems, one needs also to take into account
institutional factors – the powers, rights and duties of different tiers of government,
political traditions and differences in political culture. So, for example, Federal systems, in
which there are clear limitations on the power of the centre and constitutionally protected
rights and responsibilities of sub-national authorities, provide a very different context to
the UK, with its unitary state, parliamentary sovereignty and constitutionally and fiscally
weak sub-national governments.
In the Nordic countries, the ‘free commune’ experiments have given greater autonomy to
some local authorities, as part of a programme of administrative modernisation
(Baldersheim and Stahlberg, 1994; Albaek, 1995):
‘By instituting mechanisms for removing regulatory obstacles to local adaptation and to
some extent transferring competences to local level, the emphasis is put on fostering
capacity for self-regulation in local government.’ (Baldersheim and Stahlberg, 1994,
p. 205).
These authors note that the experiment has been a catalyst of change, and moreover ‘ the
increase of local autonomy brings with it increasing variations between communes’
(ibid. p. 209).
• In principle, balance of funding and balance of control can be separated. In other countries
centralised funding can be combined with relative autonomy at sub-national level.
• But context is important (see also section 2.8 below): elsewhere local and regional
governments have greater freedom, autonomy, legitimacy and public interest. Hence, it is not
just a question of taxation powers and the grant system. In the UK, local leadership and local/
regional sources of independent political and economic power are weak. This may change in
the future but it will be a slow process.
2.5 Fiscal equalisation and territorial equity

KEY QUESTIONS:
• What is the relationship between fiscal equalisation and local democracy/accountability?
• Are there useful lessons from looking at comparative evidence?
For a long period in the UK, territorial equity was understood in terms solely of the balance
between local authorities and the central government. But devolution to Wales and to
Scotland, the creation of the Greater London Authority (GLA) and the possibility of
regional government in the English regions (Department of Transport, Local Government
and the Regions, 2002) has also raised these issues at a meso-level: that of regions or even
‘nations’ within a possibly federal system. Famously and controversially, the level of per
capita spending on devolved services is higher in Scotland, Wales and Northern Ireland
33
than it is in England (Heald, 2001). The ‘Barnett formula’, implemented from 1981-82
maintained the existing differential between Scotland, Wales and Northern Ireland on the
one hand, and England on the other. But by prescribing uniform percentage increases in
expenditure to the four nations each year, the Barnett formula set in motion a system which
would over time, reduce the differentials – particularly if total expenditure were to rise
relatively rapidly.
With higher levels of expenditure supported by taxpayers across the United Kingdom, but
with greater freedom to determine service levels and policy1, not surprisingly, policy
differences have emerged. As Heald (2001, p. 20) puts it: ‘Under the devolved system,
policy divergence seems much more likely, as the factors which generated alignment are
now much weaker.’ So for example, differences have emerged between Scotland and
England in terms of student finance and the financing of long-term care for the elderly. In
both cases, more generous arrangements are in place north of the border.
But in the longer term, devolved control over spending and taxation will lead to one of the
following: differences in spending and in service standards across the sub-national units; or
different levels of taxation (if the sub-national units have taxation powers); or a system of
inter-regional transfers. If regional devolution is to have any real political meaning, there
has to be some element of regional taxation powers:
‘If regional governments are intended to be able to determine the level of public
spending in their areas, rather than simply to determine the allocation of a budget
fixed by central government, they would need to have some source of tax revenues
under their own control. Regional taxes would promote both independence and
accountability in regional government’s spending decisions.’ (Blow et al, 1996).
However, it is unclear whether taxation or some form of precept within local government
tax bills would best serve the case for greater accountability and transparency and hence
stimulate interest in regional politics. Moreover, explicit transfers to sustain current
spending differences will be more difficult politically with ‘contributing’ regions than the
current, largely invisible system of cross-subsidy. So far, ‘the effects of divergence…have
been remarkably benign’ (Adams and Robinson, 2002). But it would be naïve to assume
this will continue to be the case, particularly in a context where devolution of various kinds
continues, and where, moreover, there will be a growing debate about federalism and fiscal
transfers within the EU as well as within the UK.
The UK has always had a stronger commitment to fiscal equalisation and to territorial
equity than in many other countries.
‘The philosophy that the allocation of public expenditure should be determined on the
basis of need and that only central government is in a position to be able to secure the
equitable distribution of public resources on the basis of need, still exerts a powerful
hold on politicians of both left and right, and also upon the civil service and in
particular the Treasury.’(Bogdanor, 1999).
The 2001 local government White Paper re-iterates the principle of fiscal equalisation,
while making it clear that the Standard Spending Assessment (SSA) is not, and is not
intended to be, a measure of spending ‘need’.
1 That is, with a shift in the balance of control, while maintaining the balance of funding.
34
Local areas differ in both their fiscal capacities and in their spending needs. These
differences can be mitigated through the use of central government grants that explicitly
aim at fiscal equalisation between local areas. Bramley (2002) notes that the purposes of
grants from the centre to local authorities include:
• Trying to achieve ‘horizontal equity’ so that given types of taxpayer face similar local
taxes for similar services in different localities;
• Trying to achieve ‘categorical equity’ by encouraging different localities to provide

similar standards of service in key areas like education;
• Trying to correct the vertical distribution of income, particularly where local

authorities are involved in redistributive services.
What is the purpose of fiscal equalisation? One expert argues that the purpose is to:
‘make it possible for sub-national governments…to provide comparable services to

their citizens if they also impose comparable levels of taxes and charges; without,
however, imposing upon them any obligation to adopt uniform policies with respect to
the level or pattern of taxing and spending. Fiscal equalization is thus an essential
requirement if equality in the capacity of sub-national governments to provide services
is to be reconciled with diversity in service provisions and the responsiveness of the
governments to the preferences and needs of their citizens.’ (Matthews,1991, p. 145
emphasis added)
However, fiscal equalisation also has its drawbacks. Even in equity terms, ‘the corrective
grant is a blunt instrument for the purposes of income redistribution’ (Oakland, 1994, p. 8).
That is, if the object is to reduce inter-personal inequalities in income distribution, the
more efficient policy is to affect these directly (for example through personal income tax)
rather than through area-based grants. More generally, and as in many other instances of
fiscal and economic policies, there will be trade-offs between efficiency and equity
objectives. Total elimination of fiscal disparities implies both the nationalisation (that is
complete equalisation) of natural-resource wealth, and an egalitarian approach to the
distribution of public services (Oakland, 1994). For Oakland (and many others), the first is
impossible to achieve, while the second is at the very least contentious.
Nevertheless, in the UK, fiscal equalisation has played a major role throughout the post-
war period with ‘significant enhancements in 1974 and further reforms in 1980 and 1990’
(Bramley, 2002, p. 50). Does the principle of fiscal equalisation conflict fundamentally with
the kind of consumer-driven efficient outcomes implied by the Tiebout hypothesis? Bramley
(2002) considers this question and concludes that:
‘Tiebout is arguing for different service standards at different tax rates in different
localities, and for not suppressing the ‘price signals’ of differences in tax rates between
localities…One can argue for a model which contains elements of Tiebout choice with
elements of ‘creating a level playing field’ for choice and avoiding arbitrary and
counter-productive fiscal incentives to migrate which have no ‘real’ underlying
economic rationale. However, at the end of the day there are some trade-offs to be
made between equity and efficiency, and also a third goal which one might term ‘the
maintenance of communities’ (Bramley, 2002, p. 50).
35
In international comparisons, Britain generally appears to have a more developed and

extensive fiscal equalisation system:
‘the level of equalisation sought through the revenue support grant mechanism in
England is more complete than in any other developed country. In the view of a
number of commentators we have talked to, it is already considered to be at optimal
level.’ (PricewaterhouseCoopers, n.d.)
‘Britain has developed equalisation to a higher degree than other countries, (a) by
having more elaborate needs formulae paying more attention to socio-economic
factors, and (b) by more fully equalising taxable resources…International comparisons
reveal some differences of emphasis, and of implicit underlying assumptions…The
British system tends to contain more socio-economic ‘need’ factors, suggesting that its
local government system is more engaged with redistribution than others. Yet some at
least of the other (northern) European countries have local governments every bit as
concerned with redistribution as Britain. Another feature of a number of the European
systems is the implicit assumption or acceptance that both (a) large central city
authorities and (b) small, remote rural/mountain/island areas both require enhanced
resources per capita…A third striking feature..[is].. the greater relative emphasis on
resource equalisation, vs. needs equalisation, in many European systems.’ (Bramley,
2002, p. 50)
In terms of specific countries, the PricewaterhouseCoopers study identifies Denmark,

Finland, Japan, Norway and Sweden as being ‘notable for their focus upon equalisation’.
From this and other studies we highlight elements of equalisation from six countries:
• Denmark: ‘strong emphasis placed upon the self-financing of local government,

particularly through the use of local taxes. There are relatively few vertical fiscal
imbalances compared with other countries included in this study. However, the tax
base of local governments varies greatly, as do their expenditure requirements.
Financial equalisation is therefore an important principle in the financing of local
government…Its task is to ensure that the same service level is achieved with a more
uniform tax rate despite variations in the level of revenue and in the demographic
profile of the local authority.’
• Finland: 50% of municipal revenue is considered to be ‘autonomous’ and may be spent

by municipal governments at their own discretion.
• Germany: ‘Revenue distribution in Germany is therefore a complex, formal system

based on allocating shares of the major taxes between the federal government, the
states and the municipalities and additional financial transfers to ensure resource and
needs equalisation…The objective of revenue redistribution in Germany is to ensure a
uniform standard of living across the federation.’ (PricewaterhouseCoopers n.d., pp. 44-
45). The system redistributes from the wealthier states to the poorer states and also
allows federal transfers to states with lower than average per capita revenues. However,
this also creates substantial disincentives in the form of secondary tax redistribution
(OECD, 2001). Individual states (both rich and poor) lose between 86% and 49% of
any additional tax revenues they generate. Hence there are ‘few incentives to create
conditions which attract companies and to support the development of taxable
activities’ (OECD, 2001, p. 63). As a result, the Federal Constitutional Court has
required a reform to the system of inter-governmental fiscal equalisation to make it
more incentive-compatible.
36
• Norway: ‘General or block grants are used to equalise tax revenues and spending
needs…There has been a movement in recent years towards the greater use of specific
grants…[there is] increasing use of hypothecated grants to address vertical imbalances
and to meet central government priorities.’ (PricewaterhouseCoopers n.d, p. 65).
• Switzerland: The system ‘is marked by strong territorial decentralization, both of

taxing powers and expenditure assignments, and by low equalizing incidence in general
combined with important redistribution in cases of high symbolic value. However, both
the internal demographic changes and the pattern of immigration in the last 50 years
bring into question the sustainability of the present arrangements. Therefore, federal
fiscal equalization is under review’ (Stauffer, 2001, p. 207). Immigration and other
recent factors have changed the balance of need across areas. The existing fiscal
equalisation system does not pick up enough of these socio-economic factors, and so
reforms are proposed. In Switzerland, the system does not try to ensure the ‘unity of
living conditions’ but rather to ‘provide not the same, but only a basic level of public
services…Behind the smoke and mirrors of elaborate schemes, the redistributive
incidence both at the individual and at the group level remains in general small.’
(Stauffer, 2001, p. 218).
• Australia: ‘since 1942, the Commonwealth government…collects income

taxes...notionally divides the revenue between own-purpose (Commonwealth) and
state reimbursement. The states and territories then compete (for recurrent outlays
only) for general revenue grants from the Commonwealth which bases its distribution
methods on the assessment of the Commonwealth Grants Commission’ (Fletcher,
1993, p. 58). ‘The Australian form of fiscal equalisation is considered to be more
complex and more formally institutionalised than fiscal equalisation in any other
Western federation’ (ibid. p. 67). There are large transfers of income between states
and the system enjoys widespread support at the national level (Petchey, 2001).
Moreover, Petchey (1995; 2001) argues that these equalization transfers in Australia
can be shown to enhance efficiency under certain conditions, ‘principally because of its
potential to lead to a more efficient distribution of mobile factors of production across
States’. (Petchey, 2001, p. 321).
Matthews (1991) reviews fiscal capacity equalisation in six countries (Australia, Canada,
US, Germany, UK and Japan) and concludes:
‘fiscal capacity equalization does have efficiency implications with respect to revenue
raising by governments and the cost of government services…these effects can usually
be avoided or minimized in a properly designed equalization system and that, in any
case, they are overshadowed by the advantages of equality and freedom of choice
which can both be achieved under fiscal capacity equalization, but which have to be
traded off against each other under alternative forms of constitutional and fiscal
arrangements.’(p. 159).
• Fiscal equalisation can be separated from uniformity. That is, one can in principle imagine
systems that combine a high degree of equalisation with diversity in terms of the content of
spending. In the UK at present, the system seeks to deliver both equalisation and uniformity of
service provision.
37
• Fiscal equalisation exists in many countries, but it is particularly developed and extensive in
the UK. In most places there are concerns about the efficiency consequences of equalisation
and the equity/efficiency trade-off. But there is also some evidence that equalisation may not
harm efficiency. There is scope here for further research on the operation, advantages and
difficulties of equalisation systems elsewhere.
2.6 Hypothecated funding

KEY QUESTION:
• What implications does greater or lesser hypothecation have for local democracy?
There was relatively little empirical evidence on the specific question asked in the research
brief, viz. the impact on decision-making. However, some of the theoretical literature was
relevant here. There are many studies of the so-called ‘flypaper effect’ – that is, ‘money
sticks where it hits’. In theory, a non-matching unconditional grant from federal (or
national) level should produce exactly the same effect as an increase in private income of
the residents there. That is, part will go to extra local spending, and part will increase
residents’ incomes through lower taxes. But in practice, there is a much larger boost to local
expenditure – US evidence suggests around 40-50% (Oates, 1994). This alarms those who
worry about fiscal discipline and seems to confirm some of the predictions of public choice
models about bureaucrats’ and politicians’ desires to maximise their own budgets in
particular and increase the role of government generally.
Oulasvirta (1997) looks at the effect of the 1993 Finnish grant reform in which a system
with earmarked matching grants was changed to a system with general, non-matching
grants. This confirmed the ‘fly-paper’ effect, and that matching grants stimulate local
expenditure more than non-matching grants. But there were also effects on the distribution
of power inside local government. The change
‘might mean more power to the central management in the local government and a
diminished power for sector officers and groups dependent on the sector services.
Perceptions of principal actors in the local government budget process were that the
reform changed the distribution of power, in some municipalities to the disadvantage of
locally small weak groups that could benefit under the old system of earmarked
matching grants.’ (Oulasvirta, 1997, p. 397).
Bezdek and Jones (1988) look at the efficiency with which US Federal categorical
(conditional) grants achieve desired service-level objectives. They find that a conditional
matching grant that is closed-ended at a sufficiently low level of expenditure becomes, in
effect, an unconditional, general-purpose grant:
‘This means that conditional grant funds received by the grantee governments are
viewed as fungible unconditional aid, most of which can be allocated either to other
social programs or to tax reduction, instead of being spent only on the aided services
targeted by the Federal government.’ (Bezdek and Jones 1988, p. 39).
Wilkinson (1994) considers the role of tax earmarking (hypothecation). Earmarking is

sometimes advocated as being a more politically acceptable way of increasing taxation to
pay for better or more public services. By using hypothecated taxes, it can be argued that
governments are responding more closely to voters’ wishes. The stronger the earmarking,
38
the closer the tax is to a user charge. Hence, hypothecation can be advocated on the
grounds that it strengthens democracy by promoting voter choice. However, this latter
argument suffers from the usual objections to the ‘tyranny of the majority’ – how will
minority, or less popular services be paid for if voter-sanctioned hypothecation becomes the
norm. The question of which services voters of different types are more likely to pay for is
examined further in Section 3.2 below.
Moreover, the traditional public finance view is hostile to hypothecation. It reduces

flexibility; and in the case of national insurance contributions in Britain (the principal
earmarked tax) it deceives the voter (because the payments do not in fact determine
spending) (Dilnot, 1993 quoted in Wilkinson, 1994). More generally, there is the effect of
the economic cycle. If services are paid for out of earmarked taxes
‘revenues would rise and fall, and strict adherence to earmarking would require
procyclical spending or tax changes; for example, recession would require spending cuts
or tax rate increases. Alternatively, contributions to, or subsidies from, general
revenues would be required which would weaken the earmarking principle.’
(Wilkinson, 1994, p 133).
• There is relatively little evidence on the effects of simplified or un-hypothecated funding,

although there is some suggestion that the targets of hypothecation are sometimes missed or
ignored.
• The form of grant may affect not only the level of spending locally, but also possibly the
internal organisation and balance of power within the authority.
• Hypothecation is arguably more democratic (can reflect voter choices) – but the problem of
‘tyranny of the majority’ arises, also the difficulty of funding minority or less popular services.
• Traditionally, public finance is hostile to hypothecation on practical and efficiency grounds.
2.7 Electoral cycle effects

KEY QUESTION:
• How important are electoral cycle effects? In other words, do politicians deliberately
manipulate government policies, especially public expenditure, to enhance their re-election
prospects (Nelson, 2000)
Once again, there was limited evidence. A German study found that total expenditures,
and expenditures on particular services in eleven (West) German Lander (provinces), over
the period 1974-1994 were driven more by the ‘opportunistic cycle’ than by party variables
– the key factor was the effect of upcoming elections on government spending (Galli and
Rossi, 2002). A study of three Italian regions shows that in the pre-election period,
national representatives try to gain grants for spending in local districts to influence voting.
This is done in collaboration with ‘friendly’ local authorities. This is effective because it is
geographically concentrated on large number of voters, rather than spending at national
level which affects spatially segregated groups (Limosani and Navarra, 2001).
39
Alessina et al. (1997) look at the relationship between national electoral cycles and
macroeconomic variables such as growth and inflation across OECD countries. They find
‘virtually no evidence of systematic electoral cycles in which growth surges and unemployment
falls in the year or two before elections.’ (p. 254). This is because first, policy-makers are unable
to control the cycle that well; and secondly, because too obvious a manipulation of the
economy may be counter-productive. However, ‘monetary and fiscal policies tend to be
relatively loose in election years. Although these effects are not large and systematic,
restrictive monetary policies and budget tightening are rare in election years.’ (p.255)
Nelson’s review (2000) found little evidence of state tax cuts following an electoral cycle,
but a clear link with tax increases in the early years of newly elected administrations. There
is also some evidence of greater sensitivity to cycles in areas of coalition government rather
than single party control.
A study by John and Ward (2001) based on pooled cross sectional data on the central finance
of English local government between 1981/2 and 1995/6 found evidence of central funding
being targeted on marginal Parliamentary constituencies alongside a more ‘scattergun
approach’. They claim these results are novel in that ‘they show central grants to local
authorities are affected by both a national election cycle and by a local election cycle’ (p.331).
• There is some evidence of electoral cycle effects on spending levels.
2.8 Policy learning: the UK in comparative context

KEY QUESTION:
• What further lessons might be learned from looking at the UK system of local government
finance, democracy and participation in a comparative context?
Even with devolution since 1997, the UK remains a unitary state. Local (and regional)
government powers derive ultimately from Parliament. This makes the UK different from the
majority of European countries, and limits the transferability of practice elsewhere. However,
the UK is not the only country with a relatively centralised funding system for local
government. Belgium, Italy and the Netherlands also have highly centralised funding systems
(see Table 5). Nevertheless, there are key differences in local governance systems between the
UK and most other European countries, some of which are summarised in Kleinman (2002).
First, economic, political and cultural power in the UK is very centralised in London. For
example, there are few true local growth coalitions along U.S. lines in which public and
private sector interests group together and succeed in ‘boosting’ the local economy through
local tax breaks and then capture enhanced land and property prices (Logan and Molotch,
1987). In other European countries, power is generally more dispersed but there are
similarities with France/Paris.
Secondly, Britain is a unitary state with an unwritten constitution, and common law
traditions. Local governments do not have independent constitutional authority – they are
fundamentally creatures of Parliament. Again, this is very different in most other European
countries.
40
Thirdly, the high degree of fiscal equalisation and the nationalised business rate means that
there are few financial incentives to attract or retain development. Local government is
weak in comparative terms, particularly with regard to independent tax-raising powers.
Fourthly, Britain’s ‘first past the post’ electoral system, the relative weakness of intermediate
tiers and the party system at Westminster make for a different style of national politics to
that obtaining in many European countries.
Fifthly, Britain’s ‘quasi-European’ welfare state makes it very different from the US; but its
‘Anglo-Saxon’ form of welfare, and lower spending levels make it different from European
welfare states.
Table 5 Central, state and local revenue and expenditure as a percentage of total
expenditure and revenue, 13 OECD countries, 1997
Revenue Expenditure
Central State Local Central State Local
Govnt. Govnt. Govnt. Govnt. Govnt. Govnt.
Australia 58.61 36.09 5.30 60.33 34.30 5.37
(68.52) (26.29) (5.19)
Austria 67.16 16.88 15.96 69.39 15.43 15.18
(76.02) (9.35) (14.63)
Belgium 88.14 11.86 89.15 10.85
(93.96) — (6.04) —
Canada 38.20 44.45 17.35 41.89 42.40 15.70
(45.25) (43.58) (11.18)
France 81.00 19.00 82.54 17.46
(86.45) — (13.55) —
Germany 60.72 23.08 16.20 60.11 24.10 15.79
(67.07) (20.69) (12.24)
Italy 78.09 21.91 78.00 22.00
(90.92) — (9.08) —
Netherlands 75.20 24.80 78.29 21.71
(90.49) — (9.51) —
Spain 66.28 20.38 13.34 69.02 19.32 11.66
(83.18) (5.77) (11.04)
Sweden 65.60 34.40 65.63 34.37
(68.84) — (31.16) —
Switzerland 52.34 27.72 19.94 52.69 27.79 19.52
(56.79) (22.91) (20.30)
United Kingdom 77.06 22.94 78.09 21.91
(92.31) — (7.69) —
United States 50.00 24.48 21.51 52.16 26.09 21.75
(58.39) (25.93) (15.68)
Notes: Numbers in parentheses are the shares of revenue excluding grants and thus excluding double counting.
Expenditure figures are without considering lending and repayment. A dash (—) means that no data are available.
Source: Feld and Kirchgassner (2001)
41
More generally, there are issues to consider when advocating policy transfer – that is, the
importation of policy innovation from experience in other countries. As Rose (2001) points
out, there are two extremes. At one pole, there are policy transfer advocates who ‘act as if
programmes were completely fungible: what works in one country is expected to work
everywhere’. At the other pole, are those who emphasise the historical and contextual
factors to such an extent that ‘nothing that works in one country is likely to be effective in
another context’. In drawing appropriate lessons for policy transfer, the following aspects
need to be considered:
• Adequacy of search: have a wide range of possible options been examined, or is policy
transfer proposed on the basis of a very limited number of (in some cases just one)
examples?
• Sufficient information: is enough known about the policy, its implementation and its
evaluation in its home country?
• Symbolism and ideology: In some cases, policy transfer is advocated on ideological

grounds, or because the policy shift is felt to convey a symbolic message: ‘Vague policy
labels, such as magnet schools, offer a malleable idea that can be fitted to a variety of
purposes, and may communicate powerful symbolism as well.’ (Mossberger and
Wolman, 2001, p. 7).
• Adequate institutions: Institutions which provide an important component of policy

delivery and success in the exporting country may be absent or very different in the
importing country – examples in Britain include the Child Support Agency (Dolowitz
and Marsh, 2000).
• Relevant goals: Are the policy goals the same in the exporting and importing countries?
• Context: most difficult, and perhaps most important of all. How different is the general
social, economic and political context? This category includes: institutions and
constitutions (eg the differences between federal and unitary states), organisations and
organisational gaps and wider societal and cultural variables.
• Several other countries have highly centralised funding of local government.
• But the UK stands out, not because of the proportion of centralised funding per se, but rather
the combination of centralised funding, unitary state, parliamentary sovereignty and the lack
of independent constitutional basis for powers at sub-national level.
• Local government in the UK is different from most other places in Europe, and so too is the
relationship between finance and other aspects of local government.
• Policy learning can take place based on comparative evidence. But care must be taken to allow
for differences in institutions and differences in constitutional and contextual factors.
• There is scope here for a targeted piece of research here looking at the inter-relationships
between funding, powers, constitutional position and measures of democratic activity in a
limited range of countries (mainly European).
42
CHAPTER 3
3.1 Does more money mean more outputs and

better outcomes?
KEY QUESTIONS:
• What is the relationship between inputs and outputs/outcomes and is there any evidence that
additional funding improves performance and leads to better outputs and outcomes?
• What is the relationship between need, performance and cost?
The questions raised in this part of the research proposal are extremely broad. There is a
vast amount of research carried out on measuring and evaluating inputs, outputs and
outcomes in the public sector; on performance measures and on measures of need; on the
appropriate way to measure costs, performance, productivity and outputs; and on many
other related issues. In many cases, research focuses on particular public services, such as
health and education. In other cases, it may look at the performance of particular
institutions.
It would clearly be beyond the scope of this study to try to review comprehensively all this
literature. The systematic review using key search terms for this question generated over
7,000 separate publications on just one database (see Appendix). This number was reduced
to more manageable proportions by limiting the search terms and expanding from the
bibliographies. This generated a useable sample. However, it has to be said that this
technique did not in practice produce a particularly rich set of research findings relevant to
the specific over-arching questions that were asked. In part, this was due to the
methodology employed (driven by the need to reduce the very large sample of initial
findings); in part, it was due to the very broad nature of the questions asked; but in part
also, it is due to the inherent difficulties in trying to generalise across such an extensive
literature.
Nevertheless, it is possible to draw on this material, as well as earlier work in which one of
the present authors was involved, in order to shed some light on current debates of
relevance.
In this section of the report, we look first at some of the more general studies of inputs,
outputs, need, performance and costs, but also consider some relevant findings from studies
of productivity and efficiency in education provision, where there is an extensive literature.
Government policy over the last 20 years or so has shifted from the control of inputs
(mainly revenue and capital expenditure) to the control of – or at least the monitoring and
evaluation of – outputs and outcomes. Outputs and outcomes can be distinguished. In
43
general terms, outputs are taken to be more directly the result from the application of
combination of inputs, while outcomes refers to a more broad category of phenomena,
where the line of causality from posited inputs is more complex, and where other factors
show a greater influence. This terminology and distinction is widespread. Hence, in a
discussion of public sector reform in New Zealand:
‘Outputs refer to goods and services delivered, whereas outcomes are impacts on the
community that provide the rationale for government action. To illustrate the
distinction, a reduction in the incidence of a disease is an outcome (and something
which cannot be bought directly), whereas a surgical intervention, an inoculation
program, or a health education campaign are all services (outputs) which could be
acquired from either public or private sector providers.’ (Scott et al., 1997, p. 363).
Similarly, in a study of secondary schools in rural Bangladesh:
‘In estimating efficiency, the World Bank uses two terms quite distinctly. They are
‘output’ and ‘outcome’. The term ‘output’ is utilized to mean indicators such as
graduates (ie completers), measures of skill (eg test-scores on cognitive skills). The
term ‘outcome’ is referred to performance of students and through the student the
school represented by him/her in the world of work. The outcome is concretely
reflected in the earnings of the graduate.’ (Alam, 1992)
As the quote from Alam shows, once we bring together inputs and outputs, we arrive at
terms such as efficiency and productivity. As we saw in Section 2.1 above, technical
efficiency is about maximising outputs per a given level of inputs; or alternatively, reducing
inputs while maintaining quantity and quality of outputs. Hence, it is closely related to the
notion of productivity, which can be defined as the ratio of output to input. As Massy
(1996) notes, ‘This definition works well with a single output and a single input…To
extend the productivity definition to allow for multiple inputs and outputs, we note that
inputs incur costs and outputs produce benefits.’ (p. 50). Massy goes on to argue that in
higher education – the focus of his enquiry – ‘inputs and outputs are usually qualitative and
multidimensional rather than reducible to countable measures such as tons or units. The
inputs and outputs of higher education are also less tangible than those of the standard firm,
making them much more difficult to define and measure’. Such considerations can clearly
be applied across the public sector.
If inputs and outputs/outcomes are costed, then by comparing them we are deriving a
measure of cost-effectiveness. In theory, this not only allows us to evaluate the relationship
between inputs and outputs, but also to compare alternatives. That is, could more outputs
be ‘bought’ by deploying inputs in a different way – across programmes, across institutions,
across individual projects? This moves us along from technical efficiency to something
closer to allocative efficiency.
There are number of ways in which cost-effectiveness is defined and evaluated across
government programmes. Cost-effectiveness is one of a range of techniques of economic
evaluation to assess the net benefits of allocating resources to particular activities. The
techniques may be applied to evaluate either the cost effectiveness of allocating resources
to a specific programme, to elements within the programme or to particular institutions
(local authorities, schools, hospitals etc.). In their study of specialist schools, West, Noden,
Kleinman and Whitehead (2000) identify a number of different ways in which inputs and
outputs can be related in evaluation studies. They argue that these form a hierarchy of
broader evaluative techniques:
44
Level 1
The first stage involves the identification of inputs and outputs – where no values are
attached – in relation to clearly specified objectives.
Level 2
Performance indicators are used to assess options by comparing actual outputs with pre-
specified measures of success and to compare the results across initiatives or institutions.
They provide an agreed measure of success but take no account of the costs involved.
Level 3
The crudest form of cost analysis takes account only of the total cost and may be defined in
terms of cost reduction or as a cash limit. No account is taken of the nature of the product
obtained.
Level 4
A more directed approach would attempt to define cost-effectiveness for a given output – or
a costed performance indicator. The objective is then to minimise the cost of a specified
programme or measure of success, to reduce its costs by a given percentage per annum or
alternatively to increase the number or quality of the outputs for the same resource cost.
Level 5
The next level of the hierarchy is the overall public sector cost-effectiveness, which takes
account not only of the direct scheme costs, but of the total net public expenditure costs
involved in meeting a need as effectively as possible, wherever these public expenditure
costs may fall. So taking schools as an example, consider an expensive but effective
programme for reducing unauthorised absences. If measured according to level 1 or level 3,
this is likely to score badly. But it will perform much better under this measure when the
reduction in costs elsewhere (petty crime, vandalism, involvement of police and other
agencies etc.) are included in the calculation. The same situation may well apply in relation
to effective pre-school educational provision as the long-term follow up of programmes such
as Head Start in the US suggest. This measure could be derived in relation to outputs only
(Level 5a) or outputs and outcomes together (Level 5b).
Level 6
The next level measures the overall resource cost per unit where the unit includes both
direct outputs (Level 6a) and ideally wider outcomes (Level 6b). Costs here are measured in
terms of the opportunity costs – that is, of the value of the resources at their best alternative
use. Ideally, it should be possible to measure both the overall cost-effectiveness and the
effectiveness of additional resources.
Level 7
Finally, it can be argued that government should be trying to measure the overall social
cost/benefit of programmes and projects. That is, it should attempt to take account of all
the costs and benefits of a given decision not just those that fall on the public purse. This
would require an evaluation of all indirect and externality effects and also an evaluation of
the relative value of the different timing of benefits and costs. Such assessments are usually
undertaken (if at all) only in relation to major infrastructure projects. However, in principle
at least, value for money means using scarce resources to provide the highest net benefit to
society.
The hierarchy can be summarised as shown in Table 6.
45
Table 6 Cost-effectiveness and cost-benefit framework
Level Description
1 Identification of inputs and outputs in relation to clearly specified objectives
2 Performance indicators where cost is taken as given
3 Total scheme cost where output is taken as given
4 Public sector costed performance indicators
5 Public sector cost effectiveness: outputs only (5a); outputs and outcomes (5b)
6 Overall cost effectiveness per unit: outputs only (6a); outputs and outcomes (6b)
7 Full social cost/benefit analysis – which takes account of all costs and benefits in
society as a whole
In practice, what is most appropriate depends on the context, the availability of data, and
the stage at which it was decided to undertake the assessment and many other factors.
Of course, the level of outputs/outcomes will depend not only on the quantity and quality
of inputs, and the efficiency with which they are translated into outputs/outcomes, but also
on contextual factors. As set out in Section 2.1 above, these contextual factors will include
both factors beyond the control of the local authority, and those most directly within its
control – ie local political decisions. Moreover, it is one of the aims of the Government, as
set out in the 2001 local government White Paper, to enhance local political decision-
making (with scope for altering the balance of control) while necessarily changing the
current finance, grant and equalisation systems (balance of funding). In Hansen and
Gerhardsen’s (1981) model of the relationship between real needs and expenditure,
expenditure needs differ from ‘real needs’ for services because of the influence of contextual
factors, local prices and wages and economies or dis-economies of scale. Actual expenditure
differs from expenditure needs because of the influence of local priorities, local standards
and administrative efficiency (Hansen and Gerhardsen, 1981; Jackson and Kleinman, 1992).
One method that can be used to determine the ‘need’ for expenditure of different local
government units is regression analysis. However, there has been a long debate over the use
of regression analysis for this purpose, and it has been criticised in numerous ways. More
than twenty years ago Jackman (1981) argued that:
• True models of local authority expenditure are likely to incorporate more variables
than there are local authorities. Because of collinearity of the true needs factors, the
choice of ‘umbrella’ factors to represent groups of ‘true need’ factors becomes somewhat
arbitrary.
• If discretionary factors are included, regression analysis is bound to produce estimates of

spending needs systematically biased in favour of authorities with a preference for a
higher standard of service. Positive feedback will result in a tendency for subsequent
reviews of expenditure needs to uncover extra needs leading to the demand for extra
grant.
• One solution is to dis-aggregate to service and sub-service levels. This is both more
costly in terms of the detail of the information which needs to be gathered, and can
threaten local autonomy.
46
Similarly, Moore and Rhodes (1981) referred to the fact that regression analysis is both
heavily biased by past expenditure decisions, and does not cope with the exceptional
instance.
Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) are the two
potential approaches to Frontier Analysis2, a form of data analysis which only recently has
come to the fore as a tool for evaluating efficiency in public service delivery (Bates, 1997;
Grosskopf et al., 1997; Robst, 1999; Johnes, 1999). Webster et al. (2000) use both DEA and
SFA to analyse data on private hospitals in Australia and find that results are very sensitive
to relatively small changes in the choice of inputs and outputs. A recent feasibility study by
the National Institute for Economic and Social Research (O’Mahony et al, 2002) on
measuring the cost-effectiveness of local authorities concluded that, ‘the methods of frontier
analysis applied correctly are potentially very useful as a tool for comparing the performance
of local authorities, in particular where there is more than one output or outcome in
providing the service.’ (2002:ii-iii). The NIESR study found that such methods were
preferable to the use of simple indices such as amount of service provided per pound (£)
spent. The study also demonstrated the crucial importance of background variables in
significantly altering the relative position of individual authorities. At a technical level, the
study team recommended the use of Stochastic Frontier Analysis together with regression
analysis to adjust for background variables (O’Mahony et al, 2002).
Can performance be improved through institutional reform – that is, are there factors other
than increased inputs (more money) that have demonstrable effects on outputs or
outcomes? In recent years, New Zealand has undergone major reforms to its public sector.
The Labour government elected in 1984 set about
‘comprehensive reform of the roles and functions of government…Institutional

structures and systems were reformed in order to clarify objectives and strengthen
incentives for efficiency and effectiveness by giving extensive freedom to managers
while imposing tight accountabilities and clearer performance information.’ (Scott et
al., 1997, p. 359).
Moreover, the government reforms in New Zealand were not haphazard or pragmatic, but
rather followed a clear theoretical logic in which principles were applied across
government. These principles included: separation of funding, purchasing and provision of
public services; clear specification of the performance objectives of government
organisations; a distinction between outputs and outcomes; and the introduction of
competition between service providers. (Scott et al., 1997, p. 360).
What impacts did these reforms have? According to Brumby et al. (1996), the unit cost
evidence can reasonably be interpreted as providing a measure of support for the
proposition of improved productivity performance in departments. Discussing results from
Brumby et al., Scott et al. comment:
‘The unit cost measures were subject to sample bias in drawing any inferences for net
cost over the government as a whole, but were dramatic insofar as the sample itself is
concerned. For example, the fall in average unit costs for certain functions in Valuation
New Zealand [a government department that provides real estate market valuations]
2 Frontier Analysis examines the effectiveness with which a set of inputs are converted into a set of
outputs. For a given input/output dataset, a line can be ‘plotted’ along a frontier of best performance.
47
was between 10 percent and 20 percent in nominal terms over five years for a range of
estimates. The Immigration Service accommodated a 25+ percent output increase over
three years within a 2 percent increase in nominal expenditure. The Income Support
Service increased the volume of applications it processed by 60 percent over two years
with little increase in operating expenses.’ (Scott et al., 1997, p. 371).
This evidence suggests that institutional and organisational reform can have measurable
effects on outputs. Moreover, Scott et al. conclude that the differences in performance
management objectives between the public and private sectors ‘are fewer than has been
traditionally thought’. (ibid. p. 378).
De Borger and Kerstens (2000) use a variety of statistical techniques to investigate the
efficiency of municipal government in Belgium. They find that the following factors are
important in explaining inefficiencies: the level of tax that can be raised locally; the
financing mechanisms of local government; and the political characteristics of local
governments. First, higher per capita incomes and wealth of citizens decreased local
government efficiency – possibly because high incomes reduce the incentives of both
politicians and taxpayers to monitor expenditures. Secondly, they find that the way local
public services are financed is important to performance:
‘In particular, local tax rates and the size of intergovernmental grants seem to matter a
great deal…we consistently find that the local income tax contributes positively to
efficiency. The size of the per capita block grant yields a negative impact on
performance. This is not surprising in the Belgian institutional environment. Quite a
lot of these funds take the form of unconditional block grants, and there exists very
little ex-post control on actual spending.’ (De Borger and Kerstens, 2000, pp. 312-313).
Thirdly, political variables are relevant in explaining efficiency. In the Belgian case, the
number of coalition partners had a negative effect on efficiency, while the presence of the
socialist party had a positive effect. Finally – and very interestingly for our study – there was
a positive association with democratic participation: ‘the political participation of citizens
themselves seems to enhance the performance of a municipality.’ (ibid. p. 313).
De Borger and Kerstens also review evidence from other countries. Athanassopoulos and
Triantis (1998) studied municipalities in Greece and found that a high share of fees and
charges in municipal income improves performance, while the share of grants does the
opposite. For US municipalities, Hayes et al (1998) find that inefficient behaviour is
associated with richer communities, lower educational levels, and a lack of competition for
residents among municipalities. However, an earlier study by Hoyt (1990) did not find a
significant relation between tax competition and efficiency.
De Borger and Kerstens conclude by suggesting three important avenues for future research:
greater use of panel data to track performance over time; developing a proper production
model for municipalities and other public sector organisations; and integrating performance
measurement into more general planning at local and regional level. They also refer to the
lack of readily available data, a point also taken up by Blank (2000):
‘It is clear that good data on service provision, resource usage, and the external environment
are crucial for a proper efficiency analysis. In general, there are huge voids in information
provision. Efficiency analysis may have a strong impulse on improving information services
and data availability. Unfortunately, the lack of good data may sometimes induce a
reluctance against performance analysis amongst service providers.’ (p. 363).
48
EVIDENCE FROM EDUCATION STUDIES
There is a large number of studies world-wide on the relationship between funding and/or
inputs on the one hand, and output measures of educational attainment on the other.
While these are focused on one particular service, there are also some more general
implications from this literature.
For example, in England, West et al. (2000) evaluated the Government’s Specialist Schools
Programme. They showed that the average annual improvement in the percentage of pupils
gaining five or more GCSEs at grades A* to C was 1.11 percentage points in specialist
schools compared with 0.75 percentage points in non-specialist schools. This is a difference
of 0.36 percentage points. Ceteris paribus, it is then possible to ascribe the difference to the
specialist school status, and with the incorporation of suitable cost data, to derive a cost-
effectiveness measure for increasing exam performance 3 through additional spending on the
specialist schools programme. This can then be compared with alternative uses for the
funding in terms of increased outputs/outcomes.
Currie (2001) reviews the evidence on Head Start and other similar pre-school and early
school enrichment programmes in the US. The review concludes that
‘these programs have significant short- and medium-term benefits, and that the effects
are often greater for more disadvantaged children. Some of the model programs have
produced exciting results in terms of improving educational attainment and earnings
and reducing welfare dependency and crime. The jury is still out on Head Start, but a
simple cost-benefit analysis suggests that Head Start would pay for itself in terms of
cost-savings to the government if it produced even a quarter of the long-term gains of
model programs.’ (ibid. pp. 213-214).
Currie makes an important distinction between one-off or small-scale programmes and

major national interventions:
‘As anyone who has eaten cafeteria food knows, a recipe that works well for a small
group may not translate well to a larger setting. There is a large gap between the model
programs for early childhood education and the large-scale publicly funded
interventions that are currently in place.’ (ibid. p. 220)
Once again, the quality of the research is variable – Currie considers the overall quality to
be ‘somewhat disappointing’ particularly in relation to longer-term outcomes. But the
better-specified studies do find larger and more significant effects of Head Start – that is,
they find that inputs are related to educational outputs. But ‘more studies of large-scale
public programs like Head Start need to be done, preferably with large sample sizes,
randomization, and a focus on long-term follow-up.’ (ibid. p. 235)
The relationship between need, performance and cost is captured well by Duncombe and
Yinger (2000):
‘One of the central ideas in the educational finance literature is that the cost of
providing education depends not only on the cost of inputs, such as teachers, but also
on the environment in which education must be provided…A harsher environment,
3 Of course there may be other policy goals in addition to improved exam performance.
49
characterized by high rates of poverty and single-parent families, for example, results in
a higher cost to obtain any given performance level. Just as the harsh weather
‘environment’ in upstate New York ensures that people who live there must pay more
during the winter time than do people in southern states to maintain their houses at a
comfortable temperature, the harsh educational ‘environment’ in some school districts,
particularly in big cities, ensures that those districts must pay more than other districts
to obtain the same educational performance from their students.’ (ibid. p. 365).
In practice, most financing systems aim to ensure minimum spending per pupil (input)
rather than minimum performance (output). Duncombe and Yinger argue that inadequate
school district performance can be brought up to a performance standard in one of three
ways – through improved efficiency, through increasing the property tax rate; or through
increases in state grants to the local level. This study is concerned with the specifics of
school performance and financing in New York state, but their conclusions – particularly
regarding trade-offs – may also be relevant to the U.K.:
‘Raising efficiency [in low-performing school districts] up to the current ‘best-practice’

level would not be sufficient to bring large city districts up to even minimal
performance standards…Any effort to achieve a minimum performance standard in all
districts therefore faces a trade-off between the equity gains and efficiency losses
associated with increased state financing. The burden of financing the state’s
educational system is distributed more equitably across school districts if the state, with
its broad tax bases, provides more of the revenue: however, an increase in state revenue
is likely to lower the efficiency with which educational performance is delivered. In
New York, the current state share is probably too low on fairness grounds, but any
increase in state funding should be accompanied by management assistance or
monitoring to minimize efficiency losses.’ (ibid. p. 385).
Using data on Scholastic Aptitude Test (SAT) scores for 34 states from 1987 to 1992,
Husted and Kenny (2000) examine the way in which state governments (upper tier) affect
the productivity of primary and secondary education in the USA. They find that the state’s
revenue share (what they describe as a measure of ‘state meddling in local decisions’) has a
negative impact on school efficiency. Moreover, state-induced spending equalization also
lowers average test scores but with only little, if any, effect on reducing inequalities in
student achievement. Once again, although the financial and institutional context is
different, there are policy-related conclusions that are relevant to current debates in
Britain:
‘we find that policies that equalize school spending within a state make schools less
efficient. That is, holding school and parental inputs constant, these policies cause test
scores to fall. The results are quite robust to how we measure spending equalization and
to modifications in the specification that attempt to mitigate problems due to
imperfections in the SAT data…These results bring into question policy efforts
designed to shift education responsibilities from local government to the state and
federal governments. There is strong evidence that these policies cause the school
system to be less efficient and little evidence that they make test scores more equal.
Any improvement in equality in student achievement appears to require a large drop in
average achievement.’ (Husted and Kenny, 2000, p. 306).
The report of the US Committee on Education Finance (Ladd and Hansen, 2000) looked
at the question of the relationship between inputs and outputs (student performance)
particularly in the context of educating concentrations of disadvantaged students. The
50
Committee found that ‘as yet we have only incomplete answers to the question of which
types of investments are likely to be the most productive and how to structure them to
make them effective.’ (ibid. p. 10). More inputs are clearly needed when needs are greater,
but it is difficult to quantify this.
The Committee concluded that, in its opinion ‘money can matter…the lessons from
research and practice make it increasingly possible to make informed school finance
choices’. (ibid. p. 267). But there was less agreement about particular strategies. In
particular, interventions that are productive in one context may be less so in another:
‘One of the greatest challenges is how best to induce a productive use of resources in
urban districts serving disproportionate numbers of disadvantaged students. The
productivity problems in these areas differ in some significant ways from those of
suburban areas, and there appear to be no easy or simple solutions.’ (ibid. p. 267).
For the UK, Burgess et al. (2001) discuss the vexed question of whether, and to what extent,
the level of school resources affects pupil attainment. A simple Ordinary Least Squared
estimation of the relationships between school outputs and inputs suggests that school
quality drives around 8%-12% of the variance in school achievement (Reynolds et al.,
1996). A comprehensive survey of the existing evidence on the link between resources and
pupil attainment by Vignoles et al. (2000) finds three major problems with most of the
current literature: a clear lack of any theoretical structure to guide estimation; limited data
availability and poor data quality leading to bias and errors; and a variety of endogeneity
problems (quoted in Burgess et al., 2001, p. 6). This latter point includes
‘any education funding formula that allocates money to schools on a systematic basis
that deviates from a simple per capita formula, selection of pupils into schools via
parental choice of location or allocation of resources to match student need within
schools. As an example of the problem, if a school with more special needs children
gets more money allocated to it, then extra resources will be negatively correlated with
attainment.’ (Burgess et al., 2001, pp. 6-7).
There are various ways of approaching the endogeneity problem: simultaneous estimation
of resource allocation and outcomes; the use of value-added models; and ‘most promising’,
the use of quasi-experimental approaches: instrumental variables, difference in difference
estimation or random assignment experiments. ‘These approaches have generally, but not
universally, found positive results: extra resource inputs raise attainment.’ (ibid. p. 7).
Evidence from developing countries is broadly in line with the evidence discussed above.
Alam (1992) finds that the performance of secondary schools in Bangladesh, as measured in
public examinations is positively related both to the existence of regular School
Management Committees and to the ‘timely availability of salary to the teachers’. In other
words, both management and finance are relevant. Jiminez and Paqueo (1996) look at the
relationship between the efficiency of primary schools in the Philippines and the balance of
local and central funding. They find that ‘schools which rely more heavily on local sources
are more efficient – ie have lower cost, holding constant for enrolment and quality’ (ibid. p.
384). ‘Local sources’ here refers to a range of contributions, from the local school board,
municipal government, parent-teacher associations (PTA) and other sources. Alam (1992)
also briefly reviews the literature on educational efficiency in developing countries and
finds that for many input variables ‘no clear empirical (statistically rigorous) evidence is
available. In many countries the evidence is mixed.’ (ibid. p. 71).
51
• Government activity, not just in the UK but worldwide, has shifted from the control of inputs
to the monitoring of outputs/outcomes.
• The relationship between needs, performance and costs is complex. Following a critique of
regression analysis, newer techniques have been developed and used, including data
envelopment analysis and stochastic frontier analysis.
• There are problems with the measurement of inputs and outputs. Efficiency and productivity
estimates may be highly sensitive to the choice and measurement of inputs and outputs.
• Generally, more funding can and does affect outputs and services. For example, school quality
drives 8%–12% of the variance in school achievement. But so do other things. Institutional
and organisational reform can generate efficiency gains, leading to improved outputs/outcomes
for the same level of funding.
• Financing mechanisms of local government and political variables have an affect on efficiency
levels. Raising spending from local taxes – and maybe from other local sources – rather than
from central grants appears to reduce inefficiencies.
• Raising performance is difficult. Institutional factors matter – successes in one place or

programme cannot necessarily be reproduced elsewhere; demonstration projects and small,
innovative schemes may succeed locally but can be difficult to translate into national programmes.
• Institutional factors and internal culture are very important. More generally, organisations
(schools, local authorities, etc.) differ in their internal structure, culture and organisation. So
the capacity of individual authorities to establish their own management and delivery structures
will vary.
• Finance/funding on the one hand and management/organisation on the other may not be fully
separable. Rather they will interact, creating positive synergies and/or negative externalities.
Hence, care is needed in drawing policy conclusions from research (especially regression-type
research) and generalising into national programmes or national funding mechanisms.
• There is considerable scope for further research on the inter-relationships (synergies) between
finance factors and organisational/institutional factors in determining outputs and outcomes.
This research should include case studies as well as quantitative analysis.
3.2 Taxpayers, choices and services

KEY QUESTIONS:
• For which services are citizens prepared, and for which are they not prepared, to commit
additional tax resources?
• Which factors determine how people balance their priorities on spending and taxation at local
levels?
• What affects the self-interest or public welfare attitudes of local taxpayers?
• What are the effects of limiting local taxation levels?
52
Brook et al (1996) draw on a module of questions concerning attitudes towards local

taxation and spending included in the 1996 British Social Attitudes (BSA) survey. They
found:
• there is little popular demand for reduced central control over local councils generally.
However, the public continues to believe that local councils, and not central
government, should have the final say over the setting of local tax rates;
• increases in local spending are far less popular than higher spending nationally, with a
majority of respondents content, as in earlier years, with the current levels of local
spending and taxation overall;
• a far greater degree of consonance between perceptions of self-interest and notions of

the general good in attitudes towards spending on services such as the police and street
cleaning, which benefit the area generally, than on services that are more targeted at
specific individuals, such as local schools;
• whilst the majority are content with existing levels of central control over local
authority discretion in the provision of services in general, most people would support
the removal of capping controls from local councils. There is no evidence to suggest
there would be substantial support for higher local spending if capping restrictions were
removed, as long as the burden of higher spending fell on local tax bills.
While the tax and spend questions in the BSA survey described above provide some
evidence of attitudes in Britain, what of the more theoretical and comparative literature on
taxation and spending at the local level? We looked initially at the so-called ‘tax-demand
discontinuity’, which refers to situations where citizens’ demands exceed their willingness
to pay for services through taxation. This discontinuity is held to be an important factor in
the growing sense of alienation between people and government. The growing complexity
of government (including the rise of systems of governance) makes it difficult to inform and
hence involve citizens effectively in government, while at the same time they are
increasingly looking to government at all levels for protection from uncertainty and for
enhancements to their quality of life.
Glaser & Bartley Hildreth (1996) explored this empirically with data about the willingness
of US citizens to pay for parks and recreation services. They found a complex picture with
variation in terms of people’s usage of services and willingness to pay higher taxes for more
and better services. Using a simple three-way classification of the population into
Traditionalists, Free-riders and Philanthropists, they found a relative absence of
discontinuity among the Traditionalists, who tended to be older, to live in larger
households and to be longer residents in their neighbourhoods. The Free-riders, who tended
to be younger households, showed a greater degree of discontinuity in their desire to
underpay for services, while the Philanthropists, again more typically older and living in
larger households, showed discontinuity but in their inclination to be prepared to overpay.
Of course, in the UK the connection perceived between local taxes and local services is
likely to be less strong, but this research does suggest that public service providers must
work especially hard to ensure the public know precisely what they are providing. Many
public services are delivered unobtrusively and citizens are not always aware that they are
consuming a service delivered by local government or paid for by local taxes.
53
Glaser & Bartley Hildreth also point to the need for more research on what drives self-
interest among the population and on what services different types of people actually
consume at a local level.
Brodsky and Thompson (1993) also address the issue of philanthropy. They develop the
‘ethos theory’ of Wilson and Banfield, which suggested that people sometimes act and vote
in unselfish or altruistic ways, rather than simply to maximise their own welfare. In other
words, some citizens have a private-regarding ethos and some a more public-regarding
ethos. There are particular difficulties in developing appropriate empirical tests of this
proposition, not least because voting against public expenditure proposals is usually held to
be a private regarding behaviour when clearly it need not be so. Similarly, much empirical
testing relies on measuring people’s stated preferences for hypothetical expenditures, rather
than using data from actual votes on actual tax propositions.
Nevertheless, Brodsky and Thompson surveyed a sample of registered voters in

Chattanooga around the time of a local tax proposal. They found no significant difference
between public- and private-regarding reasons for voting in the local ballot and that both
categories of people in the sample used the expected reasons to justify and explain their
actual vote. Their more interesting findings concern the correlates of ethos and socio-
demographic characteristics: only the influence of education was statistically significant,
while factors of income, occupation and ethnic origin were not as influential as had been
assumed.
There is also an extensive literature on tax and expenditure limitations (TELs) in the USA
and a survey of this by Mullins & Joyce (1996) found that formal ‘tax and expenditure
limitations’ imposed by state and local governments have begun to have a significant
impact on local government structures. These limitations on the ability of local
governments to raise revenue and determine expenditure are not always absolutely binding,
they usually represent a significant constraint and can also be held to reflect something of
the local ‘mood’ of the public on spending.
Mullins and Joyce found that in jurisdictions with TELs, there tended to be greater
centralisation of power at the state (rather than municipal) level; that local responsiveness
was lessened; that there was an increased use of local non-tax sources of revenue; and there
was less responsiveness to the needs of dependent populations. They also concluded that
economic or allocative efficiency was reduced as greater use was made of fees and charges.
Bailey et al. (1993) provide a thorough review of local government charges in British local
government and note that in the early 1990s, a substantial amount of local revenue was
raised through charges – approximately the same as raised through local domestic taxes.
Charges are used for many reasons, including ideological and historical as well as pragmatic,
but tend to attract opposition as well. Perhaps the most common objection is that they
represent a double payment – on top of the pooled charge of local taxation – although some
argue they pay insufficient attention to people’s ability to pay and are not always directly
related to usage.
Bailey et al. nevertheless point to a fallacy: that services must be free in order to be
equitable and in order to demonstrate their ‘publicness’, before advocating their own
‘customised value added’ approach to charging. In this, charges can be applied fairly to
services delivered above a minimum standard or even to some non-basic or non-essential
services delivered by public bodies.
54
Finally, the issue of local governments’ responsiveness to the needs of dependent

populations is explored in the work of Southwick (1997). He compared local governments
composed of members elected ‘at-large’ with those elected on a ‘ward’ basis, and tested their
relative power to achieve different levels of local expenditure. Ward member governments
were found to act according to ‘pork barrel’ theories and to press for and achieve higher
levels of expenditure and to be more inclined to run up debt in pursuit of their spending
plans.
Higher tiers of government were also more likely develop distributive programmes, partly
because of the greater pool of resources available to them and partly because they were
more likely to be ward member rather than at-large governments. It is interesting to
compare this with the UK where some higher tier (or at least larger constituency) bodies
are more likely to use an at-large system and where the development of more locally-based
structures (eg neighbourhood councils) are perhaps more likely to use some form of ‘ward’
or area-based representation. This in turn is likely (according to Southwick) to increase the
pressure to increase expenditure or, if budgets are strictly controlled, to intensify local
political debate over spending preferences and priorities.
• The public tends to believe that local councils should have the final say over the setting of local
taxes.
• Increasing local taxes is not a popular measure, but spending on more general rather than
more specific or targeted services (eg street cleaning rather than some social services) is the
least unpopular.
• Local public service providers need to work hard to increase public awareness of who is
responsible for providing those local services.
• There is some evidence of a correlation between the level of education and the degree of public-
or private-regarding behaviour by local taxpayers.
• Greater use of fees and charges can reduce the economic or allocative efficiency of local
governments.
• Ward member forms of government tend to lead to greater pressure for increased spending on
local services than ‘at-large’ forms of government.
55
CHAPTER 4
KEY QUESTION:
• To what extent does performance-related funding produce measurable improvements in

performance, and are any such improvements sustainable?
We found that there was relatively little direct evidence on the relationship of
performance-related funding at the organisational level (eg in relation to central-local
grants), but there was a very large literature on the impact of performance-related pay
(PRP) and incentives at the individual level. While most of this material focuses on the
private sector, there is a growing literature on incentives and PRP in the public sector, as
well as some studies, both theoretical and applied, which seek to compare experience across
the sectors.
We therefore looked at a range of literature on incentives and performance, including

literature reviews and meta-studies. Our aim was to try to draw relevant inferences for the
current study from this very broad range of material. In particular, we drew extensively on
the research programme of our colleagues in the Leverhulme Centre for Market and Public
Organisation at the University of Bristol.
At the theoretical level, Dixit (2000) reviews incentives theory and considers how this
applies to empirical studies of the public sector. He concludes:
‘competition and privatization are likely to work best for craft organizations. Attempts
to privatize procedural or coping organizations, where measures of performance are
vague and contentious, will run into…problems of multi-task and multi-principal
agencies…, will meet political resistance, and as a result are unlikely to succeed.’ (ibid.
p. 38).
He argues for more research, and that such research:
‘should not seek sweeping universal findings of success or failure of performance based
incentives or privatization, but should try to relate success or failure to specific
characteristics like multiple dimensions or principals, observability of outputs and
inputs, and so on. Empirical research also needs care in handling endogeneity and
various biases in sample selection.’(ibid. p. 39).
Burgess et al. (2002) review performance monitoring in the UK public sector. They
conclude as follows:
• Performance monitoring can be used for a variety of different purposes: to improve

whole organisation performance, or to focus on individual units within organisations. It
can be combined with implicit or explicit incentive schemes.
56
• Different organisations within the public sector will have to be monitored in different
ways; moreover, public sector incentives may need to be less linked to performance
than in the private sector.
• In general, there is a lack of quantitative evidence on the impact of measures of

performance. Even where it is possible to identify improvements, it is often not possible
to attribute the change to the use of performance monitoring.
• There are obvious problems in setting targets with data that can be manipulated by
those being monitored.
• There is evidence that public sector employees care about more than the bonuses they
earn from incentive schemes.
With regard to local government specifically, it is too soon to assess the impact of best value
performance indicators. Nevertheless, there is some evidence from Martin et al. who argue,
on the basis of the experience of the best value pilot programmes, that there are already
tangible service improvements linked directly to the new system of inspection and review.
For example, in Camden, there were productivity increases which enabled the provision of
an additional 70,000 hours of care at no extra cost, while Portsmouth doubled the number
of dyslexic children being taught for the same cost (Martin et al., 2001, quoted in Burgess et
al., 2002, p. 14).
Burgess et al. (2002) also make specific recommendations for policy:
• Piloting of performance measurement schemes should be considered more widely;
• It is important to distinguish process from outcome: the link between process and
outcome needs to be better understood;
• There may be scope to develop targets based on alternative, independent information

sources such as the British Crime Survey or the General Household Survey. ‘The idea
is that these are ‘non-corruptible’ PIs and would force the relevant organisation to
focus on what rally mattered (crime prevention, illness prevention, for example)’ (ibid.
p. 2).
Burgess and Metcalfe (1999a) find that incentive pay systems are far less widespread in the
public sector than the private sector. There are probably too few incentive schemes in the
public sector and hence the evidence ‘provides tentative support for the ongoing
programme of incentivising public services’ (ibid. p. 3). Burgess and Metcalfe (1999b)
selectively review the economic literature on incentives within firms, and discuss the
suitability of the current drive towards incentivising the public sector in the light of this
literature. It concludes:
• Employees do respond to incentives, often in sophisticated ways that may or may not
be to the benefit of the organisation as a whole. The design of the scheme is hence
extremely important;
• Where workers have many tasks to perform or where output is difficult to measure,
objectively assessed performance related pay is less common, and subjectively assessed
bonus payments more common;
57
• Public sector workers are motivated by more than just their own income;
• There are probably too few incentive schemes in the public sector, from an efficiency
point of view;
• There are significant research gaps: very little evidence on incentives where pay is
determined subjectively by superiors; how do incentives interact with the need for
proper behaviour by public servants?; more is needed on the provision of and response
to incentives for teams.
Burgess and Metcalfe (1999b) also provide summary details in an appendix of a

comprehensive collection of papers on this topic. In the rest of this section we draw on the
material reviewed by Burgess and Metcalfe (1999b) as well as our own literature searches.
In general, studies of manufacturing in particular find significant positive impacts of

incentives on efficiency and productivity. For example, Lazear (1998) used data from a large
autoglass company that changed compensation structure from time to piece rates between
1994 and 1995. He found that the switch to piece rates caused average output to rise by
44% – this increase came from a combination of greater output per worker and improved
retention and recruitment. The results hence strongly indicate that incentives do matter.
Studies based on survey, rather than individual workplace data back this up. For example,
Black and Lynch (1997) use data from the 1994 Educational Quality of the Workforce
National Employers Survey and Longitudinal Research Database, with information on more
than 600 private establishments in the U.S. They find that combining profit sharing and
performance-related pay (PRP) with practices giving employees a stronger voice improves
productivity. Unionisation with incentive based pay and joint managerial-worker decision
making boosts productivity but unionisation with traditional labour management relations
has a negative effect. Booth and Frank (1997) use British Household Panel Study (BHPS)
data on individual employees to estimate productivity gains from switching to PRP. They
find that PRP raises earnings by 9% for men and 6% of women over the entire sample.
Fernie and Metcalf (1995) identify three forms of workplace governance – Authoritarian,
Collective Bargaining and Employee Involvement along a continuum of different levels of
co-operation between labour and management. They find that employee involvement,
profit sharing and joint consultation committees are significantly positively correlated with
productivity. Union recognition is significantly negatively correlated. Individual
performance-pay plans and merit pay are insignificantly correlated. A more authoritarian
form of workplace governance surprisingly leads to lower productivity and improved
industrial relations.
Much of the existing literature on incentives and performance analyses either the
manufacturing sector or, alternatively, incentives for CEOs and other top managers. Is there
evidence that incentives have the same or similar effects in the public sector?
Asch (1990) examined how Navy recruiters reacted to a multi-period incentive plan that
included piece rates, quotas, prizes and standards. The results showed that productivity is
highest in the period immediately prior to the quota/prize cut-off date and lowest
immediately afterwards.
More generally, in the public sector there are a wider range of factors influencing employee,
team and organisation motivation. Heckman et al (1996) examined how the incentive
58
structure set out through the funding of the Job Training Partnership Act (JTPA) affects
the type of applicant likely to be accepted. The structure of the incentives encouraged
programme managers to ‘cream-skim’ the most employable applicants. However, results
were contrary to the cream-skimming theory, suggesting that bureaucratic preferences for
helping the disadvantaged predominated over pecuniary incentives, at least in this study.
Marsden and French (1998) review the effects of performance pay in the public services in
Britain. They find that mot staff, except head teachers, agree with the principle of
performance pay. Up to half of line managers in the civil service and hospitals believe PRP
has raised productivity, improved goal setting and, to a lesser extent, raised quality.
However, most staff belief it has not raised their own motivation, and believe it is divisive,
undermines morale, causes jealousies and inhibits workplace co-operation. Group PRP
scores much better for morale and co-operation than individual PRP but less well on goal
setting.
In 2000, the UK government introduced a nationwide reform of teacher pay in England,

which linked increases in salary to the performance of individual teachers. Currently there
are research projects under way to evaluate the impact of the new system on pupil
attainment (Burgess and Croxson, 2001) and on motivation and performance of teachers
and schools (Marsden, 2000). This research is at too early a stage for findings to be reported
yet, but both these studies (and possibly others) are likely to yield important data in the
future.
Burgess et al. (2001) review the evidence on PRP for teachers and its effects on pupil
attainment, drawing in particular from the experience of the USA. On the general point of
the operation of PRP schemes in the public sector, they argue that:
‘the available evidence suggests that incentive schemes have similar effects in the
public sector as they do in the private sector…they do have an effect on behaviour
(that is, workers are motivated by the incentives), the schemes are not always well
designed, and they can often produce sophisticated, gaming responses and unintended
behaviour.’ (ibid. p. 12).
Specifically with regard to PRP for teachers, they find that on balance teachers do have an
effect on the outcomes of students; and that the literature suggests that pay does have an
impact on teacher behaviour (ibid. pp. 24-25). These authors conclude that individual PRP
schemes can result in small positive gains in pupil attainment; however the current UK
scheme operates more as a general pay increase for (almost) all teachers.
Marsden and Richardson (1992) analysed the impact of PRP in the Inland Revenue service,
surveying almost 2,500 staff. They found that most Revenue staff supported the principle of
performance related pay but a significant minority felt hostile. Positive motivational effects
of PRP have been at best, very modest and there was clear evidence of demotivation among
staff. ‘It is by no means implausible that the net motivational effect has been negative.’
(1992, p. 1).
A later paper by Marsden et al. (2000) extends this approach. This is based on the first large
scale survey to measure the effects of PRP on employee motivation and work behaviour
across the British public services. The sample included around 5,000 employees in the
Inland Revenue, Employment Service, two NHS trust hospitals and primary and secondary
school head teachers, surveyed between August 1996 and March 1997. The authors find
that there is evidence of a clear incentive effect for those gaining above average PRP.
59
However, this is likely to be offset by a more widespread demotivating effect arising from
difficulties of measuring performance fairly. Organisational commitment appears to offset
some of the negative effects of PRP.
FINDINGS FROM SECTION 4:
• There is relatively little evidence on performance related funding at the organisational level.
Most research focuses on the links from incentives to outputs/outcomes at the individual level.
• While the organisational and individual levels are separable, they will in practice sometimes be
linked. For example, a partnership organisation, local authority or foundation school that
obtains additional public funding on a competitive basis may seek to employ service managers
or a head teacher on a performance-related basis.
• In the UK, there is a lack of quantitative evidence on the impacts of performance measures.
There are also problems with manipulation of targets. In the future, more data should become
available on impacts, allowing for further research.
• Evidence from private sector incentive schemes is relevant to the public sector. There should be
more public sector schemes to improve efficiency. But at the same time it must be recognised
that public sector workers are motivated by a range of factors, not just money.
• There is a need to understand more about the relationship between process and outcome in
regard to performance-related funding, and further research here is desirable.
• Employees do respond to incentives. Incentive schemes seem to have similar effects in the
public and private sectors. However, there is evidence that PRP in the public sector has
negative as well as positive effects.
• Further research is needed on the impact of performance related funding at the organisational
level. There may be scope for using data from the pilot local Public Service Agreements
(LPSAs). Case studies comparing LPSA and non-LPSA authorities can also be carried out.
60
CHAPTER 5
Funding and partnership
working
KEY QUESTIONS:
• What are the perceived and actual benefits of collaboration through partnership?
• What are the costs of collaboration?
• Can partnership working be encouraged or facilitated by the creation of specific funding

streams?
• Can partnerships survive the end of specific funding streams?
There is now widespread recognition that local authorities are only one, albeit important,
participant in the new systems of governance responsible for planning and delivering many
local services. These new systems involve a variety of different relationships between a wide
range of members drawn from the statutory, non-statutory and commercial sectors as well as
from the public at large.
There is still debate as to whether these relationships are best described as partnerships,
coalitions, collaborations or networks (eg Mizrahi & Rosenthal, 2001; Huxham, 1996;
Bemrose and McKeith, 1996). However, they are all characterised by a common set of
factors:
• Some degree of collaboration to achieve a common purpose;
• Some pooling or sharing of resources to achieve these;
• Some recognition that the resources shared will vary in nature and in magnitude
between the partners.
Much research on partnership working is normative and relatively limited in scope: the
single case study abounds and there are few instances of extensive and systematic
comparative research, which looks at the operation of partnerships in practice.
Nevertheless, from the main studies, it is possible to address the relatively short set of key
questions listed above on the relationship between finance and accountability and the
position of local government.
Vaillancourt Rosenau (1999) provides a good review of the mainly American literature on
public-private policy partnerships in comparing the strengths and weaknesses of this
expanding form of governance. She identifies the different strengths of each of the three
broad constituencies:
61
• The emphasis on public interest, stewardship and solidarity among public sector
participants, as well as their social responsibility and commitment to scrutiny and
public accountability;
• The creativity and dynamism of the private sector, with its access to development
finance, its knowledge of new technologies and its entrepreneurial spirit and its
willingness to abandon unsuccessful or obsolete activities;
• The compassion and social commitment of not-for-profit organisations, with strong

moral codes and extensive networks of trust. (ibid. p. 11).
While recognising that too much should not be made of these somewhat ideal-typical
differences, partnerships offer the promise of greatest success when it is acknowledged that
all these strengths are needed and that no one player has all of them at their disposal.
Vaillancourt Rosenau considers the specific case of partnerships designed to achieve both
improved performance and cost reductions and concludes that the evidence is mixed in the
policy literature (ibid. p. 13). In the American experience of public-private partnerships in
delivering environmental services, running prisons and correctional facilities and in
education, although cost savings of up to 50% are sometimes anticipated when private firms
run public services, in practice the savings are much smaller and in some cases do not exist
at all. Indeed, in some cases, costs savings are achieved only by setting aside gains in other
areas such as service quality, equity, accountability and so forth. Cost savings are also
sometimes achieved by not including externalities (such as wages, job security, welfare
benefits and so on) in the overall framework of costs and benefits. In this case, short-term
cost savings can be outweighed by the longer-term burden of increasing the dependency of
workers in the schemes on more costly public services.
Vaillancourt Rosenau also points to evidence of public-private partnerships affecting the

opportunities for the public to get involved in the policy process. In fact, there is evidence
that these opportunities are increased in some cases and decreased in others. It is not clear
whether this varies systematically according the policy field and this is an area for further
research.
In a similar vein, evidence on the relationship between partnership and regulation is also
somewhat equivocal. On the one hand, it seems that continued regulation is required in
many partnerships in order to assure the continued delivery of quality services and to
achieve broader social goals (Saltman & Figueras, 1998), while on the other, some
partnerships have been used to reduce regulatory processes that had become adversarial and
costly in themselves (Kamieniecki et al., 1999). Hence, Vaillancourt Rosenau concludes:
‘Although reducing big government is, certainly, one of the principal incentives for
partnering, results appear to be modest. Regulation is not withering away, and it may
even be increasing in some policy sectors’. (ibid. p. 19).
The overall conclusion of Vaillancourt Rosenau’s review is that a general theory of

partnerships is still some way off. The empirical evidence, mainly from the US, suggests the
need for more contingent positions in respect of the costs and benefits of partnership
working, especially between the public and private sectors. Where cost considerations are
paramount and where externalities are limited, partnerships can be highly effective.
However, where vulnerable populations are involved and where accountability is critical,
then public-private partnerships may not be the best approach.
62
In the UK, partnerships of one sort or another have been advocated as a useful approach to
the solution of complex policy problems for many years. The 1977 Inner Cities White
Paper, for example, emphasised the need for more effective partnerships between central
and local government in tackling the problems of inner city decline. Since then, urban
policy has continued to see partnerships as a key vehicle for the development of policy and
the delivery of services in pursuit of regeneration. Again, research on the effectiveness of
partnerships has tended to be relatively small scale and non-cumulative, although there is
evidence of conventional wisdom emerging in relation to the characteristics of, and pre-
conditions for, effective partnership working.
Purdue (2001) has recently considered the significance of leadership, trust and social capital
in the development of policy for neighbourhood governance and urban regeneration. He
charts the use of various stimuli by central government to encourage the formation of local
partnerships between local government, the private sector, other public sector bodies, and
with community and non-statutory sector organisations. Chief among these has been
competition for specific sources of funds. From City Challenge, through the Single
Regeneration Budget to New Deal for Communities, it has been assumed that competition
not only increases the quality of proposals but also encouraged the formation of valuable
partnerships between the various sectors described above (see also Taylor et al, 2001).
Some of the benefits of this type of partnership were articulated in a DETR consultation
document on regeneration:
‘competition has raised the quality of projects;…it has brought together real
partnerships to an unprecedented degree…[which]…stay together despite initial failure
to secure resources.’ (Department of the Environment, Transport and the Regions,
1997, Para. 5.31-5.32).
However, empirical research by Taylor et al. (2001) on the Programme for Partnership
initiative of the Scottish Office found only limited evidence of competition acting as a
major spur to partnership formation. Moreover, their research concluded that there was,
‘little or no lasting stimulus to partnership activity’ especially for those partnerships that
were unsuccessful (p. 61). Although not the focus of their research, it does suggest that
partnerships are also unlikely to survive much beyond the period in which they receive
specific funds.
Research from a different setting, on coalition building in the delivery of social services in
New York and New Jersey, provides rather different evidence on the significance of
financial resources in the creation and maintenance of partnerships. Mizrahi & Rosenthal
(2001) reiterate the point made for many years in the literature on policy implementation
(see Hill, 2002), that the varied resources of a wide range of key players (or stakeholders)
are required for effective implementation. As well as financial resources, these also include
less tangible factors such as expertise, information, contacts and commitment. Mizrahi &
Rosenthal (2001) list the elements identified by coalition members as critical to the success
of their coalitions (or partnerships) and an abbreviated version is presented in Table 7
below.
This suggests that financial factors do not rank very highly in terms of the sustainability of
partnerships, although as usual we must be cautious in generalising from this specific case.
Of course, this is not the same as saying that the availability of additional external funds
does not serve as an essential ‘glue’ in holding together many local partnerships.
63
Table 7 Elements contributing to the success of partnerships
Elements contributing to success % of respondents Rank order

mentioning (17 elements)
Commitment to goal, cause or issue 95 1
Competent leadership 93 2
Members continued contributing resources 68 8
Adequate funding 40 15
Previous history of collaboration 28 17
Source: Mizrahi & Rosenthal (2001)
The nature of the relationships between the various members of local partnerships has been
the focus of much research and advocacy over the last decade in the UK. Drawing on
research on the three bidding rounds of the Single Regeneration Budget (SRB) Challenge
Fund, Hall (2000) presents data on differences in the degree of involvement in regeneration
partnerships among local authority, other public sector bodies (especially TECs) and
voluntary sector organisations. Perhaps not surprisingly, he found that local authorities were
most closely involved, acting as the dominant player or leader in 60% of all successful bids in
the third round of SRB (p. 8).
He also draws on earlier work (Hall et al., 1996) in presenting a typology of partnerships
according to the level of involvement of member organisations:
Shell Only nominal involvement of non-lead bodies;
Consultative Strongly controlled by lead body, but scope for marginal influence by
other members;
Participative All partners often have access to decisions mechanisms;
Autonomous All partners have equal access to all decision mechanisms and use them.
Most partnerships studied fell into the category of ‘consultative bodies’ and hence fell well
short of the aspiration voiced in many studies that there should be greater equality in the
nature of the relationship between partners in these settings. (Hall, 2000; Hall et al., 1996).
A more empirically robust evaluation of the effects of partnership working was carried out
by Brennan et al. (1998) on behalf of DETR, and described in their interim report on the
evaluation of the SRB Challenge Fund. This attempted to quantify, among other things,
the effects of working specifically in a partnership mode to secure the comprehensive
regeneration of the target areas. The evaluation team generated a set of possible benefits of
partnership working and asked respondents in each of their (20) case study areas to assess
the impact of these in practice. The results are presented in Table 8 below, although it
should be noted that they relate to the perceived impact of possible positive benefits.
Interestingly, one of the more specific financial benefits – the achievement of scale
economies and the ability to negotiate lower costs – was judged to have had least impact in
the case studies.
64
Table 8 The impact of partnership on programme costs and benefits
Economic mechanism Qualitative assessment of impact

(Number of case studies answering)
Zero or Weak Strong Total
negligible
Co-ordination
1 Avoidance of 6 4 10 20
duplication
2 Larger scale activities 7 4 9 20
3 Partner specialisation 4 6 10 20
Clustering
4 Economies of scale 12 4 4 20
5 Critical mass 10 6 4 20
6 Generation of 11 5 4 20
neighbourhood interest
Synergy
7 Common objectives 7 5 8 20
8 Bending main 7 7 6 20
programmes
Source: Brennan et al. (1998) Table 10.1, p. 158
Respondents were also asked to describe any adverse effects of partnerships and these
included:
• Increased administrative and project costs;
• Extra delays;
• Reduced programme impact; and
• Reduced efficiency and cost effectiveness.
Again, these are mainly related to financial aspects and suggest that there may be an
imbalance between the less tangible benefits of partnerships and the more tangible costs.
Finally, there is scope for further research on the precise impact of partnership on service
delivery and the achievement of policy goals, especially if the research is able to draw on
more than a limited number of case studies.
65
FINDINGS FROM SECTION 5:
• Partnership working requires not only collaboration, but also the pooling or sharing of
resources.
• The scope for accurately calculating the magnitude of any benefits of partnership (lower costs,
expanded pool of resources, less regulation etc) is limited as different partners bring different
types of resource that cannot always be aggregated.
• There is some evidence of partnership working reducing the regulatory burden, but also of
increases where there is a lack of trust among partners.
• Competition for resources (especially in the field of urban policy and regeneration) has some
positive impact on stimulating partnership formation, but failure to secure funds usually
corresponds with partnership dissolution.
• However, in one major US survey, the adequacy of funding was not seen as a vital element in
the success of partnerships.
66
CHAPTER 6
Conclusions
This review was commissioned to shed some light on a number of questions and hypotheses
concerning the relationship between local government finance, service delivery and local
democracy and to propose further research (and research approaches) to fill any gaps in the
existing literature.
The voluminous literature on all aspects of local government is characterised by a high

degree of specialism and, in general, by a tendency to neglect the possible linkages between
areas of specialisation. This review set out not only to look explicitly for literature that
attempted to explore some of these linkages, but also to suggest avenues for research where
gaps in the literature exist. Before presenting our findings and conclusions under the four
main headings set for us in the brief, we will reflect on some issues arising from the data
itself and on the scope for learning from experience described in other settings.
The nature of the literature

The literature is very diverse: it covers a wide range of theoretical material, especially in the
fields of democracy and accountability and in fiscal studies; a vast number of case studies and
empirical applications in which theoretical propositions are tested against very specific data
sets; and numerous normative studies extolling the virtues of particular systems and approaches.
We limited ourselves primarily to material written in English, but it is unlikely that this will
have imposed a significant limitation on the coverage of relevant material.
Because of the extent of the material and its diversity, our search strategies had, of necessity,
to be flexible and it was not possible to develop the kind of robust and unchanging protocol
for selection of material that is found in more traditional systematic reviews. As the
Appendix describes, the inclusion of only one additional word with a Boolean connector
often had the effect of reducing the size of an initial search by a considerable degree.
Moreover, the intrinsic nature of the literature in this field means that it is not possible to
impose the kind of methodological constraints on studies to be included that one finds in
systematic reviews of health interventions. We did not, nor would we have been able to,
attempt any form of meta-analysis by combining the data from similar studies in order to
achieve larger and more robust samples.
The importance of context in policy transfer

While students of comparative policy have long recognised the importance of context in
determining the scope for policy transfer, the growing popularity of realist approaches to
social research has reinforced this point.
67
What happens in one setting, let alone what works in a normative sense, depends on the
existence of an underlying causal mechanism and a specific set of contingent variables. In
relation to this review, it is important that we are especially aware of the local (or national
or regional) factors that explain particular outcomes and exercise caution in any attempts
to read off from one case what might happen in another setting. Hence, we need to be
cautious of any assumptions about the significance of place and setting in the construction
of theoretical models of economic or political behaviour and also in the transfer of learning
based on empirical applications of these models.
Overall, the UK rather stands out among other advanced industrial countries with
developed welfare states because of its combination of centralised funding, unitary state
organisation based on Parliamentary sovereignty and the lack of constitutional autonomy
for sub-national government. For these reasons, many of the problems and issues of public
finance and local government in the UK are not so readily apparent elsewhere. Likewise,
the constitutional, legislative and policy concerns of local government in other countries
are less relevant in the UK.
Finance, accountability and democracy

While there is a relatively prominent public debate in Britain about the magnitude and
consequences of political disengagement and the possible crisis of local democracy, this
debate includes very little reference to the role and significance of public finance in local
government.
The most important aspect of the relationship between public finance and local democracy
concerns variations in patterns of spending and in the quality of services provided.
Spending by local authorities varies because of differences in local needs, different costs of
providing services (for instance due to the sparsity of populations in rural areas), and
differences in the efficiency with which services can be provided.
Central grant regimes should in principle take account of and compensate for differences in
needs and costs, but not for variations in allocative efficiency. Arguments are more finely
balanced as to whether or not the centre should allow, let alone compensate for, different
political choices made locally about the range and quality of services provided.
This goes to the heart of the political debate about decentralisation, local choice and local
accountability. Enhancing local democracy and encouraging greater participation in local
decision-making are important contemporary policy goals, but they are not the only ones
and in some respects they run counter to the goal of providing equal access to services
regardless of locality. However, some of the literature suggests that the capacity to make
significant local choices about levels of local taxation and about the range and quality of
local services is essential to the revitalisation of local political engagement and broader
processes of devolution.
Much of the theoretical literature in this field derives from the work of Tiebout in which it
is claimed that overall, greater allocative efficiency is achieved through decentralised
systems in which municipalities or jurisdictions ‘compete’ for households by offering
different bundles of taxes and services. In a ‘Tiebout world’, this is all to the good:
individuals have different preferences for tax/service bundles and local democratic systems
reflect this; with perfect labour and housing mobility, dissatisfied citizens simply move to
another jurisdiction to maximise their preferences.
68
Conclusions
However, even if it were possible to move towards such a ‘Tiebout world’, it is likely that
residential sorting in line with household preferences would lead to inequalities and a
degree of segregation that runs counter to many current policy goals. Nevertheless, this
literature does support what appears to be an important element of the 2001 local
government White Paper – a shift from uniformity to greater diversity, while retaining in
broad terms the existing system of equalisation embodied in devices such as SSAs and the
RSG.
There is little evidence one way or another on the relationship between the balance of
funding in support of local government and democratic engagement. While public
knowledge of the reality of local government finance (including the balance of funding and
the balance of control) remains poor and patchy it is difficult to establish clear causal links
with political behaviour. There is, though, evidence that more widespread perceptions of
the trustworthiness and capacity of the institutions and people of local government affects
political behaviour in general, and turnout in local elections in particular. There is less
evidence to support the currently fashionable view that changes to the mechanisms of
registration and voting will provide a significant and enduring counter to the long-term
decline in political engagement.
There is much scope for further research in this area. There would be benefits in
comparative research among countries of the European Union with different solutions to
balancing the costs and benefits of raising different proportions of revenue locally and to
the tolerance of local variation while ensuring minimum service standards. There is also a
need for a targeted piece of research looking at the inter-relationships between funding,
powers, constitutional position and measures of democratic accountability in a limited
range of mainly European countries.
Within the UK, it should be possible to monitor behaviour among a set of local authorities
around the introduction of the ‘balanced scorecard’ and greater freedoms. This could be
compared with measures of democratic engagement and with the development of new
structures for providing local accountability. More specifically, it might be helpful to
explore the effect of changes in the balance of control and the balance of funding using
intensive and deliberative methods such as focus groups or citizens’ juries and also to use
techniques of ‘experimental economics’ to investigate the behaviour of small groups of
individuals presented with various tax, service and outcome scenarios.

Performance monitoring and performance management are now established as important
techniques in the pursuit of higher service standards. While the focus of attention has
shifted from the control of inputs to the achievement of outcomes, there remain significant
problems in the measurement of inputs, outputs and outcomes. New analytical techniques
show promise but these measurement problems continue to impede the construction of
reliable estimates of efficiency and productivity for many public services.
In some fields, such as education, there is evidence that the level of funding does affect
outputs and quality of service. But so do other things, and institutional and organisational
reform can also lead to efficiency gains. The financing mechanisms for local government
also have an effect on efficiency. Raising spending from local taxes – and maybe from other
local sources such as charges – rather than from central grants appears to promote greater
efficiency.
69
Again, it is important to exercise caution when looking to generalise from the experience
of a few case studies, but studies of performance in particular local government settings
point to the importance of institutional and cultural factors. It is likely that matters of
finance and funding on the one hand, and management and organisation on the other, are
not fully separable but rather they interact in producing positive synergies or negative
externalities in relation to overall performance.
As above, there is evidence that local public service providers need to work hard to
increase public awareness of who is responsible for providing local services and of the costs
of providing. Set alongside the provision of comparative performance data, this may well
increase the likelihood that the public will be willing and able to make more informed and
effective contributions to local political debates about funding and service quality.
The introduction of local Public Service Agreements provides an opportunity to develop a

mix of intensive qualitative studies of what drives service improvements as well as more
extensive and comparative studies of the relationship between inputs (funding) and
institutional (process) factors in determining outputs and outcomes.
Performance related funding and partnership

working
Most research on performance monitoring and management focuses on the links between
incentives and outputs or outcomes at the level of the individual. There is little systematic
research on the links between performance and funding at the organisational level.
Notwithstanding the results of the review of the best value pilots and the impending long-
term evaluation of the broad agenda of modernisation in local government, there is a lack
of quantitative evidence on the impact of performance measurement and management in
local government.
This field is also capable of generating considerable controversy as recent reactions to the
recommendations of the Spottiswoode Report on the measurement of efficiency and the
improvement of police performance demonstrate. The use of such techniques as Data
Envelopment Analysis and Stochastic Frontier Analysis has been criticised as staunchly as
it has been advocated and there is still no consensus on how to measure and then aggregate
the performance of individual organisations (like local authorities) into rankings that
enhance and inform public debate.
As well as further research into the development and application of advanced analytical
techniques, there is also scope for further research into the relationship between process
and outcome in regard to performance-related funding, especially in exploring the extent to
which performance targets can be manipulated and the effects of this.
Problems of measurement and definition are also apparent in research on the relationship
between funding and partnership working. For example, the scope for accurately calculating
the magnitude of any benefits of partnership (for example, lower costs, an expanded pool of
resources or less regulation) is limited as different partners typically bring different types of
resource that cannot always be aggregated.
Much research relies on a limited number of case studies and adopts a normative rather
than analytical approach and there is need for more rigorous, comparative and extensive
70
Conclusions
studies of the precise costs and benefits of partnership working in different fields of local
governance.
There is, however, some evidence that partnership working can reduce the regulatory
burden especially where there is a relatively high degree of trust between partners, and also
that the need to compete for funds has a positive impact on stimulating partnership
formation. More generally though, evidence on the significance of funding in partnership
working is more equivocal. While there are signs that partnerships formed to bid for
competitively allocated funds do not survive the failure to secure funds, other evidence
points to the importance of non-financial elements in ensuring the success of partnerships.
It is clear that in the move from traditional systems of local government to more diffuse
forms of governance, partnerships between statutory and non-statutory bodies and between
public service organisations and commercial providers will continue to be important. It is
also clear that some of the broader factors of trust, transparency and accountability that
have been identified as vital components in the reinvigoration of democratic local
government are even more significant in the evolving systems of local governance.
Overall conclusion
Overall, this review has highlighted the importance of finance as a key tool of public policy.
The allocation and management of public finance is an important (if not the most
important) aspect of the relationship between central and local government. This holds
whether the constitutional and political context is at the federal or unitary ends of the
spectrum, albeit in different ways.
Much research in this broad field is highly specialised and does not effectively explore the
links between the financial and non-financial aspects of local government even when the
significance of these links is recognised and acknowledged. There is, therefore, a need for
more research on the trade-offs that exist between different broad policy goals, such as the
need to manage local public expenditure and the desire to stimulate greater local political
engagement. Often these trade-offs are not recognised and not presented in ways that allow
the debate to move forward constructively.
Until debates of this nature are properly supported by good quality and relevant research
evidence, there is a danger that they will be prey to the influence of fashionable viewpoints
that do not have a strong evidence base or that take insufficient account of contextual
factors in advocating the adoption of practices that appear to work well elsewhere.
There is scope for a variety of research studies (discussed above) ranging from deliberative
panels and small group ‘experiments’ through qualitative case studies to statistical analysis
of the experience of different local authorities. By producing a range of studies using
different methodologies, the research for evidence-based policy-making in this area can be
enhanced.
71
APPENDIX 1
Methodology
The span of this research was extremely broad, along at least three dimensions:
• The disciplinary base of the literature to be reviewed was very wide, encompassing
studies of local government finance which draw strongly on economics, accounting
and finance; studies of local democracy and participation which may have a
sociological, political science, or social/public administration framework; and research
on service delivery and performance which may use a management science or
organisation theory basis.
• The four main questions identified covered a wide range of issues. Within these four
questions a large number of detailed sub-issues were set out in the research specification.
• The specification included a review of overseas as well as UK evidence.

Given this breadth of focus, and the need to examine a range of different inter-
relationships, there was a strong need for the research to:
• Utilise a methodology of systematic review of the evidence; and
• Understand the links between economics and finance on the one hand, and public
policy, service delivery and local democracy on the other.
The work programme comprised a review of a wide range of literature both in the UK and
elsewhere. Ex ante, we decided on a methodology which used techniques of systematic
review of the literature in order to scope the full range of available and relevant literature.
Given the likely size of the number of individual studies generated, we anticipated using a
two-track strategy was used for reporting results, comprising a systematic review of all
relevant literature as well as more detailed reporting of particularly significant key studies.
In practice, we had to adapt the methodology of systematic review to fit our needs in a real-
time process of learning-by-doing. This was driven partly by the nature of the research
topic(s) and the very broad range of issues included in it. But it was also due partly to
differences between the ways in which public policy research findings are reported
compared with medical and para-medical research. In medical and related fields, where
systematic review was developed, search terms have precise and limited meanings. In social
science, however, meanings are more ambiguous and the same concept can be referred to by
a variety of terms and combinations. We therefore moved to a mode of working which
combined systematic review with a more traditional social science literature review
(drawing on the expertise within the team) in order to focus the project and complete
within available resources and timescale.
The literature searches were developed in four stages, specific to each of the research
questions, looking at the links between:
• Finance and local democracy, participation, accountability;
• Funding and service standards;
• Performance-related funding and performance; and
• Funding and partnership working
72
Methodology
In carrying out the systematic review, the research team drew on the general expertise of
the Cochrane Developmental, Psychosocial and Learning Problems Group (CDPLPG) at
the School of Policy Studies. This group, part of the international Cochrane Collaboration,
has been established to bring Cochrane methodology to bear on a wide range of medical,
social, educational and socio-legal research issues. Their methodology focuses on the use of
systematic review of the literature world-wide in order to identify robust research findings.
Three general points can be made about the use of systematic review. Firstly, the source
literatures can be large and, particularly for this study, the range of literatures around local
government issues, funding and democratic participation are, themselves, vast. Secondly,
searching the international literature brings into play a wide range of synonyms which need
to be searched. Thirdly, although the databases available within the social sciences cover a
wide range of the literature, it is not always obvious which aspects are included or excluded
or where overlaps between coverage occurs. Added to this there is an ever-increasing
number of websites which cover organisations and institutions which conduct or
commission relevant research.
These three factors have relevance to any study that carries out a systematic review, but
have particular salience to this one, where the scoping of the literature needed to be carried
out quickly and accurately. The technology-based system, which is used to speed up the
process, involves the systematic layering of search terms, but this relies heavily upon the
capacity of the technology that is incorporated. One of the early findings of this study has
been to suggest complexities which need further investigation before similar reviews can be
claimed to be truly systematic and rigorous in scope. This is not to suggest that the results
found here, or in other studies, are not useful. The point is, rather, that the use of systematic
review should be viewed with the caveat that, until technology makes further advances and
social sciences resources are thoroughly and systematically catalogued within databases with
sophisticated retrieval mechanisms, extensive review requires a significant time resource
and the development of clear strategies which are thoroughly understood in scale and scope.
There is a particular point to make here about the nature of the literature within many
areas of the social sciences. As the various social science disciplines have developed, so
have the linguistic parameters used to describe multiple theoretical and empirical themes,
issues and events. ‘Local government’ may be found in the literature in many different
forms, for example. This makes more salient the use of systematic review procedures, which
seek to capture such anomalies.
The expertise of the CDPLPG was sought at the beginning of the research process,
providing training on appropriate search techniques and data handling. The project team
drew up a list of keywords for searching and a shortlist of the most suitable databases on
which to focus the early searches. These were, initially:
• the University of Bristol library catalogue;
• ASSIA;
• BIDS IBSS;
• Econlit; and
• websites of relevant organisations
73
The scope of the searches was wide and complex search strings evolved, which resulted in
large results sets in some cases. It quickly became apparent that some technical and
practical difficulties needed to be overcome. Briefly, these included:
i. The volume of potential results on simplified search terms made reliance on
refined search strategies essential;
ii. A problem was found (not previously encountered) with the University catalogue,
whereby search strings were truncated and only partial results achieved. This was
investigated but not resolved during the course of the project, so less complex
search strategies were used to find the key literature. Other library catalogues were
explored, although none was found to incorporate a search engine which would
enable the combinations of searches which our search strategies required;
iii. The search engine on one database was returning only partial results as part of the
database was inaccessible. The exact reasons for this have not been established;
iv. Websites, generally, did not have complex search engines and the search strategies
were therefore appropriately simplified (and, hence, time consuming).
Search results ranged in number from 50 to over 13,000. All results were imported into an
EndNote database where possible and duplicates eliminated before a manual evaluation of
each finding was undertaken. Some entries could be immediately identified as irrelevant;
others needed more careful review, reading abstracts or finding papers and books. EndNote
was used to track this process and as a means of sharing findings between the research team.
Where results would not import into EndNote (from the library catalogue or websites),
other paper and electronic means were used as appropriate.
Within the timescale allowed for this work, some strategic decisions needed to be made to
retain control over the workload. This necessitated searching just the main databases which
were relevant to each of the four strands and systematically discounting much literature
which, while theoretically or empirically connected with issues on which the study
touched, were of no direct assistance in answering the research questions.
In practice, this required focussing attention on specific search terms, which were
developed in conjunction with the study’s sponsors. The findings from the databases were
then sorted on a three-stage system for Question 1:
• Initial sort to discount material which was obviously of no relevance;
• Second-level sort to examine more closely the literature of which the relevance was
less certain; and
• Final stage of finding and reviewing literature which was of particular relevance.
For Question 2, the large number of top level results found (n = 13811), together with the
funding and time constraints, made it necessary to refine the results further before filtering
out those for review. This is most easily explained by dividing the results according to the
sub-questions:
i. Searches for the literature on need, cost and performance found 1313 items; these
were further refined by looking for those which related to welfare, or policy, or
service, which reduced the number to 700. Of these, 31 were reviewed;
ii. 7297 items were found by the search for literature on funding and outcomes.
When this was further limited to items dated after 1979, the number reduced to
6605. A random 10% sample was drawn from this and, from this, 42 items were
appropriate for further review;
74
Methodology
iii. The ‘willingness to pay’ literature search revealed 4674 items, which were limited
by year as in 2) above (n = 4445), then a 10% random sample drawn. From the
sample, 22 items warranted further review;
iv. Searches on the literature on voter turnout found 527 items. All were examined
and 74 were reviewed further.
At the request of the project sponsors, a further specific search was undertaken for items
relating to fiscal equalisation; this revealed a further 63 items, of which 21 were reviewed.
For Question 3, the search strategy was further refined. The search was scoped using one
database (Econlit) and all-encompassing search terms; this found 7298 items. Limiting the
search terms to ‘performance-related’, ‘performance related’, ‘finance-related’ or ‘finance
related’ revealed a total of 55 items within the same database. These 55 were all found and
reviewed, with bibliographies used to identify strands of literature or particular authors,
which were then followed up as appropriate.
The searches for Question 4 were more straightforward, finding a total of 912 articles
relating to funding and partnership or joint working. This was further refined by restricting
the search to articles which also related to ‘government’ or ‘state’ (n = 376).
Where the searches for the second and subsequent questions revealed literature which may
have been appropriate for earlier or later questions, these findings were saved or reviewed,
as appropriate.
75
APPENDIX 2
Search strategies
QUESTION 1 – FINANCE AND LOCAL DEMOCRACY
Stage 1 – Search A
(As two separate searches)
govern* AND
• sub-national OR lander* OR
• sub-region* OR departement* OR
• local OR parish* OR
• region* OR civic OR
• municipal* OR county OR
• devol* OR counties OR
• federa* OR commune* OR
• provinc* OR district* OR
• sub national OR borough* OR
• sub region* metrop*
(As separate searches)
(state) within 3 (govern*)
(state) within 1 (administration*)
department* AND (france or french)
Stage 2 – Search B
financ* OR duty OR
tax* OR duties OR
fiscal OR excise* OR
grant OR investment* OR
grants OR investing OR
revenue* OR aid OR
expenditure* OR subsidy OR
spend* OR subsidies OR
charg* OR subsidise OR
funding OR payment* OR
funds OR levy OR
rate* OR levies
Stage 3 – Search D
democra* OR understand* OR
participa* OR satisfaction OR
vot* OR perception* OR
turnout OR approv* OR
consult* OR endors* OR
poll* OR sanction* OR
referend* OR consent* OR
forum* OR agree* OR
fora OR dissatisf* OR
engage* OR view* OR
contribu* OR opinion* OR
76
Search strategies
involv* OR attitud* OR
attachment* OR belie*
support* OR
(As separate searches)
(electoral) within 1 (regist*)
(electoral) within 1 (roll*)
Search results then combined with OR and saved as search strategy D
Stage 4 – Combining searches
• Combine A AND B – Saved as strategy C (local and finance)
• Combine A AND D – Saved as strategy E (local and democratic/participation)
• Combine C AND D – Saved as strategy F (local and finance and

democratic/participation)
Stage 5 – Search G
alternative* OR autonom* OR
hypothecat* OR independ* OR
unhypothecat* OR protect* OR
simplif* OR allocat* OR
ringfenc* OR assign* OR
earmark* OR designat* OR
target* OR direct* OR
Search results saved as search strategy G
Stage 6 – Combining searches
• Combine C AND G – Saved as strategy H (local and finance and spending
autonomy)
• Combine F and G – Saved as strategy J (local and finance and

democratic/participation and spending autonomy)
QUESTION 2 – FUNDING AND SERVICE STANDARDS
(input* OR financ* OR fund* OR expenditure*) AND (output* OR outcome* OR result*
OR performance OR behavio* OR efficienc* OR effective* OR balance)
Search results saved as search strategy A (inputs and outputs)
(public sector) OR (local government) OR health OR education
Search results saved as search strategy B (limitation to public sector)
Stage 3 – Search C
need* AND cost* AND (performance OR outcome* OR result* OR efficenc* OR
effective* OR balance)
Search results saved as search strategy C (relationship between need, cost and performance)
Stage 4 – Combine searches
• Combine A AND B – Saved as search D (relationship between funding and
outcomes in the public sector)
• Combine B AND C – Saved as search E (relationship between need, performance

and cost in the public sector)
77
Stage 5 – Search F
citizen* OR taxpay* OR user* OR voter* OR household* OR individual*
Search results saved as search strategy F( citizens)
Stage 6 – Search G
pay OR support* OR prefer* OR accept* OR endors* OR tolera* OR approv* OR
sanction* OR consent* OR agree* OR will*
Search results saved as search strategy G (agreement/willingness)
Stage 7 – Search H
(tax* OR expenditure) AND (referend* OR election* OR turnout OR vot*)
Search results saved as search strategy H (votes on public expenditure)
• Combine F AND G – Saved as search J (citizen’s willingness to pay)
• Combine F AND H – Saved as search K (nature of voter turnout)
QUESTION 3 – PERFORMANCE RELATED FUNDING AND PERFORMANCE
Single stage strategy

(performance related) OR (performance-related) OR (finance related) OR (finance-
related)
QUESTION 4 – FUNDING AND PARTNERSHIP WORKING
funding OR resource*
Search results saved as search strategy A
(joint work*) OR collaborati* OR partnership*
Search results saved as search strategy B
• Combine A AND B
78
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Background and approach

The review had two main objectives:

The nature of the literature

Hence, financing local government is often treated as a technical subject, examined

FUNDING AND SERVICE STANDARDS

Performance monitoring and management are now established as important techniques in

The introduction of local Public Service Agreements (LPSAs) provides an opportunity to

PERFORMANCE RELATED FUNDING AND PARTNERSHIP WORKING

Hence, financing local government is often treated as a technical subject, examined

‘By removing restrictions and requirements on planning, spending and decision-

• What evidence, including the comparative evidence, is there on the finance-related

• What is the relationship between fiscal equalisation and local democracy/

• How important are ‘electoral cycle’ effects?

In Chapter 3, we go on to look at the relationship between funding and service standards.

Hence, in Chapter 3, we consider the following questions:

• What is the relationship between need, performance, cost and context?

• What is the evidence that additional funding improves performance/outputs/outcomes?

• What is the level of turnout in referenda on spending levels and priorities?

2.1 Issues and assumptions

• Be simple and comprehensible;

• Give stable results year on year;

• Be based on reliable data;

• Not create perverse incentives;

• Ignore efficiency variations;

• Produce allocation of resources widely regarded as ‘fair’;

• Be founded on a consultation process.

a) Efficiency and effectiveness differences – reflecting forms of local organisation and

‘Local government is inevitably heavily involved in provision of a redistributive

• The balance of funding and the balance of control (2.4);

• Fiscal equalisation and territorial equity (2.5);

• Electoral cycle effects (2.7);

• Comparative evidence (2.8).

Findings are summarised at the end of each section.

FINDINGS FROM SECTION 2.1:

• Devolution implies greater acceptance of geographical differences in taxation, spending,

• Spending varies across areas because of:

ii. differences in needs and costs;

iii. different political choices;

2.2 Evidence on turnout and participation

• How does Britain compare with other countries?

Table 1 Overall turnout at local elections in Britain, 1973 – 2000

Table 2 Average turnout at sub-national elections within the European Union

The DETR study of turnout concludes:

‘Turnout in sub-national elections appears to be in general decline. Few countries show

• Marginality of the seat at the last election;

• Multiple member wards;

• Number of parties contesting elections;

BALANCE OF FUNDING AND TURNOUT

issues to do with involvement in local decision-making; holding local referenda and

Table 3 Factors most likely to improve turnout in local elections

Note: Most relevant factors for this review highlighted in bold

Table 4 Age and voting in local elections

Age Voted % Did not vote %