Expenditures on health comprise a very small proportion of local government expenditure in both France and the UK since this is the responsibility of central government .sx By contrast , sub-national governments account for over 50% of total health expenditure in Australia , Canada , Denmark and Switzerland .sx The UK and North America stand out for the extent to which control over educational spending is shifted towards lower tiers of government .sx Expenditure decentralization in the UK and other unitary states in Europe is rather low by comparison with federal countries in North America and Europe as well as Scandinavia .sx In Scandinavia total sub-national expenditure is high because of responsibility for a substantial fraction of social welfare spending .sx 3 .sx Fiscal decentralization in theory .sx Much of the relevant literature on 'fiscal federalism' has originated in North America , and reflects the particular government structures of the US and Canada .sx Here we organize the methods and results of this literature in the context of the very diverse arrangements observed in European countries .sx Decentralization performs two distinct functions .sx First , local communities' decisions about public services may better reflect local residents' preferences .sx Second , administrative decentralization may improve the information needed to implement centrally-determined policies .sx 3.1 The decentralization of choice .sx Decentralization allows communities to better adapt to their preferences the levels of local services and taxes .sx Local public goods display the 'public good' characteristics of non-rivalry in consumption and non-excludability , but benefit only a limited geographical area ( Cornes and Sandler , 1986) .sx Voting provides the most obvious mechanism by which differences in individual preferences might be reflected in collective decisions .sx Unfortunately , it turns out to be difficult to devise clear criteria for identifying efficient levels of decentralization when voting is the mechanism by which preferences are expressed .sx One rather limited case where decentralization is unambiguously desirable is when decisions are made by groups that each contain individuals with identical preferences and circumstances .sx Where there is a greater degree of heterogeneity in the population , few patterns of decentralization result in an unambiguous improvement ( in the Pareto sense) .sx The desirability of decentralized decision-making hinges on the balance between the interests of different individuals , not all of whom will necessarily gain from greater decentralization .sx 3.2. Choice through mobility .sx Whilst it is highly unlikely that the population can be subdivided geographically into groups consisting of wholly identical individuals , circumstances can be envisaged where the population might choose to sort themselves in this way .sx This is the so-called Tiebout model ( 1956) .sx Faced with a range of local authorities offering the full spectrum of possible levels of provision , individuals choose a particular level of provision by moving to the area where it is on offer .sx Under certain conditions this process achieves a Pareto-improvement .sx Three groups of assumptions are needed for the Tiebout model to be achieved in practice :sx ( a ) there should be enough jurisdictions offering a sufficient range of levels of public services .sx In addition , there should be enough individuals to ensure that public goods can be provided efficiently in each of the jurisdictions ; ( b ) individual mobility should be costless , and individuals should move in response only to fiscal conditions , and not to other characteristics of the various localities ; and ( c ) public services in each jurisdiction should be financed by lump - sum taxes , set equal to the cost of providing public services to the marginal group member .sx This assumption can be relaxed to allow for local services provided by a property tax only under very stringent conditions , in which zoning regulations specifying the type of property that can be built in each area make the property tax in effect a lump sum ( Hamilton , 1976) .sx The first assumption requires a multiplicity of small government units and that the functions assigned to local government do not involve substantial economies of scale .sx Whilst many European countries have small local government units in rural areas ( where fiscal reasons are unlikely to be a significant factor in location choices ) , local government in urban areas tends to involve rather larger units offering a correspondingly restricted range of choices .sx In contrast in many US cities a large number of small local jurisdictions may indeed provide the required range of fiscal choices .sx When the first two groups of assumptions are not met , the Tiebout model can quickly lead to gainers and losers .sx In particular , if not all individuals are freely mobile , an improvement in mobility of some would not necessarily result in an improvement in the situation of all .sx Those unable to move may be disadvantaged by an influx of residents with preferences sharply different from their own .sx This is perhaps one of the most significant limitations of the Tiebout model .sx Policies designed to make the system of local government conform more closely to the Tiebout assumptions ( for example , by increasing the number of government units , and removing obstacles to migration ) will result in both gainers ( those who move to areas more closely approximating their preferences ) and losers ( those who are unable to move , who may find that local levels of provision move further away from the standard that they would prefer) .sx Piecemeal improvements to bring the system closer to the Tiebout assumptions may sometimes reduce welfare .sx Furthermore , population sorting leads to homogeneous communities .sx This outcome is sometimes seen as undesirable , either for basic reasons of social philosophy , or because there are efficiency benefits from mixed communities .sx The Tiebout model is of very limited interest in most European countries , and proposals for structural reform that aim to move closer to the Tiebout assumptions will not necessarily improve matters .sx On the other side , mobility may place constraints on the structure and decisions of local government , as we will see later .sx 3.3. Decentralization of implementation .sx A fundamentally different perspective is provided by 'agency' models of local government , in which local governments administer some of the policy functions of central government .sx Here the objective of decentralization is to exploit two main advantages of smaller-scale units :sx better information and better control .sx 3.3.1. Better information about local needs is available to local bureaucrats .sx This allows more precise targeting .sx In principle , of course , information available at a decentralized level could be communicated to central decision-makers , but the costs of information processing appear to rise sharply with the size of organizations .sx 3.3.2. Better control over administrative 'slack' and under-performance follows from the information advantages of local voters .sx Delegated decision-making leads to familiar 'principal-agent' problems of control , since those charged with implementing central policies may choose to pursue their own objectives ( comfortable conditions of service , or 'empire building' ) at the expense of the objectives set by the central government .sx Decentralization to local governments , rather than simply to administrative agencies of central government , allows the central government to make use of local voters as a control mechanism to constrain bureaucratic under-performance .sx The role of voting is not any more to express individual preferences , but to provide control in a situation of common preferences and priorities .sx This presupposes that the interests and preferences of local voters broadly coincide with the preferences and objectives of central governments .sx Differences in the objectives of central government and local voters can undermine the value ( from the point of view of central government ) of elections as a control device to reduce bureaucratic slack .sx 3.4. The assignment of policy functions .sx Taken together , the three views of the role of sub-central governments presented above do not provide simple assignment rules for policy functions .sx A range of other considerations are involved .sx 3.4.1. Interjurisdictional externalities .sx As with any other externalities , a number of possible approaches could be adopted to ensuring that the interests of those affected by interjurisdictional externalities are taken into account .sx Bargaining between the affected parties is likely to result in efficient outcomes where the numbers of parties is sic !sx small .sx Fiscal instruments can be designed to operate like Pigovian taxes .sx A third approach is to move the assignment to a higher level of government , so that the interjurisdictional externality is internalized ( Olson , 1969) .sx In that case , one needs to balance the gains with the cost of service provision .sx Whilst a higher tier assignment may allow economies of scale to be exploited through specialization and a more efficient division of labour , the costs of communication and control rise more than proportionately with the size of the government unit ( Helm and Smith , 1987) .sx 3.4.2. Macroeconomic stabilization .sx For much of the post-war period there has been a general consensus that the appropriate location of macro - economic stabilization is the national level .sx Because they have greater spillover effects ( leakages ) , uncoordinated local stabilization policies would be less effective .sx Coordination would at the very least introduce new costs , and at worst could be thoroughly undermined by the incentives to 'free ride' .sx In recent years , indeed , increasing international economic integration has begun to undermine the consensus that even the national level of government is appropriate .sx Some of the debate over the transfer of macroeconomic 'sovereignty' under the European Monetary System and the Delors Plan has been conducted precisely with a view to internalize spillovers among nation states ( MacDougall Report , 1977 ; Padoa-Schioppa , 1987) .sx 3.4.3. Income redistribution .sx Two main reasons argue for assigning the distributional functions of government to the central level and to confine the role of local governments to those policies that do not have a significant redistributive impact ( Oates , 1972) .sx First , when income levels differ between areas , a given reduction in overall inequality can be achieved more efficiently if redistribution occurs between individuals than between different areas .sx Second , population mobility restricts the ability of local governments to make independent choices about redistributional priorities .sx Any jurisdiction attempting to operate a more redistributive policy than its neighbours will tend to attract individuals who benefit from it , and to be less attractive to those who lose .sx The ability of the area to sustain any degree of redistribution above its neighbours is reduced , or , where mobility is high , eliminated altogether .sx In practice , in most European countries , this does not need to be an all-or-nothing choice , and the range of functions operated by state and local governments does include many with some redistributive effect .sx Where mobility is low , the fiscal externalities from independent redistributive policies may be weak , and other considerations may be more relevant in determining assignment .sx In addition , it is possible - albeit at a cost - to devise financing arrangements for local government that largely offset the budgetary consequences of fiscally-induced migration .sx Economies of scale , informational requirements for efficiently targeting redistributional policies towards individuals , and the interaction between government unit size and the effectiveness of local elections as a control mechanism , are other key issues in determining the level of government .sx Helm and Smith ( 1987 ) argue that the appropriate assignment for the implementation of redistributive policies may contrast sharply with the conventional wisdom that redistribution should be left to higher tiers of government .sx 4 .sx Assignment of tax instruments .sx 4.1. Principles .sx Much as for spending , tax assignment hinges on economies of scale , the extent of interjurisdictional spillovers and population mobility .sx Although US evidence suggests that there could be substantial economies of scale in tax administration , its importance can easily be overstated .sx It is generally possible to assign the administration of taxes to a higher tier of government whilst allowing lower levels of government to choose the tax rates and other taxation parameters .sx Separating tax policy and tax administration may give rise to certain problems with achieving appropriate incentives for enforcement efficiency , but it seems to work reasonably well in many countries .sx Interjurisdictional spillovers in taxation raise the possibility of 'tax exporting' - levying taxes on non-residents to finance the services supplied to residents .sx Taxes on business activity and sales generally suffer from this deficiency , and are particularly inappropriate where government units are small , and the degree of economic integration high .sx In many countries taxes on business constitute a significant revenue source for local governments .sx However , as economic integration has increased within Western Europe , pressure for the reform of local business taxes has grown , with local control over business taxes being effectively ended in the UK and Germany , and active debate over the future of local business taxation in France and North America .sx Population mobility places some constraints .sx