Public finance, public administration and spatial policy

POLITICAL GEOGRAPHY

QUARTERLY,

S upp1ement to Vol. 5, No. 4. October 1986, S119-S133

Public finance, public administration and spatial policy Recent developments in urban systems and policy responses in the USA, UK and FRG ROBERT J. BENNETI

ABSTRACT. This paper analyses the relations between fiscal, administrative and policy systems in the context of changing environments created by forces of economic change and restructuring The analysis is developed within the context of urban systems within three countries: the USA, UK and Germany. The administrative, fiscal and policy systems of these three countries are described and the recent development of fiscal structures is assessed. Fiscal imbalances are argued generally to have increased within the urban system of each country. The consequences of economic change for fiscal structures are then analysed and factors underlying recent changes are examined. The argument of the paper is that fiscal and administrative structures can be assessed only within the context of the political and constitutional assignment of fiscal and other functions. Within this context recent changes in fiscal balance at local government level are argued to be mainly the result of changed priorities of central (or federal-state) ievel governments towards forms of ‘fiscal conservatism’.

finance, public administration and spatial policy concern the interaction of fiscal, administrative and political systems as they structure and restructure the geography of the state, para-state, and non-state sectors of economies. The _fiscul system concerns the structure and incidence of taxation burdens and expenditure benefits. The administrative system concerns the decision-making structures of bureaucracy and implementation of policy. The policysystem concerns the translation of political objectives into a~inistrative, fiscal or other structures. As well as this set of interactions within the activities of the institutions of state and para-state, activities and changes also take place in the non-state economy. These changes, external to the state as a political-administrative system, have profound impact on the state, and on the division of state from non-state activities. This paper seeks to unravel this set of interactions. The discussion is developed within the context of urban systems, but the approach is general. The paper first introduces a framework for understanding the interaction of taxation, administration and policy within the context of three examples of urban systems which are outlined for the US, UK and Germany. The consequences for the urban system of recent changes in the economies and the policies of these three countries are then described. Public

0260-9827186104 S119-15 $03.00 0 1986 Butterworth & Co (Publishers) Ltd

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Urban

Public finance and spatial policy administrative

systems

in practice

The systems of finance, administration and policy developed for urban areas vary greatly between countries. The discussion of these issues in much of the academic literature tends to be dominated by the experience of the older industrial cities of the northern USA, particularly of New York City. This is an important case, but a more general and subtle analysis demonstrates that each national system of cities is strongly contrasted, and even within countries major differences also arise. These contrasts depend upon the way in which the powers of central and local government are divided within the state. They also depend upon the division between state and non-state activities in different constitutional situations. It is a fundamental argument of this paper that the mechanics of these changes cannot be under stood apart from detailed study of the administrative and constitutional frameworks of central-local relations in any country. Most particularly, however, it is argued that administrative and constitutional questions themselves cannot be understood apart from the prevailing policy culture which determines how problems are perceived and responded to. Within this context the administrative and constitutional frameworks for the development of economic change are discussed below within three economies. These three economies (USA. UK and FRG) have experienced profound changes which are typical of those occurring in most developed Western economies in the nature and number of jobs, composition of households, the role and power of intermediaries (such as corporations), and the economic demand for goods and services. In summary we shall refer to this as the phenomenon of economic restructuring. This phenomenon is well-documented in many recent contributions (e.g. Clark, 1940; Bell, 1974; Galbraith, 1974; Dahrendorf, 1975: Chandler, 1977; Pred, 1977; Gershuny, 1978; Mossey, 1984). For cities, economic restructuring has had its chief consequences in the relative and absolute declines of both population and economic activity. This has shifted the location of most rapid rate of growth in population and economic activity steadily outwards from cities, first to suburbs, and then to smaller towns in the outer metropolitan areas. This phenomenon has been termed ‘counter-urbanization (Berry, 1976), or ‘devariously metropolitan decentralization, suburbanization’ (Van der Berg et al., 1981). It is chronicled for Europe in Hall and Hay (1980) and in Britain by Goddard and Champion (1983). Within the urban system, economic restructuring tends to lead to strong contrasts in fiscal burdens which reinforce the original pattern of economic and social change. As a consequence of this strong dichotomization a series of important spatial policy questions arise. Of these the most important are: 1. Appropriate assignment of responsibilities for services and their expenditure between central and local government (e.g. should education be a central or local financial responsibility?). 2. Appropriate assignment of the costs of local services between central and local governments (e.g. should local differences in council house costs be centrally or locally borne? cf. housing cost yardstick); or should payment of teachers’ salaries be a central or local responsibility (e.g. although locally administered they are a higher-level responsibility in Germany). 3. Appropriate assignment of taxes between central and local government (e.g. access to income tax by local as well as central government). 4. Assignment of responsibility for setting tax rates on local taxes (e.g. should these be locally autonomous, set uniformly by central government, or autonomous within limits as with ‘rate-capping’?). 5. Appropriate size and distribution of central-local transfers by grants and other support

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(specific vs. general grants; scale of transfers; distribution criteria). 6. Appropriate assignment of responsibility for loan and debt finance. 7. Appropriate size and organization of local authorities themselves; the consolidation reorganization question. 8. Extent of local responsibility for social and economic growth-related programmes.

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Different mixes of responsibilities in each of these categories give rise to very different outcomes: for local authorities, for people, for businesses, and for central government. These outcomes will also vary greatly with respect to accountability, degree of resignation, and voting with feet. In order to make the discussion more concrete the structure of three types of urban systems as developed in the USA, UK and Germany is outlined in the following three sections.

(a) The US urban system Most of the literature on the ‘urban crisis’, especially the ‘urban fiscal crisis’ has been dominated by consideration of the administrative and fiscal structure of the older, northern and metropolitan areas in the USA (see, for example, Sternlieb and Hughes, 1978; Clark and Ferguson, 1983a). This characterizes especially Marxian explanations (see, for example, O’Connor, 1973; Harvey, 1973; Hill, 1977). The organization of the older, mainly northern, industrial cities of the USA is highly fragmented, uncoordinated and strongly competitive between local jurisdictions. The typical pattern, shown in Figure 1, is a functionally integrated economic system or labour market which is heavily fragmented into a major central-city government surrounded by two or three counties within which are a multitude of suburban governments (usually municipalities and townships). These municipalities are referred to as the ‘incorporated’ area. Most municipalities are very small in area and population, certainly compared to the central city. They are dispersed, and it is possible for unincorporated areas to be surrounded by incorporated areas. In addition there are a large number of special districts for certain functions, particularly schools, fire, police, water and electricity supply, flood control, etc. Some of these special districts are organized at a metropolitan level, e.g. water and transport services, perhaps by coordination between counties: some are city-wide, e.g. housing; some are organized on approximate equality of population, e.g. School Boards. Generally, however, there is no correspondence of the boundaries of special districts and other governments. The councils of the central city, county and municipalities are elected with, mostly, an elected executive. The special-purpose districts are normally appointed. Hence, as well as administrative fragmentation, there is also political fragmentation. Occasionally central cities may also be counties, giving them greater administrative coordination; even where this occurs, however, the rest of the metropolitan area is highly fragmented. Most governments, whether city, county, township or special-purpose, have autonomous taxing powers, make independent expenditure decisions, and may also use charges and fees. Whilst almost all these governments use property taxes and fees, many use sales tax as well, and a number, particularly central cities, use income tax. In most states. local government has autonomy in definition of the tax base: this is an important source of inequality and is a major contrast to most other countries, particularly the UK and Germany. The taxing systems differ greatly between each locality, and also differ considerably between states. In most states, state constitutions are permissive of local actions. Generally at least one-half of local actions are within a context of freedom to act. This is in marked contrast to the UK where local authorities cannot act unless empowered

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Central City m

Municipalities

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FIGURE 1. Typical area1 organization of US metropolitan by special-purpose districts (not shown).

areas, which is overlain

to do so (the doctrine of ultra vires). Typically, cities and municipal governments operate socalled ‘housekeeping’ functions: police, fire, sanitation, streets, planning, libraries, recreation. There is democratic control of police and fire services, but their chiefs are appointed by the mayor. Typically the counties operate social and welfare services, and provide services for those areas within the county which are not incorporated within a municipality. As a consequence of this variable allocation of functions and taxing powers the typical US metropolitan area is fragmented, not only administratively and politically, but also fiscally. There is no congruence of the economic labour market of the urban system and of the political, administrative or fiscal structure. The result is a system in which strong positive feedbacks can be developed which lead to marked imbalances and continued divergences in fiscal burdens and benefits between areas. This is often particularly focused between central cities and suburbs, but also there are frequently marked imbalances between rich and poor suburbs. In this situation the practical policy tools to overcome imbalance mainly focus on three options: (i) consolidation and annexation; (ii) increased state action; (iii) increased federal action. Consolidation and annexation seek to extend the responsibilities of the major governmental jurisdictions, particularly of the central cities, by combining together local municipalities (consolidation)

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or allowing the central city to annex localities around it. Neither option offers much practical hope in most northern states. Consolidation and annexation normally require the consent of each locality and this is not normally forthcoming. However, annexation can be applied compulsorily, in most states, to an unincorporated area. In southern and southwestern states unincorporated areas have surrounded the central cities, whilst older northern industrial cities have been surrounded by incorporated areas. Annexation has therefore been a major option in cities like Dallas, Houston and Atlanta, and this represents a strong contrast to the northern US cities. Increased state and federal action have been the options which have been most effective in overcoming fiscal imbalances. However, the level of action in many cases has not been sufficiently strong or sufficiently redistributive to solve, although it has ameliorated, the fiscal problems. The states do embark on a large number of fiscal support programmes, and these have expanded in recent years. However, most state legislatures are dominated by rural and suburban interests, such that the poor, especially those in central cities, are a political minority, even within highly urbanized states. It has been difficult, therefore, to gain a political will at state level to overcome fiscal imbalances. At federal level, a massive expansion of direct federal-local aid, passed through the states, occurred in the 1960s period of ‘war and poverty’ programmes. This aid increased in level through the early 1970s with numerous intergovernmental grant programmes of which the most important were Revenue Sharing, Community Development Block Grant (CDBG), Countercyclical Revenue Sharing, Public Service Employment Program, and the Comprehensive Employment and Training Act (CETA). These had the dual effects of giving aid to fiscally stressed areas, and creating leverage on the states also to act on their local fiscal problems. Through the period from World War II until the middle 1970s therefore, a steady increase in the amount of higher-level government fiscal support progressively reduced, though by no means solved, the problems of fiscal stress and imbalance within the US urban system. (6) The UK urban system

In comparison with the USA and Germany, and also compared with most other OECD countries, the UK urban system has a highly consolidated form of administrative, financial and political control. Since 1974 in England and Wales (1976 in Scotland) a uniform twotier system of local government administration has been instituted by central government legislation. In this system the major metropolitan areas are differentiated from the nonmetropolitan areas, as depicted in Figure 2. In the non-metropolitan areas the upper tier, the County (Region in Scotland), is responsible for the major functions of education, personal social services, transport, police, fire, and refuse disposal: whilst the lower tier, the District, has mostly minor services such as housing, public transport, and refuse collection. In the metropolitan areas the services are administered solely by the Metropolitan Districts (Boroughs in London), or by special-purpose metropolitan bodies. The speciallpurpose bodies are concerned mainly with transport, police and waste disposal (and education in London). Prior to their abolition on 1 April 1986 metropolitan county governments administered most metropolitan-wide services. There is, therefore, an important contrast between the location of major responsibility, with the county having the major services, and hence expenditure levels, in the non-metropolitan areas, and the district or London borough having the major responsibility for service expenditures in the metropolitan areas. In the two types of locality, however, an attempt has been made to keep population sizes relatively similar. Nevertheless, the metropolitan districts are generally larger, at 140 000-700 000, than the non-metropolitan districts at 80 000-400 000. It was also intended to keep a close

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-

county

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District Boundary

Boundary

FIGURE2. Typical area1 organization of UK metropolitan areas. (The county level is called ‘region’ in Scotland. The metropolitan counties and GLC were abolished from 1 April 1986.)

relation between the sizes of metropolitan districts and non-metropolitan counties; the latter range from 120000 to 1.5 million. In the period since reorganization in 1974, therefore, and up to abolition of the metropolitan counties in 1986, the metropolitan areas had large consolidated districts with the addition of a general-purpose metropolitan government at the county Ievel. Not all the metropolitan functional system was contained within this unit, particularly in the London region, but the form of urban government was far more consolidated than in the USA or Germany. After 1986 a less systematic treatment has been accorded to metropolitan-wide services: in some urban areas special-purpose districts, or cooperation between districts, is sufficiently close that a form of county coordination still exists: in other areas, particularly in London, considerable competition and lack of coordination have resulted, especially between the inner and outer metropolitan area. Nowhere, however, does fragmentation or competition come close to the pattern obtaining in US cities. In the nonmetropolitan areas there are a number of major urban systems, though not at the scale of large agglomerations. Here the pattern is one in which there are one or two large city districts surrounded by suburban or rural districts. Each district, however, has similar levels of responsibilities which are usually fairly minor. The county, therefore, performs a major coordinating function for these urban systems. As a result, fiscal disparities cannot so readily arise. A major change occurred with reorganization in 1974. Prior to reorganization the large city districts were County Boroughs with responsibilities for almost all local functions; the counties being responsible for the major functions in the suburban and rural areas outside the county boroughs. Under this administrative arrangement considerable fiscal imbalances could, and did, arise. Each tier of administration has autonomous taxing powers on the property tax (‘the rates’). The lower tier administers tax collection and the upper tier makes precepts on the tax base which the lower tier collects. The property tax base is defined by national legislation, in contrast to the USA. All localities also use fees and charges, although the

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extent of usage varies very considerably between areas. Until 1985 local taxing decisions were completely autonomous, but since that date ‘rate-capping’ legislation has set upper limits, in terms of centrally assessed expenditure requirement, beyond which local tax rates cannot be raised. On the expenditure side of the budget, UK local authorities have always been more constrained than their counterparts in most other countries, particularly the USA and Germany. Generally they cannot act unless specifically empowered to do so (the doctrine of ultra vires). The executive councils of each tier of administration are elected, usually under declared political party tickets. The level of political party involvement at local level has steadily increased, and this has meant the decline of the ‘independent’ councillor who was formerly dominant in the non-metropolitan areas. Special-purpose bodies in metropolitan areas are normally appointed with a large membership derived from the administrative or elected councillors of other local governments. As a result there is some fiscal, political and administrative fragmentation in the UK urban system, and this has increased since 1986; but it is relatively minor compared with the USA. A major area of controversy has surrounded the precepting by upper tiers on lower-tier tax bases; this blurs the lines of accountability and often has required low-spending, relatively conservative, outermetropolitan and suburban areas to levy high local taxes to fund high-spending expansionist inner-metropolitan local governments. A further area of controversy has surrounded the increasing level of politicization of local government. In particular, there has been a rapid expansion of more extreme leftwing politics in the older industrial areas normally administered by central-city and metropolitan district governments. This ‘new left’ local socialism (see Boddy and Fudge, 1984) has sought rapidly to expand local services, expenditure, and especially manpower. Although developing from the early 1970s the activities of these political groups have been particularly evident with the Thatcher administration at central government level-local administrators have sought to conserve locally expanded services as well as openly to confront central government’s alternative political objectives. The UK urban system has to some extent become the battleground between political ideologies on the question of the appropriate size and form of the public sector, as well as on the constitutional issue of the appropriate level of autonomy of local from central government. As well as a high level of consolidation of local government, the UK is also distinguished by a high level of central government support for local services. This occurs mainly through a wide range of grants, of which the most important is the Rate Support Grant (RSG). Grants in total accounted for over 45 per cent of local revenue in the 1970s and have declined only a little in the early 1980s. Of these grants nearly 80 per cent is made up of the RSG, which is a general grant allocated to equalize the spending need and tax base of local authorities. In addition to RSG there is a range of specific grants. In the 1980s the proportion of specific grants has expanded at the expense of general revenue support from RSG. This reverses the trend established in the 1958-1979 period of expanded central general grants. Like the USA, therefore, and over the same period of time, the UK has seen a steady expansion of higher-level government support to local government, followed by a period of contraction. In the UK the generally higher level and greater degree of redistribution of central government grants has substantially ameliorated fiscal disparities compared with the USA (see Bennett, 1982). Nevertheless, positive feedbacks associated with the relocation of population and economic activity have been important, and have tended to accelerate during the mid-1970s and 1980s. Dissatisfaction with the system of local revenues based on the rates has been expressed in publication of government proposals and a timetable for reform (GB Government, 1986).

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(c) The West German z&an system In comparison with the USA, or even the UK, much less has been written about the German structure of urban finance in the context of models of fiscal stress and the consequences of economic restructuring. A recent discussion of the German urban system in the context of the Anglo-American debates is given by Bennett (1984) who demonstrates that, although the structure of intergovernmental relations is strongly equalizing, recent developments in intergovernmental aid and federal tax legislation are creating the potential for considerable fiscal stresses to develop in the older industrial cities. The organization of German local government has similarities to that of the USA. Arrangements differ between states @rider))) and the level of intergovernmental involvement in terms of grants also varies considerably. The organization of government in the older industrial areas, particularly in the Ruhr, is one in which a number of large consolidated tracts characterize central cities, which often abut each other. These are surrounded by smaller local authorities which are often of very small size. In the lessurbanized areas large cities are similarly consolidated tracts with large popLllations surrounded by many small local jurisdictions. In the outer-metropolitan and rurai areas the county exists as an administrative level, but for most small rural areas the End is the most important provider of services. The lowest tier of local authority (gemeinde) is often very small indeed: normally under 15 000 in population, with many local authorities under 1000 in population. These small tracts exist despite considerable efforts to consolidate in the late 1960s and early 1970s. In the metropolitan areas, and for the large cities in less-urbanized areas, the central cities usually have the status of being counties as well as gemeinden (so-called k~e~sfye~~s~~d~en). To these city-counties the states normally delegate considerable powers which result in a coordinated and consolidated form of urban administration. Outside the urban centre, however. coordination relies on the state or county government which may, but usually does not, give consideration to urban structures and restructuring of population and economic activity. For some functions, notably transport, water supply, sewerage and hospitals, associations of local authorities (verbiinden) do give a major level of coordination of services in both urban and rural areas. The resulting pattern of urban government, shown in Figure 3, is thus relatively fragmented between central cities, suburbs and outermetropolitan areas, with coordination within major central cities and other urban centres (particularly where they are city-counties), and some further coordination between local authorities occurring for certain functions where associations exist. Nevertheless, the very small size of German local authorities produces highly fragmented urban administration with the ability to develop strong disparities between central cities and the rest of the urban system. The executive councils of all levels of government are elected, but those of the associations are normally appointed by the local authorities. All levels of government, including associations, have autonomous taxing powers, make independent expenditure decisions, and make extensive use of fees and charges. The main source of revenues is often fees, particularly for associations. Larger communities rely mainly on local taxes, chiefly those on businesses. Smaller communities usually rely mainly on shared taxes and grants. A property tax provides a small source of revenue for almost all localities, and most localities also have minor and relatively insignificant taxes such as land transfer tax, amusement tax, drink and ice cream tax. Business tax, property tax, fees and minor taxes provide autonomous revenue sources for which tax rates vary considerably. Valuation of tax base is a state-wide function under federal legislation. In addition to autonomous taxes, a major contrast to the USA and

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Central City/City-County rT?J

City-County

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FIGURE3. Typical area1 organization of West German metropolitan areas; which is overlain by local authority associations (not shown) to perform special functions (gemeindeverbanden).

UK is the importance of shared taxes. These are taxes which are legally the responsibility of one level of government, but shared with other levels of government through constitutional provisions. The federal VAT provides the major source of income to the states through such sharing. Federal income taxes are shared 15 per cent with local authorities (14 per cent, 1969-1979), whilst 40 per cent of the local business tax is shared with the federal government (up to 1979, decreasing to 14 per cent in 1985; Bennett and Krebs, 1986b). In addition there is a complex network of federal and state general and specific grants. The result is a set of interrelationships between federal, state and local levels which is rather more complex than in the USA, although rather more uniform across the country (except for state-level grants). The extent to which fiscal and political imbalance can develop within this system depends on the developments of local tax rates and state-level grants, but is most fundamentally determined by federal legislation which adjusts the size of autonomous local tax bases and shared revenues. As in the USA and UK, reforms in the postwar period, particularly in 1956 and 1969, had the effect of redistributing tax bases and increasing the equity of

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expenditure and taxing functions. Particularly important to revenue equalization was the exchange of a share of local business tax for a share of the federal income tax since 1969. Also important was the steady increase in federal and state-level grants. Since about 1978, however, this expansion of support has been reversed, again as in the USA and UK. The result has been an expansion in the level of fiscal disparities, particularly between central cities and other areas. Moreover, the expansion of disparities has accelerated during periods of recession, as in 1980-1984. Structures of positive feedback of fiscal change have therefore been stimulated in the period since the iate 1970s.

Consequences

of recent

changes

The previous discussion has outlined the USA, UK and FRG administrative, fiscal and political structures and their intersection with economic restructuring. The consequences of this intersection depend upon the balance of local interests (tax base, need to spend, political priorities) with federal-state or central interests, as well as the economic development of the economy, state and para-state sectors as a whole. The consequences of administrative, fiscal and political interaction with economic restructuring are now developed at length below for the three examples of the USA, UK and FRG. In each of these countries recent developments have shown the emergence of an increasing level of fiscal disparities. These disparities characterize the comparisons between wide classes of local authorities, but are often particularly focused between local authorities within the functionally interdependent system of metropolitan areas. For each country all indicators show rapid increases over the period leading up to the mid-1970s. Thus total expenditure, total tax yields, manpower levels, and payments from central or federal-state government, all steadily increase over this period. The balance of revenue sources to fund expanding expenditure, however, changes markedly over this period. Local government in each country experiences a steady growth in transfers from higherlevel government. Expansion of expenditures was thus underwritten in large measure by expansion of support from the national rather than the local tax base. By the mid-1970s in each country expansion of central support was leveliing off, and by the late 1970s reverses occurred. The detailed mechanics of these changes differed between the three countries, but despite their very different administrative and fiscal structures, the general factors underlying the changes were very similar: first, a reversal of central government support replacing expanding levels of transfers by contraction, and second, a general questioning of the extent and role of local government activity. Space is insufficient here to present the evidence of these urban fiscal disparities: hence the redder is referred to ACIR (1980, 1985), Bennett (1980, 1982, 1984), Bennett and Krebs (1986a,b) and Offord (1986) for a full review of the empirical evidence and relevant literature for the three cases of the USA, UK and FRG. Here attention is concentrated on the policy culture which has allowed greater tolerance of the development of wider fiscal disparities within local government. Tolerance of the increases in fiscal disparities that have occurred cannot be divorced from the political system and the policy culture within which they have developed. The dynamics of the political and policy culture are the features that mediate between need, taxing and central government support, on the one hand, and the final outcomes of fiscal pressure, on the other hand. They derive from the ideologies and preferences of political leaders and organized groups, from the attitudes of administrators and bureaucrats, and from the interest-group representation of municipal employees and professionals, all developed within the social, economic and political climate of voter support, and acquiescence or assent of the population and business community affected by their decisions. A number of recent analyses

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of the development of urban fiscal problems within the context of changing political culture have been made. A good example in the USA is the study by Clark and Ferguson (1983). They argue that the ‘New Deal Democrats’ that instituted the War on Poverty programmes in the mid-1960s-early 1970s period have been replaced by what they term ‘New Fiscal Populists’. Others have termed this the growth of fiscal conservatism. Clarke and Ferguson argue that in the earlier period the politicians depended heavily on organized groups of unions, civil rights and ethnic organizations, but overlooked the ‘silent majority’ of individual citizens, particularly the middle class. As a consequence Republican and New Fiscal Populists have emerged to represent the interests of individuals as taxpayers and consumers; they have emphasized market forces as instruments of policy rather than organized groups; and they have argued that services can be maintained only by shifting the burden of support from taxes to charges and quasi-fee systems of public finance, improving efficiency of delivery, contracting out service provision, and replacing public by private services. The result has been pressure to diminish tax burdens on people and businesses, reduce the level of intergovernmental support borne on federal and state tax bases, and seek to maintain public services by market-line forces. In the UK the emergence of a new ‘fiscal conservatism’ or ‘new right’ in central-local relations is argued by Dunleavy (1984). In this view bureaucracies are seen as budgetmaximizers which have crippled market power. The need then is to induce ‘market discipline’ into government: at central and local levels. Within this view local government can offer market opportunities by encouraging migration to better mixes of taxes and/or services in accord with preferences. Thus, in most extreme forms (e.g. Scruton, 1980), the emergence of greater fiscal imbalance is seen as inevitable, and desirable. Deeper analysis, however, suggests that the polemic of the new right, and its identification by the left, simplifies a much more complex clash of pro-spending tendencies of many local authorities, with centralist controls which pre-date the present Thatcher administration-although the conflict clearly itensifies since 1979 (see Gyford and James, 1983). Similar clashes, though much less extreme, between federal and local interests have also occurred in Germany, as evidenced in the recent English-language review of business tax discussions given by Bennett and Zimmerman (1986). These changes in general-political and policy culture become highly focused within the urban system. In the USA this has been marked by, first, changes in the national tax system which, although not specifically aimed at state or local government, nevertheless have a major impact on their finance. The general level of federal corporation and income tax has been reduced, and the tax bases eroded by various major and minor concessions. Important recent changes were the expansion of accelerated depreciation allowances under ERTA (1981) and ARERTA (1982) and increases in exemption levels for small businesses. Since 66 per cent of state and local governments apply the federal tax definitions or closely follow them (Penniman, 1980) there has also been a major erosion of the state and local income and corporation tax bases. This, combined with a more conservative mood on tax raising in general, has resulted in major cutbacks in tax yields. A second factor has been the reduction of federal aid to state and local governments. Grant programmes have been reduced, abolished or modified: for example, the important Revenue Sharing Program has had all state level transfers removed. Many federal categorical grants have been consolidated into Block Grants but at a much lower level of funding. The claim has been to shift responsibility from federal to state level for the support of local government. However, this ‘new federalism’ relies on states being willing or able to take up the burden. In practice, a major cut in intergovernmental transfers to local government has resulted. A third factor is an attack on specific aid to urban and city financial support: a very direct reversal of the

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expansion of federal-local aid in the early 1970s. The cutbacks in many major programmes of urban aid (e.g. CDBG, PSE and CETA) have been accompanied by cuts in welfare programmes which also are disproportionately concentrated in cities (e.g. food stamps, social security payments and public housing). A fourth factor has been the growth in resistance of local populations to continued expenditure and tax expansion at state and local level. Apart from general voting influences towards low spenders and tax cutters, there has also been a rapid growth in tax limitation referenda. In the US most states allow direct referenda to make constitutional and other policy changes at state and local level. There has been a rapid rise in the number of tax limitation votes since 1970, and especially since the demonstration effect of Proposition 13 in California in 1978. The result is that, compared with nine states in 1970, 38 states had limitations on taxes or expenditures by 1982. Although different in mechanics, a form of ‘New Fiscal populism’ has also affected the UK. Well before 1979 a slowdown in local expenditure was occurring as a result of diminished central government support. Cash limits on local spending were introduced in 1976, and the local finance system became steadily more integrated into central government expenditure planning and control under PESC. However, since 1979 these changes have accelerated as the Thatcher government has sought to reduce direct income tax and corporation tax and increase indirect taxes, especially VAT. At the same time it has been sought to limit local rate levies and reduce local expenditures by abolition of supplementary rates since 1982, rate-capping from 1985, and reductions in RSG since 1980 with grant incentives to spend close to centrally set targets since 1981. In addition in the 1984 budget (effective for 1984-1985 tax year, with transition arrangements to 1986-1987) there has been a progressive reduction in corporation tax rates from 52 to 36 per cent, and abolition of National Insurance surcharges. As a consequence, local taxes have become steadily more important for both people and businesses, a feature accelerated by selected reductions in income through the 1979-1984 recession. At the same time as local tax becomes steadily more important, central grants have been held in check and then reduced, so that a major shift in the balance of central-local tax burdens has been initiated. The influence of central government on these changes, and the spatial variation across the urban system, has been a major factor leading to increased rate poundages since 1974. New need to spend accounts for 1 per cent of 1974- 198 5 increases in rate poundages in central cities, but a decrease of 4.3 per cent 1974-1985 in other areas. Changes in the levels of grants received by local authorities are the second-most important influence on changing rate poundages. These induce a downward influence on rate poundages of 15 per cent 1974-1979, but an upward influence of 26 per cent for 1974-1985 in central cities. In other areas poundages are reduced by increased grants by 4.3 per cent for 1974-1979, and increased by 17.6 per cent for 1974-l 98 5. The change in total rateable value of areas is a further influence on rate poundages. This reduces rate poundages to keep a constant expenditure level. The reduction is 6.2 per cent (1974-1979) and 11.5 per cent (19741985) in central cities; and a reduction of 7.4 per cent (1974-1979) and 12.9 per cent (1974-1985) in other areas. The effect of local government discretion to spend at higher levels is also an important factor. This accounts for 7.4 per cent of poundage changes in central cities; 6.5 per cent (1974- 1979) (1974-1979) and 7.0 per cent (1979-1985) and 3.9 per cent (1979-1985) in other areas. However, expenditure growth ranks well behind the influence of rate revaluation and grant effects in importance in influencing poundage change, and is roughly equal in effect to that of the growth of new rateable value. Clearly these conclusions aggregate many different local authorities together. But the main conclusion of this analysis must be that approximately 15-26 per cent of change in rate poundages (1974-1985) is accounted for by factors in the control of central, not local,

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government, namely rate revaluation and grant levels. A more minor though important effect can be related to local government expenditure expansion: approximately lo-14 per cent. Change in the urban system increases the tax base and the new need to spend, giving a net decrease in poundages of about 10 per cent. In Germany, a form of ‘New Fiscal Populism’ has also been evident, its prime focus being to reduce the burdens on business to stimulate economic growth. National tax reductions have resulted in grant transfers from federal and state levels of government being reduced from 30 per cent of local revenue in 1970 to 27 per cent in 1985. Most of this reduction is due to cuts in capital grants from 9 to 6 per cent of total revenue. Most important in Germany have been not grants, however, but reforms of taxes, mainly focused on business tax relief. These reforms have been accomplished by modification of federal tax definitions which, as these must be applied by local government, then modify local tax receipts. The federal government has increased the level of tax-exempt local profits from DM 15 000 to DM 24 000 in 1978, and to DM 36 000 in 1980. The level of deductible interest payments has been increased from zero before 1982 to 40 per cent (1983) and 50 per cent (1984), plus 12 per cent of land value since 1982. The tax-exempt level of local capital assets has similarly been increased from DM 6000 (1978) to DM 120 000 (198 1). Additionally, long-term debt deductibility was introduced in 1983, as for the profits tax. The local payroll tax, responsible for approximately 8 per cent of revenue for the 30 per cent of local authorities using the tax, was reduced by 6 per cent in tax yield in 1978 by increasing the tax-exempt payroll level from DM 9000 to DM 60 000. The tax was then abolished with effect from 1980. The consequence of these changes was to exempt all but large businesses from local business tax. The research results of Bennett and Krebs (1986a,b) make it clear that these changes disproportionately affect central cities since these are the main receivers of business and payroll taxes. Some compensation is received from reform of the upward sharing of the business tax and by increases in the income tax share. But these effects diffuse across the urban system and, in the case of the increase in income tax share, go mainly to hinterlands rather than to central cities. Conclusions In the discussion presented above it has been possible only to outline a set of administrative, fiscal and political relationships between local authorities within urban systems, and the different effects of economic change on the development of central-local actions in the three countries. Despite major differences in the mechanics of change in each urban system, however, many of the consequences of change are remarkably similar in the three countries discussed. These similarities may suggest a convergence, as time progresses, towards a general pattern of fiscal conservatism, a major manifestation of which will be increasingly severe fiscal imbalances between localities within the same functional urban systems. The USA, in its older northern industrial cities, still presents the extreme. It has a highly fragmented and competitive local government administrative system, and there is a tradition of relatively low levels of federal or state government involvement in local government, with a resulting high degree of autonomy in tax and expenditure development. As a result it has been possible for extreme levels of fiscal disparities to develop between areas even before the recent development of fiscal conservatism; and this has been accepted as a ‘normal’ outcome of the functioning of the economic and political system. Germany is an even more highly fragmented local government administrative system but is overlain by a high degree of state and federal involvement in grants, tax sharing and constitutional responsibility. However, recent pressures for national tax reduction, particularly to ease the tax burden on businesses, have resulted in a strengthening of fiscal disparities in recent years which again has been

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largely accepted as a necessary outcome of fiscally conservative macro-economic reforms. In Britain, local government is highly consolidated and kept within tight limits of service responsibility and expenditure levels. Since the late 1950s a high level of central involvement in support for local services has prevented major fiscal imbalances arising; indeed a major reduction in fiscal differences occurred with the development first of central grants and then, in 1974, with the r~rg~i~ti~ of local government, Recent reductions in levels of central support, tighter expenditure controls, and pressure for tax reforms shifting burdens from higher to lower income groups, suggest that the fiscal imbalances within the UK, which have increased since approximately 1977, will increase still further as time progresses. In each country a new stage of development of spatial policy is being reached where aggregate policy changes made for macro-economic reasons, to modify personal or business incentives and taxes, and induce market-line pressures in the public sector, have profound spatial consequences which tend to increase fiscal imbalance within the urban system. At the same time explicit spatial policy changes, to reduce urban aid, central grant supports, or modify local tax definitions, in order to increase market-like pressures, are reinforcing the macro-economic changes often to the disadvantage of central cities. And all this is occurring at a time when economic change and restructuring of the economies of the USA, UK and FRG is putting further pressure on the finance both of central cities, to bear the costs of decline, and of outer-metropolitan hintedands, to bear the costs of growth. Hence whilst it might have been true to say in the mid- 1970s that fiscal crises similar to those in the USA were not developing in countries like Britain and Germany, the effect of recent changes in the political culture which frames central-local reiations are beginning to suggest that fiscal imbalance, resulting in stronger positive feedbacks within the fiscal system, can develop in the future. The outcome of these pressures will depend on the extent to which, on the one hand, fiscal changes can successfully stimulate a market-like response which maintains services and, on the other hand, deficiencies in revenue as a result of conservative fiscal policies can be made good through improved efficiency of service delivery or substitution by non-state market goods. Certainly within the transition period in establishing this new political and economic culture those areas with high need and/or low resource bases will find considerable fiscal difficulties. Within the spatial context of the urban system, these difficulties will tend to focus increasingly on declining sectors of the economy, which are often particularly in central cities of the older industrial areas. References ACIR (1980). Certral City-Suburban FticaalDisparity and LXstress 1977, Report Ml 19. W~hin~on, DC: US Advisory Commission on ~tergove~~tal Relations. ACIR (1985). SignifiCant Features ofFiscal Federalism, 1984 ed. Washington, DC: US Advisory Commission on Intergovernmental Relations. BELL, D. (1974). The Coming Post-Industrial Society. London: Heinemann. BENNE~, R. J. (1980). The Geography of Public Finance: Werfare under Fiscai Federalism and Local Gowrnment Finance. London: Methuen. BENNETT, R. J. (1982). Central Grants to Lucal Government: The Political and Economic Impact of the Rate Suppoti Grant in Engkznd and Wales. Cambridge: Cambridge University Press. BENNETT, R. J. (1984). The finance of cities in West Germany. &ogress in Pianning 21, l-62. BENNETT, R. J. AND KREIS, G. (1986a). Locnf A&o@ Fitzance in German Cities: Ana&sis ofthe &dget in Relation to SpatiaI Structure of Committees. London: London School of Economics, Working Paper ‘Local Business Tax’ project. BENNETT, R. J. AND KREBS, G. (1986b). Local Taxes in German Cities: Analysis of the Spatial Structure and Development of Tax Yields, Tax Base and Tax Rates. London: London School of Economics, Working Paper ‘Local Business Tax’ project.

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