Spending Cuts or Local Tax Increases? An Analysis of Local Authority Preferences in England

Abstract

Local authorities in England have been set spending targets. If they exceed these targets, their central government grant is reduced, thus sharply increasing the local tax rate. The resulting spending decisions of local authorities have been analysed, in an attempt to explain their behaviour in terms of a model of rational spending behaviour in line with neoclassical consumer theory. Various families of indifference curves indicating preferences between expenditure and local tax rate increases have been tested for consistency with the actual spending decisions of the authorities, and evidence found to support such a model. Empirical results are presented. But there is evidence that other variables, such as past spending decisions and expectations about the future, also have a significant impact on spending decisions.