The 1990 Reform of U.K. Local Authority Finance: An Alternative Analysis: Reply to Barnett and Smith

Abstract

IWOULD LIKE to thank Richard Barnett and Peter Smith for their comment on my paper on English local authority finance, which I found both useful and stimulating. In their analysis they make two points. The first is that, given the system of finance described in the paper, the regression results reported on local authority spending are misspecified since they take no account of the kink in the budget constraint faced by local authorities. This is of course correct, and in subsequent work with James Gordon, we did use the econometrics of kinked budget constraints to look at the behavior of English local authorities in more detail.1 In the earlier paper, however, I was not attempting to build a model of local authority behavior. Rather, I was trying to illustrate the fact that local authorities did appear to alter their spending, depending on the differing tax prices they faced due to the system of local authority finance then in place; hence, the graphs of the relationship between ratable value and spending provided in the text. The regression results reported were simply meant to illustrate this relationship evident in the graphs, a point which I probably did not emphasize sufficiently in the text. Barnett and Smith's second point is that, while the system of local authority finance described in the text is accurate for the years before 1989/90, in 1989/90 itself (the year for which I analyzed spending data),