Should central government seek to control the level of local authority expenditures

<p>Should local authorities be free to determine their expenditure, provided they finance changes in spending by changes in local taxation? We set up a theoretical framework to analyse this issue, and discuss three arguments that have been put forward for central control of such spending. The first relates to tax spillovers, the second to distributional effects combined with imperfect local democracy and the third considers self-interested local politicians. While these arguments cannot be entirely dismissed, they are subject to numerous qualifications and, if correct, would imply the desirability of a number of policies other than expenditure capping. </p>