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One of the UK’s most influential right-leaning think tanks has come out for a move to a federal system in which each layer of government must raise the cash it spends in almost all areas.

The Institute of Economic Affairs – traditionally seen as a champion of Thatcherite thinking – argues that the UK Government’s introduction of English Votes for English Laws (EVEL) is “no solution to problems caused by devolution”.

Author Professor Philip Booth argues that under today’s devolution arrangements “there is far more devolution of spending than of revenue raising” and this is “probably the worst of all possible combinations.”

Related: The UK is on the road to becoming a federal state and an independent body is needed to oversee Government funding, Plaid Cymru states

Referendums

He writes it is “crucial” that “revenue must be raised by the layer of government that is undertaking spending” and that “one layer of government must not bail out the debts incurred by any other layer of government”.

The paper comes as the debate continues about whether a referendum should be required before the National Assembly gains income tax-altering powers.

Before the introduction of a federal system, Prof Booth argues, there should be referendums in each of the UK’s nations – and Scotland would once again have the opportunity to vote for independence.

poll loading Should there be a fully federal UK? 0+ VOTES SO FAR YES NO

He writes: “The referenda could pose alternatives such as the status quo or full independence for Scotland and the other nations. However, the main proposal would be for a federal system to be created.

“Within that federal system, Wales and Northern Ireland would have to decide whether they should be independent nations in the same way as Scotland or join England while having a degree of devolution.”

Read more: Wales needs to find its place in a federal Britain in the wake of the Scottish Independence Referendum, argues Peter Hain

Under his proposals, the federal government would have “a very limited number of powers including defence, foreign affairs and border control and a small parliament and executive.”

The federal parliament would have to be prevented from clawing back powers, he writes, stating: “Federal states have a tendency towards centralisation, the US being an important example. Centralisation would be prevented by requiring unanimity among the parliaments of all the individual nations as well as agreement of the federal parliament before any further powers were passed to the federal (UK) level.”

Within each nation, he continues: “[R]esponsibility for the following should be transferred from national government to the local level: environmental policy; working-age welfare; education and health; granting of permissions for and regulation of natural resource exploitation; lifestyle regulation; policing; and housing and planning.”

Opinion: Why stirring the federal beast in the United Kingdom could prove a dangerous move

Wales 'over-represented'

Claiming that today “Scotland, Wales and Northern Ireland are over-represented in the UK parliament,” he writes: “[In] England, there are nearly 30% more electors per parliamentary seat than there are in Wales... Overall, therefore, the devolution settlement creates unrepresentative government and is likely to create a bias towards big government.”

He states there are a median average of 56,800 voters per seat in Wales, compared to 72,400 in England.

Pressing for change, he writes: “The UK has the most centralised government of the G7, as measured by the proportion of revenue raised by sub-central government. In the UK, only 5% of revenue is raised locally, compared with 50% in Canada and 13% in France, which is the next most centralised country by this measure.”

Read more: What Britain needs is a federal system

Launching the proposals, Mr Booth, who is Professor of Finance, Public Policy and Ethics at St Mary’s University, Twickenham, said: “The UK’s approach to devolution is incoherent and unstable. It’s clear that the only long-term stable solution is to create a proper federal state with a very small number of powers held at UK level.

“All other issues should be the responsibility of separate governments in Scotland and the Rest of the UK (or England, Wales and Northern Ireland). There should then be a sweeping decentralisation of regulation, tax and spending powers to local government.

“With very few exceptions, each layer of government must raise what it spends.”

Related: Carwyn Jones says a federal Labour party is 'one option'

Shadow Welsh Secretary Nia Griffith said: “This report highlights the flaws of the Government’s botched plans for English votes for English laws. Rather than being a genuine attempt to reform the Commons, they have more to do with the Conservative Party’s self-interest in increasing their Parliamentary majority.

“The new system prevents Welsh MPs from voting on issues which directly affect their constituents and has weakened Wales’ voice at Westminster. People in Wales want their MPs to be able to speak up on cross-border services but this crazy reform could put paid to that.

“Serious questions about how the country is governed would be best addressed through a UK-wide constitutional convention, rather than the Government’s rushed and highly partisan approach.”

Read more: Dafydd Elis-Thomas calls for 'liberation of England' in new federal arrangement for UK

Plaid Cymru MP Jonathan Edwards MP said: “English Votes for English Laws is nothing but a sticking-plaster solution which creates even more constitutional complexities and consigns Welsh MPs to a second-class status. In the very least we need to be moving to a model in which all constituent parts of the UK are treated with equal respect.

“The current Wales Bill obviously falls far short of delivering this and is a symptom of the lack of statesmanship by the Westminster elite. The gross geographical wealth inequalities which exist within the British state are a direct result of the over-centralised grip of the Treasury on economic policy.

Contrast this with more federal or con-federal structures such as the US and Germany where wealth is more geographically equally spread. The only hope for the Welsh economy is the empowerment of the Welsh Government with meaningful job-creating levers.”

The Wales Office declined to comment.