Conclusions and recommendations
Introduction: Balance of Funding
1. We
commend the ODPM for its commitment to transparency on the progress
of the review and for making a range of working papers publicly
available, including the steering group minutes. (Paragraph 9)
2. Enhancing the accountability
of local authorities to the people they serve is at the heart
of the balance of funding debate. (Paragraph 14)
Gearing
3. The
Committee is convinced that gearing has a negative impact on local
authorities by distorting accountability, magnifying any weaknesses
in the formula grant system and making the entire system less
clear. It was the major factor in the 12.9% average increase in
council tax bills in 2003-04. The ODPM has confirmed that there
is no evidence that gearing has any positive effects on efficiency.
(Paragraph 40)
4. It is clear that
Government grant can be significantly reduced from its present
level and still fully meet its functions of equalisation and meeting
national objectives through ring-fencing. Revenue Support Grant
of £27 billion in 2004-05 is well above the level needed
for equalisation. Plans to cut ring-fencing will mean a greater
proportion of grant is paid through Revenue Support Grant. We
conclude that the only purpose of keeping grant so much higher
than necessary is to have a greater control of local authority
expenditure, as a tool of macroeconomic policy. While economic
stability is a legitimate goal, the relatively marginal effect
of small changes in local authority expenditure within the context
of the whole economy and negative impact of gearing on local authorities
leads us to recommend that central Government should have control
only over the grant it needs to meet the goals outlined above.
Local authorities should have control over a much greater proportion
of their income, at least 50%. Our proposals for the taxes which
should fall under local government control are outlined later
in this report. We accept the Minister for Local and Regional
Government's argument that equalisation means that some gearing
effect will always be part of the system, but the changes we propose
aim to reduce this and its distorting effects. A shift in the
balance of funding of the order of our recommendation would make
the system significantly more acceptable and transparent. (Paragraph
50)
5. The Government
needs urgently to clarify its plans for funding for schools.
(Paragraph 51)
Other grant issues
6. We
recommend that the ODPM publishes details of the estimated cost
pressures for each local authority service. We accept that much
of the detail is likely to be technical, but summary information
could spell out at a national level what funding had increased
by, what servicespecific inflation was predicted to be,
what assumptions about efficiency improvements have been made
and hence what remains for actual service improvements. (Paragraph
58)
7. There would be
obvious advantage in a three year rolling programme of grants
for local authorities. It would enable authorities to publish
at least indicative budgets for the same period, and associated
local tax rates. The Spending Review system in central Government
already provides this element of certainty and predictability.
A similar scheme already operates in Scotland. We would in principle
like to see the practice of three year assured funding proposed
for school budgets extended to all local service funding. If
this is not done it is important that the ODPM and Dfes explain
the relationship between education and other local authority spending
and whether all education funding is effectively going to be ringfenced.
We recommend that ODPM inquire into the lessons to be learned
from Scotland, and investigate appropriate safeguards for its
introduction in England. (Paragraph 62)
Capping
8. The
Committee acknowledges that the Government wants to ensure that
its national policy agenda is followed at local government level,
and in particular its macro-economic policies, although we have
expressed our conviction that variations in local government expenditure
have little macro-economic effect. We believe that this would
be more constructively achieved through discussions within the
Central-Local Partnership than by capping. It is much more appropriate
for local authorities to be held to account for local decisions,
including the level of local taxation, through the ballot box.
If the Government insist on retaining capping, capping should
be selective, rather than general and selected local authorities
should be given a year in which to meet the requirements. (Paragraph
70)
Passporting and Ring-fencing
9. Despite
the 8 July announcement by the Secretary of State for Education
and Skills, we recommend that the Government ensure that its target
of reducing a ring-fenced grant to 10% of overall grant in 2005/6
is met. The Government should provide an annual statement of its
performance and intentions with regard to ring-fencing and passporting
in future years. (Paragraph 81)
10. We recommend that
the Government reconsider the use of ring-fencing and passporting,
and acknowledge the potential role of the local electorate in
terms of setting the local agenda. Mechanisms such as the central-local
partnership can be used to ensure minimum standards. However,
local authorities should be given the freedom to implement local
priorities, and be judged for these decisions by the local electorate.
(Paragraph 82)
11. The Government
should allow local authorities to make spending decisions, and
take the consequences for these decisions at the ballot box. If
Central Government wishes directly to control education funding
it should consider funding education directly. If it believes
that education is an important and integral part of local government
services and funding it should set minimum standards and then
allow local discretion. The present situation lacks clarity and
transparency as to where responsibility lies. (Paragraph 83)
Best Value and the CPA
12. The
Committee recommends that the Government dramatically reduce their
inspection regimes on local authorities. In particular the Government
should consider the concerns of smaller local authorities and
ensure their inspection regimes are proportionate to their size
and responsibility. The Government should continue to free "good"
and "excellent" authorities from some inspection and
plan-making regimes and should ensure the inspection framework
is appropriate to the improvement needed in "poor" and
"weak" councils. (Paragraph 92)
Council Tax
13. We
recommend that council tax should be retained, provided it and
council tax benefit are reformed in line with our other recommendations
in this report in order to address the shortcomings of the current
arrangements. In addition, local authorities need greater freedom
in the use of their other sources of revenue to ensure that council
tax payers are not exposed as at present to large increases in
annual bills. (Paragraph 100)
14. We recommend that,
in principle, banding should be expanded at either end of the
scale with divisions in what are now bands A, G and H. We also
recommend that multipliers should be changed to ensure that the
new bands are broadly in line with household income, resulting
in a wider range of liabilities from the present ratio of top
to bottom bands of 3:1. All these reforms should be implemented
at the same time as revaluation, in 2007, to avoid unnecessary
disruption. (Paragraph 115)
15. We recommend that
consideration be given to regional and sub-regional banding being
introduced to address any inequalities caused by revaluations
and changes to the banding arrangements but not addressed by equalisation.
(Paragraph 119)
16. If council tax
is retained, then the ODPM should, at the earliest possible date,
draw up and implement a strategy with local authorities to improve
public confidence in council tax and their knowledge of the impact
of revaluation. This should not wait for detailed information
on property values, which can be communicated later, but concentrate
on the general effects of revaluation and how council tax has
been reformed to address its failings. We also recommend that,
as suggested by the Audit Commission, council tax bills in 2007
should separately identify changes in individuals' bills that
are the result of i) local spending decisions, ii) revaluation
and iii) reforms to council tax. (Paragraph 123)
17. We welcome the
Minister's commitment to a 10 year domestic revaluation cycle.
(Paragraph 124)
18. Whatever other
changes are made to council tax benefit, the Government needs
to give a higher priority to increasing its take-up by a number
of readily identifiable target groups, in particular pensioners,
and low-income households. It is unfortunate that the central
Government is saving over £1.2 billion of unpaid council
tax benefit every year, and that 2 million households are paying
more than they should to local government. (Paragraph 130)
19. We recommend that
in response to this report the Government set out the nature of
the inquiries it has set in motion into conversion of council
tax benefit to a tax credit, any obstacles identified so far,
and a timetable for possible implementation. We are strongly of
the view that this is the way forward in making a property tax
a more acceptable means of raising local revenue. We do not, however,
underestimate the time and effort required to implement such a
change, not least at local level. As an interim measure, and a
further means of improving take-up, we therefore recommend that
council tax benefit be re-branded as council tax discount or rebate,
more accurately reflecting its true nature. (Paragraph 132)
20. The Government
should do further work to ensure equity release schemes, or other
means of deferring payment, are available. (Paragraph 133)
Review of Local Income Tax as an alternative
21. The
introduction of a local income tax in 1976 would have been a leap
in the dark, which ahead of new technology would have created
acute administrative problems for local government. Since then
new technology, and a scaling down of the plan for local income
tax to that suggested by CIPFA, has created a system that might
work. Nevertheless, the evidence is not remotely persuasive. Administration
would be costly. There is still far too little known about the
practical implications including the cost, redistribution effect,
impact on tax payers, including first time buyers, and where people
choose to live. It would be unwise to pursue implementation of
a local income tax before detailed research on these areas had
been undertaken. (Paragraph 143)
Business Rates
22. In
the Committee's view it would be both practical and sensible to
halt the decline in the proportion of local revenue which comes
through business rates. (Paragraph 155)
23. The Committee
therefore recommend that the cap which prevents business rates
increasing by more that the rate of inflation is removed. Irrespective
of whether business rates remain at a uniform national rate set
by central government or are relocalised and set by local authorities,
the Committee believe that the proportion of local government
revenue which is raised nationally through the business rate would
be fairer at a level of 25%. (Paragraph 156)
24. The Committee
therefore recommends that the Government returns business rates
to local authority control as soon as possible, but no later than
1 April 2006. In addition, the proportion of local government
revenue derived from business rates should account for at least
20% of total local government revenue. (Paragraph 160)
25. When business
rates are restored to local control, the Committee recommends
that the Government put in place a mechanism to prevent excessive
increases by, for example, limiting the annual increase in business
rates in an area to no more than the annual percentage increase
in the council tax in the area. (Paragraph 166)
26. For as long as
the Government continues to set a national rate in the pound but
with annual increases greater than inflation, the Government should
consider:
- enshrining in primary legislation the maximum rate
of increase above inflation that can be imposed; and
- announcing any increases above inflation as part
of a three year rolling programme. (Paragraph 167)
Different tiers of Local Government
27. The
Committee believes that the complicated nature of sub-national
service provision and service cost needs further clarification,
and that the Government should review the information that accompanies
council tax bills. Whatever judgement is made on implementing
a revised council tax, the Committee believes that the Government
should survey authorities to gauge current best practice and feed
these findings back into the central-local partnership for discussion,
before the next council tax bills are issued. (Paragraph 171)
28. The laudable desire
of Parish councils for expenditure directly attributable to their
activities to be known to local electors, and to be raised from
local taxation, is a further strong argument for a local tax base
and local taxes. (Paragraph 173)
Alternative means of raising local revenue
29. We
believe that any decisions about new taxes should be taken at
the local level. As these taxes will be fairly revenue low, there
should be safeguards put in place to protect local authorities
from any cut in central grant, if they choose not to raise local
revenue in this way. The important point is the existence of local
flexibility and accountability of local authorities to their electorate
for the decisions they take. (Paragraph 182)
30. We believe that
local authorities should have the opportunity to increase their
income by extending more fees and charges to a wider range of
services. Local authorities should also be allowed to make profit
from services. All local authorities should be required to have
in place a socially inclusive fees and charges remission scheme.
(Paragraph 185)
31. Despite being
prima facie attractive, we have doubts about the legal and practical
possibilities of a local sales tax. We recommend that the Government
investigate the implications of introducing such a tax in order
to inform local government decision making. (Paragraph 190)
32. We recommend that
local authorities consider the experience of congestion charging
in both London and Durham and in the light of this reflect on
its potential usefulness in their area. However, the most important
point is that local authorities should retain the option to implement
congestion charges where appropriate to their area. (Paragraph
193)
33. Local authorities
could choose to invest income from workplace parking charges in
local transport infrastructure as they can from congestion charging:
there is no good reason to limit their freedom to do so. (Paragraph
195)
34. The Committee
believes that a tourist or bed tax could generate funds to reinvest
in services for tourists, thus bringing fringe benefits for local
people and businesses. (Paragraph 198)
35. Overall we believe
that local authorities should have the opportunity to introduce
a 'basket of local taxes'. However, it is important to acknowledge
that they will not raise enough revenue to replace the existing
council tax and that they should be seen as nothing more than
a supplement. It should also be acknowledged that the primary
role of such local taxation should be to generate behavioural
change, i.e. a congestion charge should lead to reduction in car
usage, rather than just seek to generate revenue. (Paragraph
199)
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