Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Ninth Report

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)


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)


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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