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


Memorandum by the New Local Government Network (NLGN) (LGR 25)

  The New Local Government Network (NLGN) welcomes the ODPM Committee inquiry into the Balance of Funding issue. There are many organisations with very detailed views and analyses of these issues. We ourselves recently published a pamphlet ("New Localism, New Finance") making a number of detailed points that are relevant to the Committee's deliberations.

  However we believe that we can add most value to the Committee's inquiry by bringing some context to the discussions as we believe that these issues can get down to the detail too fast.

THE BRITISH PECULIARITY

  Taxation is always contested terrain. While taxation is understood as a payment for collective goods, the public can be very instrumental in their attitudes towards it. So the way that money is raised locally and the amount that is raised will be controversial in any system.

  However in the British system local taxation is more complex than this because there is a constant pull and push between central and local government. Unlike many other countries, local government in Britain has no "constitutional" right to exist and no right to decide for itself which taxes to use and how much to raise through them. In recent decades the amount raised locally—as opposed to being distributed from the centre from nationally collected taxes—has shrunk, which also adds to the tensions between centre and local government.

  Historically local government had far more power to raise money in different ways, to borrow to finance lumpy expenditures and to spend as it chose. Misty eyed folk-memories of this period often colours attitudes—especially of those looking back to a municipal golden age. But that era has long gone and in its extreme form, is unlikely to return.

WHY HAS LOCAL TAXATION AND FUNDING BECOME AN ISSUE?

  The poll tax raised awareness of local taxation to fever pitch for a few years. But in fact the changes carried out to end that débâcle did succeed in quietening the debate on the local taxation front. It erupted again partly because council tax has consistently risen above inflation over recent years and more particularly because it went up extremely steeply in 2002-03.

  While the 2002-03 rise was primarily the result of the Government introducing too many changes to funding formulae etc at the same time, views differ as to what the underlying causes are. But it is common ground that at the root of it all is the fact that councils raise on average only around 25% of their own funding, the vast bulk through the council tax. This means that to raise another 1% on their budget they will have to put the very visible council tax up by 4%. Some argue that councils have been forced to put up council tax year after year as the Government, though very generous in cash terms relative to the previous two decades, nevertheless asked for more and more from the local authorities in terms of delivery. Another alternative perspective is that while local government settlements have been fairly generous over recent years, councils became lax on efficiency and value for money, believing they could shelter from any storm by "blaming the government" for underfunding. Experts, let alone the public, find it very hard to distinguish between these theories.

THE CONTEXT FOR THE BALANCE OF FUNDING REVIEW

  It is very hard to get a sensible grip on the issue of the balance of funding—and indeed the way any local money should be raised—without taking a more overall view of the place of local government in the delivery of public services and the democratic process.

  The pure "localists" would go for all freedom to the lower tier with a very minimal central role over anything including local taxation. The command and control and "steering centralists" would want to sort out the issue with minimal giving up of ultimate levers at the centre. The "New Localists" perhaps find themselves in the most difficult situation. New Localism sees a continuing relationship between the centre (and regional) tier and the local (Corry and Stoker, 2002). The role for instance includes the right of the centre to set out binding national minimum standards in a number of areas. Overall this means that while as much power as possible should be devolved, including on taxation, there will be a continuing role for each and a balance has to be struck.

  To try and clarify some of these issues, it is worth thinking about why we want local government to be able to raise any of its own finances at all. If taxation was all collected centrally, and distributed to local government but then local councils had total freedom on how to spend it, then arguably we would have local "government" rather than local "administration".

  However there at least two flaws in this argument. First, if the centre is raising the money—and being seen to do so by the electorate—they will want to have a great deal of control over how it is spent both distributionally (on what it is spent) and efficiency (whether it is spent well). Thus such a system always tends to become a centralised system.

  Second, it gives no room at the local level for politicians to ask their public about their trade offs between more money raised and more spent locally. These trade offs—key to much of our democratic discourse—have all been taken at the central level.

  A further question that may be asked is, irrespective of its role in deciding how much it will allow to be raised locally, why should the centre care how the money is raised or mind if different local authorities use different methods?

  Of course the issue of blame is important here. It probably is true that the British public and media will blame the centre for not stopping local tiers of government from bringing in an unpopular tax rather than exclusively blaming the local politicians. But beyond this, the case is hard to make. The centre-left will have concerns about equity and may want to put limits around the potential regressivity of certain taxes while the right may want to operate in the reverse manner. But it is hard to see why this completely rules out allowing localities to use different taxes.

  It is certainly true that the types of tax used and the way a tax is designed, may have different macro-economic effects, first as they affect savings behaviour in aggregate and second in their effects on productivity. But rather than rationalising extreme centralism on tax options, this again would probably only justify the centre in putting limits to local freedoms not declaring a universal system for all areas.

  Overall then, it is hard to see why we cannot have a greater degree of subsidiarity in choice of local tax instruments

PROS AND CONS OF LETTING GO MORE ON TAXATION

  What from the centre's perspective are the risks—and the benefits—of changing the balance of funding and of letting local government have more freedom in what taxes it sets? The benefits are clear. The centre would be allowing local politicians to once again play a fuller role, putting accountability squarely in the hands of those most able to effect change in many areas of life that are not very amendable to targets, inspection and ring fencing. Innovation, experimentation and risk taking would be encouraged and services should improve as a result.

  The risk from the centre's perspective—and that of the public—is that councils "do the wrong thing". Some of these effects would be localised and so a job for the local electorate to sort out, or—in extremis—central government. But if the balance were changed fundamentally so that far more money was raised locally then a whole host of individual authorities raising money without considerations for the aggregate effects might cause severe sub-optimality. This could mean aggregate spending in the economy and aggregate tax can get too high (or low). However the big macro effects come from the size of the public sector borrowing—ie the spending unfunded by current revenues. This in turn is a rather different issue and indeed change has already occurred here when the 2001 Local Government White Paper heralded the return of borrowing powers to local authorities.

  Of course there are practical issues too. Varying taxes by locality in a small place like Britain might confuse citizens and businesses trying to operate and move between different spatial areas. Local income taxes in some localities only may be impractical—or at least enormously inefficient in terms of administrative costs. There might also be arguments about the effectiveness of eg local sales taxes since "cross-border" shopping would be too easy.

  There are also traditional Treasury arguments that competitive "tax" bidding for business would mainly just effect location within the country and so would be very poor value for money of the nation as a whole. Different taxes may look from the centre's perspective as having different dangers. A litter tax in a town or a lower property tax may look to offer little danger except to that town. A higher business rate by contrast may be felt to have more externalities associated with it not least in the "image" of the country both to the domestic business sector but also to the foreign one.

  Another concern stems from a belief that to achieve equity goals, a great deal of funding has to remain central and that any move to more local funding threatens this (Walker, 2002). From another angle government may worry about threats to the policy of equalisation, an important instrument for achieving equity—ie redistribution from the centre to spatial areas—when there are many more variables in the system. It is hard enough to work out appropriate grant allocations in a simple world with one tax, but if these are many and they differ between areas, this may become much harder. If an area is short of cash but chooses not to raise local tax can the government make sure it does not end up giving more subsidy?

  There are ideas around that confront these issues (McLean and McMillan, 2003) and much depends on how extensive are the areas which the centre is going to insist on being delivered at local level as agents of the centre (the national minimum standards). But there are certainly risks that central objectives will be harder to carry out.

  Of more worry to government are crude political risks. Without change in the political and media culture of Britain, the national government will fear it will find itself blamed for local goings on even if in fact it has given up much control of them.

ATTITUDES TO LOCAL TAXATION IN LOCAL GOVERNMENT

  The local government community has been fairly united on wanting more taxation raised locally. This is perhaps surprising. If more is to be raised locally, then councils in poorer areas are presumably going to find life harder and so may want to resist too much of a change in the balance of funding. Equally areas with higher costs of providing a given service may be cautious about grabbing back more responsibility for their affairs than those who feel they are close to the efficiency frontier. Lurking behind all of this is of course the degree to which allocation of cash from the centre to local government for "equity" and "need" reasons will continue in a more localised funding system.

  In principle there is no reason for it not to continue and to be at least as effective in redistributing according to need, costs and ability to raise money as the current system. Most analysis suggests that equalisation up to current levels is certainly not at threat unless the funding system went way beyond 50:50 in terms of local funding. But many wonder how this would play out in the longer run. If more localised funding was seen to be a signal that areas should stand on their own feet more then the lobbying by the richer regions to give up less might become intense.

  In terms of which taxes to use, the debate does not always take an obvious path. Clearly a tax related to income might be most progressive—although this assumes that wealth especially in housing is very closely correlated with income—which might attract the centre-left. On the other hand, to ditch completely any property tax would be strange economics while the sheer practicalities of introducing such a thing from scratch may give good grounds for caution.

  One other differentiation may in practice play a role. Under the Government's "earned autonomy" approach to public services, some freedoms are to be given only to those who do well in assessment like the Comprehensive Performance Assessment (CPA). Thus while new tax freedoms may come the way of excellent councils, the poor and weak may gain nothing or little out of such changes and so may suffer relatively.

  Finally, one other factor that might come into play in due course could be that elected regional assemblies—should they come into being—could have an influence. At one level this may be seem as problematic to start with as they add their "levy" (the precept) to the council tax—along with the ever increasing precept levied by police authorities. But one could see their role developing in a more interesting way. They could for instance start to have some role in "policing" what happens in terms of local taxation in their region. This might well be the spatial area within which spill overs are most relevant while a better handle on equalisation might be possible here (assuming the central authority had already made some decisions on this in allocations to regions). This need not mean a regional income tax or whatever or indeed any regional tax, but some ability to hold the ring as different local authorities used their tax freedoms.

CONCLUSION

  Local taxation is currently controlled by central government in terms of scale, in the proportion raised locally and in its make up. In a totally centralist model this makes sense. And even in a New Localism paradigm, it would be wrong for the centre to give up everything. But it is not clear that it needs to be so rigid nor that we would not have more subsidiarity in the forms of local taxation. While the most likely outcome of the Balance of Funding Review is probably a major reform of council tax, some relocalisation of the business rates, the freedom to bring in more, smaller taxes, and some shift in the overall balance of funding towards the local, these more fundamental issues are at least worth considering.

REFERENCES

  Corry D and Stoker G (2002) "New Localism", NLGN , London.

  McLean I and McMillan A (2003) "New Localism, New Finance", NLGN, London.

  Walker D (2002) "In Praise of Centralism", Catalyst, London.





 
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