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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