Memorandum by Nicholas Boles, Director,
Policy Exchange (LGR 26)
1. What is the role and purpose of government
grant in ensuring adequate local government revenue?
1.1 Central grant funding should focus on
resolving extreme differences in local spending needs and tax-raising
capacity; it should not seek a level of precision which implies
Whitehall second-guessing each authority's response to local spending
requirements.
1.2 Ideally central grant financing should
be seen as a supplement to locally generated income, making up
for that which cannot be generated/is needed locally (either due
to low local tax base, or extreme local need) rather than being
the mainstay of local income as it is currently.
1.3 As far as possible, central grants should
be general in nature—specific grant financing to local authorities
has risen drastically in recent years, and they now make up approximately
16% of local income.
1.4 Specific funding is restrictive and
stifles autonomy, and is simply a tool for central government
to pursue central ideals (namely the uniform provision of services)
rather than allowing local authorities to respond directly to
local service needs and use funds where they are required.
2. Is the current balance between centrally
and locally raised revenue appropriate?
2.1 The current balance of funding is too
heavily skewed in favour of central funding. Currently over 60%
of local funding in England comes from centrally controlled sources
(if charges for services are included within the definition of
local income along with council tax).
2.2 The current system reflects the high
level of central control over local finance and local spending
decisions, and is a product of central government's desire for
nationally uniform service provision.
2.3 Heavy reliance on central funding contributes
to the gearing effect meaning annual changes in central grant
allocation have a disproportionate effect on local council tax
bills.
2.4 Requirements to passport increases in
grant financing into certain services is a further restriction
on local freedom. Passporting can increase pressure on council
tax bills, and in a political environment where council tax rises
are headline news, can leave some local authorities struggling
to finance all their spending requirements.
2.5 Heavy reliance on central funding also
creates behavioural distortions at a local level by creating a
subordinate local government sector, which looks to central government
for guidance when providing and funding local services, rather
than responding directly to local needs.
2.6 We believe local authorities should
be raising at least 50% of their income through locally determined
taxes and charges local sources and most local authorities should
raise 75%.
2.7 The bias towards central funding in
England is unusual by international standards. In Sweden, grant
finance made up only 13% of local sector income in 1999, with
the majority of local income coming from a locally administered
income tax. In Germany and France in the same year, grants made
up 51% and 23% of total local sector income respectively [Data
from Dexia]
3. Should businesses contribute directly
to local services?
3.1 Yes. A local business rate/tax is an
appropriate method of raising local finance.
3.2 Businesses use local services and should
contribute to their funding.
3.3 Current nationalisation of the business
rate has removed the direct link between businesses and their
local communities, and also relies directly on accurate census
information for its distribution.
3.4 Local authorities should also have greater
freedom to introduce direct charges for local services (both to
businesses and individuals).
4. Is the Council Tax a viable and adequate
source of local revenue?
4.1 The council tax has weaknesses;
4.1.1 it is regressive and penalises those
on fixed incomes, eg pensioners;
4.1.2 it is non-buoyant (ie its yield does
not automatically rise in line with a tax base/economic growth);
and
4.1.3 it is currently being asked to bear
too much of the burden of local government finance.
4.2 These weaknesses are exacerbated by
the gearing effect (caused by the high proportion of central funding
in local revenue) and the fact that the council tax is the only
tax under direct local control.
4.3 Most factors relating to mechanism of
the council tax are under central control; provisions for central
capping of council tax budgets exist (and is a real threat in
the current financial year). Council tax bands and valuations
are also centrally set and adjusted.
4.4 Currently council tax contributes only
16% local income in England (2002). Clearly, as a stand alone
method of taxation, council tax is not an adequate source of local
income.
4.5 However the council tax does have some
strong advantages as a form of local taxation; property is a secure
asset base, and property taxes are easy to administer and collect.
Despite its regressive nature property tax does bear some relation
to individual wealth, and if combined with other local taxes could
be an effective part of a more progressive bundle of local taxes.
4.6 Most of the problems associated with
council tax stem from it being the sole source of locally determined
income, which puts undue pressure on it to meet local spending
requirements.
4.7 However the strengths and certainties
of property taxes mean that they should remain in the local finance
system as a local tax in some form, be it council tax or a reformed
system of property tax.
5. What other local taxes might be acceptable?
5.1 Local government needs a basket of taxes
at its disposal.
5.2 This basket should include a form of
property taxation and should also include a progressive form of
taxation.
5.3 These should include a buoyant form
of local taxation, such as a local income tax, either directly
implemented (as in Sweden) or as part of an assigned revenue package
from a percentage of national income taxes (as in Germany).
5.4 Any new taxes should use existing administration
systems as much as possible to avoid introducing additional and
costly bureaucracy.
6. To what extent does central Government
control or influence contribute to local government expenditure
and taxation?
6.1 Required passporting of increases in
grant finance into specific service areas is in effect an order,
passed down by the centre, to spend money in those areas. The
increases in grant are effectively ringfenced into specific service
provision.
6.2 The same can be said of the wide variety
of specific grants (and the newer targeted grants), which central
government uses to direct local authority spending into those
areas which it deems "important".
6.3 As mentioned above, a local government
finance system which has a heavy bias towards centrally determined
sources of funding, creates an upward looking culture in local
government.
6.4 In terms of local taxation; the council
tax is a local tax, but important elements of the tax (band setting,
valuation of property) are directly under central control. More
importantly, the government retains the right to cap local council
tax budgets if it believes council tax rises are excessive.
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