Memorandum by Professor Glen Bramley (LGR
28)
INTRODUCTION
1. By way of background, I am an academic
urban economist who has undertaken research, scholarship and teaching
in the field of local government finance since the time of the
Layfield Inquiry in 1976 to date (prior to 1994, at the University
of Bristol). The other allied fields in which I work include local
public services, housing, urban planning and regeneration
2. This evidence broadly follows the structure
of seven questions posed by the Committee. However, it is not
a comprehensive or balanced review of these issues, but rather
a selective pulling out of particular points which are: (a) important
to the current "Balance of Funding" (BOF) review; and
(b) issues on which, from my research and other involvement, I
have a contribution to make to the debate.
3. In preparing this evidence I have reviewed
the progress of the BOF Review and its commissioned papers as
available on the ODPM Website, and comment on some of these as
appropriate.
ROLE OF
GRANT AND
BALANCE OF
FUNDING
4. It is worth starting by considering briefly
what is the problem which this Inquiry, and the related Balance
of Funding (BOF) Review, is addressing. The most important feature
of the present system which the BOF Review latches on to is the
fact that about three-quarters of local government revenue funding
derives from central grant rather than from a locally variable
tax. This weakens and confuses accountability, particularly because
of the high "gearing" effect. Other problems include
the particularly onerous cost of service improvements for poorer
local authorities, and the general lack of buoyancy of local tax
sources.
5. However, there are other pressures for
questioning the present system and seeking reform. Caricaturing
things a bit, one could distinguish several other perspectives:
— The "tabloid" perspective,
which expresses alarm at double-digit Council Tax increases, fears
"out of control" local spending, and highlights instances
of particular (usually elderly) CT payers in particular difficulty
— The "central-local relations"
perspective, which raises concern about the pressure and argument
around funding formulae and distribution, the role of specific
grants ("ring fencing" etc), attempts by central government
to get national policies implemented locally, and concerns from
localities that central government has underestimated the cost
of honouring existing commitments, pay settlements, pension systems
etc.
— The "development" perspective,
which looks at local authorities' ability to fulfill their local
leadership function and points to the effective financial straitjacket
which prevents them taking initiatives to invest in their locality
which would generate a future return
6. All of these debates arise in what must
have been the most benign, least conflictual period of central-local
relations for 25 years! A combination of sustained real spending
and grant increases, stable 3-year settlements, and relative lack
of political conflict between centre and localities should have
made things easier. Things could get a good deal rougher as these
conditions change in the future.
7. Given the basic funding structure, the
first and foremost task of the grant system is to correct "vertical
fiscal imbalance" (ie problem that centre controls nearly
all the taxes, but local authorities have to do a lot of the spending).
To reduce the grant, obviously, more of the taxes have to be given
to or shared with local government. There are technical feasibility
issues here, but ultimately this is about control. If the Centre
is unwilling to cede full control of tax rates to local authorities,
formally designating them as local taxes will not fundamentally
alter things. It is rightly pointed out in some of the contributions
to the BOF Review that "balance of control" issues also
need to be discussed and these do not equate in simple ways with
BOF (see further discussion in last section).
8. The second general task of grants is
equalisation. The importance of equalisation is generally acknowledged
by most contributors to the BOF Review, and there are good underlying
theoretical grounds for this. Britain seems to have stronger concerns
about equal service standards than some other countries and this
is associated with our more sophisticated equalisation mechanisms
(particularly SSA/FSS) within the grant system. Full equalisation
requires quite a lot of grant, but far less than the existing
total level in England. Some alternative/additional local tax
bases (eg re-localised Non Domestic Rate, NDR) would require more
equalisation. So-called "dynamic equalisation" (ie Equalising
the opportunities of different localities to choose different
levels of service) is attracting renewed interest, but this would
increase the complexity of the system.
9. The third general task, usually associated
with specific grants, is to support the provision of particular
services which are of "national" interest, which are
highly redistributive, or which generate significant "spillovers"
beyond the local area. Whether all existing specific grants can
be clearly rationalised in these ways is questionable. Local government
associations always argue for block grants over specific grants,
and the balance ebbs and flows over time, generally seeing more
consolidation into block grants in periods of retrenchment and
cutback. I would promote for debate the somewhat heretical view
that national government interest in local services varies a great
deal, and that some very important and expensive services are
subject to intense national interest, so that a more general "variable
geometry" model may make more sense. This could imply large
specific grants (like the police grant for example) or even more
radical models like direct core funding to provider units (eg
schools).
10. Is level of local autonomy, responsible
and accountable local decision-making inextricably and causally
related to the BOF? This was the central proposition of Layfield
in 1976 and the proposition that "he who pays the piper calls
the tune" has been accepted by many commentators since then.
Central governments have never really accepted this argument,
however. For example, they have suggested that even where authorities
were mainly funded by block grants, so long as they had discretion
to vary expenditure between services and were locally accountable
for their efficient and effective performance, this could represent
a satisfactory level of local autonomy. This is effectively the
position of the Scottish parliament currently, and of local government
in some European countries. Some economists did not accept the
argument, but emphasised "marginal accountability"—that
local voters/taxpayers should pay the full marginal cost, £
for £, of locally decided variations in spending—a
view which strongly influenced the 1990 reforms which led to the
present situation. However, the Layfield view, now sometimes referred
to as emphasising "average accountability", has come
back into some currency, for example in the 1998 Select Committee
Report, and is clearly a central issue in the BOF Review. Other
commentators suggest that BOF is not the only and maybe not always
the dominant factor; more important is the general attitude of
central govenment and its willingness to tolerate local spending
and taxation decisions which deviate from its preferred pattern.
In other words, how sincere is its commitment to "localism"?
11. The issue has become linked for some
with the health of local democracy and the legitimacy of its mandate
compared with that of central government. Hence the BOF Review
has looked at evidence as to whether voter turnout can be linked
to BOF measures. This research suggests that the effect is at
best marginal.
12. It is clear that the gearing effect
is the most concrete concern of those criticising the present
system for its effects on local autonomy and accountability. This
leads to the question: could gearing be reduced without necessarily
changing the BOF dramatically? The answer to this is actually
"yes", as shown in Steve Freer's contribution to the
Review, and conceded in the ODPM paper on Equalisation and Gearing.
Gearing results from the combination of the % share of the grant
vs the local tax and from the fact that the grant is fixed. If
grant is allowed to vary with (budgeted) expenditure (or the local
tax rate), it can achieve any desired relationship between % tax
rises and % expenditure rises. This is very similar to how the
old RSG worked up to 1989, and indeed how Exchequer Equalisation
worked for some local authorities from 1948 onwards. This was
thrown out of the window because of the purist obsession with
marginal accountability, and because of concerns about the complexity
of operating grants which varied with expenditure. However, I
would agree with Steve Freer that these difficulties can be overcome
and that it would be well worthwhile going down this road. I published
an article in 1987 criticising the 1986 Green Paper for its approach
on this issue.
13. If there is one "magic bullet"
in the whole BOF debate, this is it! It solves the two problems
of gearing/accountability and meeting the need for dynamic equalisation,
without the hassle of introducing new local taxes.
14. A couple of points need to be noted
about this, however. Revenue Support Grant would have to be treated
as "Annually Managed Expenditure" rather than a Departmental
Cash Limit, and the Treasury/ODPM would lose a degree of budgetary
certainty. While it decouples gearing from the share of grant/local
tax, there is still some advantage to be gained from changing
the balance. With the present 25/75 shares, this scheme would
mean that there would be a large amount of positive matching grant,
so possibly providing too much encouragement to expenditure while
providing too much of an open-ended commitment to the Treasury.
With a more balanced split, these tendencies would be lessened,
and resource-rich authorities would make positive contributions
into the pool (negative marginal grant) as they increased their
spending. Whatever the overall split of revenue sources, under
this kind of grant scheme there would be a reasonable case for
increasing the marginal cost of spending (in percentage terms)
for spending significantly in excess of FSS.
LOCAL BUSINESS
PROPERTY TAX
15. I would argue that re-localisation of
part of the Non-Domestic Rate (NDR) is the most plausible way
of increasing the locally-variable tax share. The main reason
for this view is my perception that the alternative major revenue
sources are unlikely to be acceptable candidates. In particular,
Local Income Tax, while technically feasible and clearly usable
on the basis of experience in other countries, seems unlikely
to escape central control given its sensitivity as a national
political totem (and largest single tax) in the UK. As argued
below, Council Tax is reasonable, can be improved, but cannot
be expected to bear a significantly higher weight than it already
does. Locally variable sales taxes, VAT etc would seem to pose
many practical problems. It is not therefore coincidence that
LGA are arguing strongly for re-localisation of NDR.
16. The arguments for nationalising the
NDR in the 1980s included the following:
— NDR was a growing, highly variable
and unpredictable element of business costs.
— Arbitrary variations in NDR burdens
could distort business location decisions or competitive performance.
— NDR was out of proportion with any
benefits business derived from local government services
— NDR did not promote accountability
because (a) business did not have a direct vote, while (b) the
"final incidence" of the tax (eg on consumers, workers,
landowners, owners of capital, and whether they lived locally
or not) was obscure.
— As a consequence, "marginal
accountability" was weakened, with local domestic taxpayers
paying for less than half of each extra £ of expenditure.
17. I have always believed that these arguments
have been somewhat overstated. As a property tax, NDR should move
broadly in parallel with land values which reflect business conditions
and profitability; failure to do so may be due to Government's
failure to undertake regular revaluations. NDR rates are (and
should be) tied to domestic sector rates or CT level, which exerts
a strong moderating influence. Equalisation prevents gross variation
in local rates. Because of capping, gearing and other pressures,
LA expenditure converged strongly on SSA levels during the 1990s,
so variations under today's conditions would be less than in the
past. Businesses derive significant benefits from local services,
particularly when education and human capital are considered,
although it is true that there are strong spillovers between localities
involved here. Businesses may not have a direct vote but business
has always been a significant and influential lobby on local decision-making,
not least because of the local political sensitivity of jobs.
I believe that getting business involved in local affairs has
been less easy (in some respects) since 1990. Experience since
1990 suggests that people are more likely to think in terms of
percentages than "pounds per head" when considering
and voting on tax and service changes (ie Average rather than
marginal accountability).
18. With these arguments in mind I have
always favoured retention of a locally variable element of NDR,
although willing to concede that this might vary less than domestic
rates/CT. There are additional arguments, which have to do with
the incidence of different taxes and how these may reflect the
benefits generated by local services. The Council Tax falls on
local residents in their role as consumers (and to a lesser extent,
as owners of fixed property). NDR, like some other possible alternative
or supplementary revenue sources, has the characteristic of widening
the net sectorally (to capture workers and capital) and spatially
(to capture regional and national groups, such as commuters and
visitors, who may be benefiting from local service provision).
19. NDR is a tax which can be in part "exported".
In Britain, an orthodoxy has built up that "tax exporting"
is anathema, essentially because it does not contribute to accountability
to local voters. However, there are other perspectives, which
could lead to a more favourable view of such "exportable"
taxes playing a role in local finance. Prud'homme (1999) provides
a contemporary statement of the case, in the context of a study
which shows that the main French local tax (the "Taxe Professionelle")
is highly "exportable". Prud'homme shows that, despite
its exportability, none of the obvious and measurable adverse
consequences which would be predicted in fact materialised—the
exportable tax did not rise more than other local taxes, and so
forth. Further, he goes on to argue that such a tax has a number
of positive virtues as a local tax: it is elastic with respect
to GDP growth ("buoyancy"); it promotes local government-business
partnership and consultation; it is in part and indirectly a tax
on externalities, and hence it helps to encourage local authorities
to allow large industrial and other developments which might otherwise
be resisted (countering "NIMBYism"); and it is uncorrelated
spatially with income, unlike other tax bases (and hence implicitly
lessens the strain on equalisation arrangements).
20. The argument that local authorities
should be given some fiscal incentive to encourage development
has received increasing attention in the context of attempts to
modernise and streamline the planning system and recently the
Barker review of housing supply. I agree that such incentives
are desirable, but would suggest that they are actually more needed
in respect of new housing development. It is not just about incentives;
it is also about paying for the necessary infrastructual costs
of development (see below). The government has recently proposed
a scheme ("LABGI") to allow individual local authorities
to retain an element of NDR revenue growth above a certain threshold.
I suspect that this scheme is too limited and tokenistic to fully
do the trick. Any step in this direction involves compromising
on the pure goal of equalisation, but perhaps that is a price
worth paying for giving authorities more scope to plan and develop
their areas in a positive way.
21. I think an appropriate compromise would
be to localise a major chunk, say a half, of the NDR. Taken in
conjunction with a dynamic equalisation scheme (the magic bullet
mentioned above), this could be set up so that local deviations
in NDR rates would be, in percentage terms, lower (say half) of
the deviations in CT rates. It is true that NDR tax bases vary
more between areas and therefore resource equalisation has more
work to do, but some of these variations are uncorrelated with
incomes and CT bases.
22. One not unimportant further point about
the NDR is that since 1990 it has been indexed to the RPI; this
has inevitably and progressively whittled away at the scale of
the tax revenues generated. This is the opposite of the buoyancy
which appears in most lists of desirable principles. In future
I would argue that the NDR should be indexed to something that
kept it moving in step with the rest of local revenues, for example
GDP-x%, where x% represents the annual increment in NDR properties
between valuations.
COUNCIL TAX
VIABILITY AND
REFORM
23. Compared with previous efforts (notably
the Community Charge) and other taxes, the Council Tax can only
be described as a solid success. It is a workable, viable tax
which is not too unpopular most of the time. As a predominantly
property-related tax it contributes to the overall balance of
the UK tax system and creates some incentives to the efficient
use of housing property. As such it would be absolutely crazy
to throw it away.
24. On the other hand, lessons from history
and comparisons with other countries suggest that it is not feasible
for property-related taxes to take a much larger share of the
BOF than that taken currently. When property tax rates get too
high you tend to get tax revolts—that in a sense is what
happened in UK in the mid-1980s, and has happened periodically
in the USA.
25. Modest reform and refinement is needed
to carry CT forward successfully. Revaluations need to happen
more regularly. The work of the NPI for the BOF Review highlights
the issues pretty well. There is a very strong case for more bands
at the top and the bottom. CT is not an income tax, but what the
NPI show is that it has broad proportionality to income across
the bands and this aids defensibility. Making the tax more fully
proportional to property values would probably a step too far,
except perhaps in the context of a general rebalancing of taxes
involving other elements. The other really striking point from
the NPI study is the serious underclaiming of CTB among elderly
owner occupiers. Since this is the main group involved in the
current "tax revolt", there ought to be ways of lancing
this boil directly, possibly as suggested by NPI through rebranding
of CTB as something other than a "Benefit" and by increasing
the capital disregard or reducing the capital tariff.
26. If, as the NPI suggest, CT is a tax
which is broadly proportional to household income, across bands,
then maybe the system should aim to achieve the result that it
was broadly proportional across areas as well. This would imply
that resource equalisation should be based on income rather than
on property values ("equivalent Band D properties").
This, incidentally, is a suggestion which was made by the Layfield
Committee back in 1976 and which could be said to have a respectable
economic rationale. I think it is a good idea in theory, but would
have to contend with two issues: reliable local measures of income,
and transparency of the local finance/grant system. Local income
measures are gradually improving, and if there was a policy requirement
this might force the relevant departments (Inland Revenue and
ONS) to expedite things. The transparency point amounts to saying
that, instead of there being a single Council Tax for spending
at FSS, there is a national average figure but that the local
figure is "adjusted for income" (ie to give a common
ratio of council tax to income). I think that this would be better
than having regional differences or multipliers in the grant system
(clear rationale, more systematic, no cliff edges).
27. The Barker inquiry on Housing Supply
looked at a range of tax issues with a view to seeing which might
promote housing supply or better balance supply and demand. Particular
interest focussed on site value taxation and on development gains
taxation or charging. These are discussed further below, but I
would say that the tenor of discussions between the Barker team
and academic experts was not to suggest that these, particularly
the former, represented some "magic bullet". I think
these options should be seen as supplementary sources of revenue,
rather than mainstream substitutes for the principal options which
remain, as ever, domestic and nondomestic property taxes, income
taxes, or sales/turnover/value added taxes.
OTHER LOCAL
TAXES AND
CHARGES
28. Before discussing certain other local
taxes and charges I am going to be heretical again, and use the
"H word" of British public finance, Hypothecation. Historically,
hypothecation of taxes or grants to particular purposes has been
anathema to national Treasuries and to Local Treasurers and Corporate
decision-makers alike. Hypothecation reduces these decision-makers'
flexibility and discretion. However, the flip side is that hypothecation
increases transparency, control and accountability from the viewpoint
of the taxpayer. Survey and qualitative research confirms that
general public understanding of what things cost and how they
are paid for is lamentably inaccurate. People are becoming more
and more sceptical about politics in general, not just local politics,
and a lot of this is about how their taxes are used. It may be
argued that, in the broader scheme of things, the long term way
forward to rebuild the relationship between decision makers and
voters is through more general hypothecation. We have already
seen chinks of concessions from the Treasury on particular aspects
of this. It is much more strikingly apparent when new and unpopular
local taxes, such as congestion charging, are proposed. The only
way to get these accepted is to promise to hypothecate all the
revenues to related areas of spending, namely public transport
improvements.
29. When is a tax not a tax? The answer,
obviously, is when we call it a "charge". On this basis,
the poll tax was not a tax but a charge. In that instance, this
particular subterfuge did not work. However, there are other examples
where this transmutation of a tax into a charge has been semi-successful,
notably water and sewerage. Most people still pay what is in effect
a compulsory and universal levy based on some property-tax related
formula, but because the utilities have been privatised and because
there is an option of metering it is alright to call this a charge.
In some other countries (eg Italy, Ireland) refuse collection
is funded by a specific "charge", albeit one based on
some formula relating to property characteristics. Parking on
the street and in council-owned carparks is subject to charges
from which surpluses are earned.
30. Congestion taxes or charges are obviously
topical examples following the successful (from some viewpoints)
introduction of a scheme in London, and one may include workplace
or general parking taxes/levies in this category. These may turn
out in the longer run to be a useful addition to the range of
local taxes and charges, but clearly they do not constitute a
general solution to the BOF question for mainstream council services.
Only some authorities will use them. Voters will demand that most
of their revenues are hypothecated to improvements in transport
infrastructure. The more successful they are at influencing behaviour,
the less revenue they raise.
31. Environmental taxes and charges (eg
relating to waste) may also become of increasing salience. However,
it is again the case that these are more directed to altering
behaviour than to raising revenue. Some forms of environmental
tax (eg landfill tax) add to local authorities costs rather than
to their revenues.
32. There is another route by which charges
might become much more important as a source of local authority
revenue. That is what might happen if govenment went further down
the road of direct funding of clients, under so-called "quasi
market" arrangements. The obvious example here is education.
If government funding goes mainly with the pupils, the local authorities
then charge for services, whether of a whole school package or
simply (where schools are autonomous) for the local support services.
This is another scenario which could give rise to the "variable
geometry" mentioned earlier. Some may see this as far-fetched,
but this is in fact now effectively the basis of 16-plus funding
for both school and FE routes.
CAPITAL FUNDING
33. This Committee Inquiry is labelled as
being about "Revenue" and most of the discussion of
local government finance tends to focus on the revenue account.
However, it is worth looking briefly at the capital side. Capital
investment is particularly important for new development, for
regeneration, for planning the future of areas and communities
and hence for the local authority's community leadership role,
its contribution to partnerships and so forth. Under the Sustainable
Communities Plan the ODPM is placing higher expectations on what
local authorities should aim to achieve in these fields, while
the Barker Inquiry also points to the need for more funding support
for new development infrastructure.
34. In analysing the fiscal issues facing
cities in Britain recently my main conclusion was that Britain
had avoided the "fiscal stress" syndrome associated
with declining cities in the US, but at the cost of placing them
in a straitjacket of controls which meant that they could not
actually do very much positive to develop themselves. Unlike the
golden era of municipal enterprise in Britain, cities (or other
local authorities) could not invest in their futures in the expectation
of receiving a return (through property taxes, utility charges,
etc), and they could not even recycle some of their existing assets.
35. There has been much casting around and
experimentation with different forms of innovation to get around
these constraints, often under labels of "partnership".
However, it is not organisational form or the existence of partnership
which is crucial, so much as the ability to release a stream of
resources. Some local partnership activity is chiefly geared to
attracting a greater share of the fixed pool of central or EU
resources, rather than increasing the size of the pool. The main
ways of increasing the real resources available involve accelerating
borrowing/investment profiles (through off-budget devices like
PFI or LSVT), developing hypothecated taxes/charges, and making
more use of assets.
36. Local authorities do have substantial
capital assets in terms of land and property, and have generated
significant capital receipts over recent years. Long term reforms
to capital accounting should provide more awareness of asset shortfalls
and surpluses and, but making good the qualitative shortfalls
(eg the "decent homes" target) may more than gobble
up any surpluses. Assets and capital receipts raise issues of
hypothecation and equalisation. For example, it could be argued
that more of the council house sale receipts should have be hypothecated
into the replacement and repair of the social housing stock; or
that more of Edinburgh's profits from commercial land developments
should have gone into providing these with proper public transport
infrastructure. But one reason why local authorities have not
been given complete freedom to re-spend capital receipts has been
the gross disparities between prosperous growth areas and economically
declining areas.
37. I have for long believed that "planning
gain" (use of planning agreements) is of major significance
in the context of providing infrastructure and social/environmental
benefits (mainly of a capital nature) in association with new
development. Central government tried and failed three times since
1947 to solve the problem of betterment taxation. Local government
has gradually developed a pragmatic solution, messy and uneven
but with a number of positive virtues, as summed up in the following
table.
Table 1
DIFFERENT ATTRIBUTES OF PLANNING AGREEMENTS
VS TAXES
|
| Planning Agreements | Taxes
|
|
| Locally determined | Statutory
|
| Discretionary | Universal |
| Variable | Uniform |
| In Kind | Financial |
| Hypothecate | Unhypothecated
|
| Re-used Locally | Redistributed Nationally
|
|
| |
38. We have little reliable data on the extent and value
of planning gain, because most of it is provided in kind rather
than in cash. The amount of "affordable housing" provided
under planning agreements is now almost as large as that funded
by the official development programme of the Housing Corporation,
although this is not all "additional" to publicly funded
investment. Planning gain has been much debated in the context
of planning reform and more recently Barker; reform proposals
have been put forward and withdrawn in short order. My own general
view would be to go with the grain of this successful pragmatic
solution but to regularise and extend good practice within this
framework, rather than try to outlaw it and impose a uniform national
tax.
39. Off-budget/balance sheet solutions (like PFI, LSVT)
are mainly a way of accelerating investment in new or improved
assets, and cannot be pursued indefinitely. Not counting them
as borrowing is extremely dubious and this has some implications
for macro fiscal rules. It is slightly more defensible for trading
undertakings with realisable assets, like housing associations
and transit systems; less so for pure public services like schools
or hospitals.
40. The Prudential Regime for borrowing control is an
interesting development and appears to represent a major example
of the "new localism". However, it is clear that major
additional debt-financed investment is only going to be deemed
"prudent" if it generates new revenues, for example
through expanding the scope of a trading service, if it achieves
significant cost savings (eg substituting technology and capital
for staff), or if it unlocks subtantial profit in the longer term
through an activity like land and property development.
GOVERNMENT CONTROL
AND INFLUENCE
41. We will get the degree of local autonomy we deserve.
It is necessary always to ask how sincere is the underlying commitment
to localism, versus the traditional British unitary state assumptions
which emphasises national (government-in-parliament) sovereignty.
I would observe that there is an instinctive centralism in much
of the way British politics works, eg the constituency role of
MPs. The emphasis on equalisation, common standards and the frequent
concerns about "postcode lotteries" are another aspect.
Traditionally Conservative administrations were more localist,
because they were less concerned with these things, but in the
1980s they were relatively interventionist because they were trying
to impose a revolution from above in how local government functioned.
There are still echoes of this in the Best Value/Modernisation
drive under the current regime. Local government is always a convenient
target for blame and scapegoating, for government as well as opposition
and the media, and this may contribute to its relatively poor
image and opinion poll standing.
42. It is clear that central governments are very concerned
about some services, such as education, but does government care
equally about all local services? I would question this, which
is why I come back to issues of variable geometry and possibly
hypothecation.
43. Some of the worst bust-ups between central and local
government (eg the 2003 schools funding crisis) have arisen because
of a failure to agree on a realistic basis the cost of existing
policies and of new commitments entered into (eg pay deals). There
are always areas of interpretation and negotiation in these primarily
technical matters; and sometimes government ministers have rushed
to present their "spin" on this before general agreement
has been reached. This can be part of the "blame local government"
syndrome mentioned earlier. Maybe there is need for some more
independent joint body for agreeing these matters.
|
