Memorandum by the Office of the Deputy
Prime Minister (LGR 01)
1. The Government welcomes this opportunity
to submit a memorandum to the Committee on the important and complex
subject of local government funding in England. It looks forward
to seeing the Committee's report. It is helpful that the Committee
plans to work within the timescale of the Balance of Funding Review.
2. This memorandum addresses each of the
issues identified by the Committee for this inquiry.
3. The Terms of Reference of the Balance
of Funding Review (attached as Annex) require it to analyse the
options (but not make recommendations).
What is the role and purpose of government grant
in ensuring adequate local government revenue?
4. The Government provides grant to supplement
the money available to local authorities from council tax and
re-distributed business rates to ensure that they have adequate
funding for local services. Grant plays a crucial role in equalisation,
taking account of both the resources available to local authorities
from local sources and their relative different needs.
5. As background information, the two charts
below indicate how local authority revenue expenditure is funded
and how it is spent.
Financing of revenue expenditure (Budget
2003-04 data)
Local authority gross expenditure by service
2001-02
To what extent does central Government control
or influence contribute to local government expenditure and taxation?
6. Of course, the level of Government grant
provided is important in determining the extent of local government
expenditure. But it is Government policy to increase local government
financial freedom. In the 2001 White Paper, it argued that the
"balance of control" was a more serious and urgent issue
than the balance of funding. That is why the Government has acted
to increase local financial freedom, in particular through the
Local Government Act 2003, which gives authorities important new
freedoms to borrow, attract business, trade and charge for services.
Government is also committed to reducing substantially ring-fencing
of Government grant. It has done so by £750 million in 2004-05
so that on current plans by 2005-06 ringfencing will be less than
10%. We have also reduced ringfencing further for councils with
an "excellent" CPA rating. However, to meet national
objectives, the Government expect local authorities to increase
spending on schools in line with their increases in schools' Formula
Spending Share.
Should there be a ceiling on local government
expenditure and taxation, and if so how should controls operate?
7. It is for each authority to determine
its own taxation and expenditure levels. However, it is also clear
that the public is unhappy about the unsustainable growth in council
tax bills over the last two years, and the Government has been
very concerned too. That is why the Government has made it clear
that it will use its powers to cap excessive council tax increases
in 2004-05.
Is the current balance between centrally and locally
raised revenue appropriate?
8. As the Government's 2001 White Paper,
"Strong Local Leadership—Quality Public Services"
recognised, many local authorities are concerned about the "balance
of funding", the proportion of local spending which is financed
from central and local sources. The nationalisation of the business
rate in 1990 shifted the balance of funding so that the proportion
raised locally was reduced from about 50% to 25%. National taxes
including the business rate now account for about 75% of local
government spending. The graph below indicates the changed balance
over time.
Balance of funding from 1981-82 to 2001-02
9. Although the average proportion raised
locally is about 25%, this varies widely across England, from
about 10% (eg Newham) to 50% or more (eg St Albans). In general,
deprived areas with high needs and a low council tax base receive
much more central grant than more affluent ones. The equalisation
of needs and resources is essential so that all areas receive
sufficient resources to meet national service standards.
10. But whatever their balance of funding,
many councils argue they cannot be properly accountable to their
taxpayers if they have to rely heavily on central grant funding.
They also criticise the impact of the balance of funding on their
"gearing". This means that on average, if a council
wants to raise its budget by 1%, it has to raise Council Tax by
4%.
11. It has been argued that gearing could
act as a spur to efficiency by encouraging councils to look at
ways of driving down costs rather than pushing up taxes. This
does not appear to be the case—research done for the Balance
of Funding Review shows that highly geared authorities do not
perform better than others. Also, it is clear that there is no
obviously "right" level of gearing, and that changing
the balance of funding will only reduce gearing, not remove it.
12. In the 2001 White Paper, the Government
stated its view that there was no quick or easy way of securing
a major shift in the balance of funding. As explained in paragraph
4 above, it also stated that it thought the "balance of control"
was a more serious and urgent issue than the balance of funding.
It has acted on that already.
13. Nonetheless, in the White Paper the
Government accepted that the balance of funding issue was of serious
concern to local authorities. So it agreed to establish a high-level
working group to look at all aspects of the balance of funding
issue, review the evidence and consider reform options. This group,
the Balance of Funding Review, started work in April 2003 and
will report in summer 2004. The Minister for Local Government
chairs its Steering Group, which has representatives of local
and central government, business, the unions and other experts.
(The Review's Terms of Reference are attached in the Annex).
14. The Review Steering Group has met several
times. It has discussed the principles of a successful local government
finance system, held a public consultation, and commissioned independent
research—all of which is publicly available on the ODPM
website. One of its research findings is worth highlighting at
this point: many of the public are not clear where accountability
for local government services lies or where the money comes from.
But what matters to them is not where local authorities get their
money, but that services are efficiently delivered. There seems
to be no sign of a direct link between the balance of funding
and local election turnout.
15. The Review is hearing evidence on a
number of possible reform options proposed by those who responded
to the public consultation, including reform of council tax, introduction
of a local income tax, re-localisation of business rates, and
a "basket" option of smaller taxes and charges.
Is the Council Tax a viable and adequate source
of local revenue?
16. The Government recognises the concern
over the level of council tax increases. Some in local government
have asserted that council tax rises are the result of the Government
not providing enough grant to meet councils' expenses. But in
fact the total of formula grant will be £46.1 billion in
2004-05, an increase of 5.5% compared to 2003-04 (and specific
grants take the overall increase to 7.3%). This is not, of course,
a one off increase. It is part of a programme of sustained growth
in investment in the vital public services delivered by local
government. Overall Government funding to English local authorities
is up by 30%, in real terms, over the last 7 years.
17. Given these generous grant settlements,
and the scope for efficiency improvements, the Government's view
is that there is no need for excessive council tax rises. Councils
have set their budgets for 2004-05 and the figures show that the
average council tax increase is 5.9%—less than half the
average increase last year, and also the lowest figures for nine
years. The Government has targeted capping powers and has made
it clear that it will use these to cap excessive increases. Decisions
on excessiveness are likely to be based on a number of principles
which may or may not include the levels of council tax and council
tax increases in 2004-05—and the Government may determine
other principles. However, the Government is not pre-judging the
criteria. It will first need to consider information received
on budgets and council tax increases from all local authorities.
18. In the longer term, the Government is
looking at the future of council tax through the Balance of Funding
Review. It is one of the four options on which the Review has
asked for further evidence from expert organisations, in this
case the New Policy Institute, who presented a paper to the Review
Steering Group for discussion on 15 January. Many responses to
the Review's public consultation last year said that there were
serious problems with council tax. But most of them suggested
that council tax could be reformed rather than abolished. This
is a tax that has been widely accepted until recently. From an
international perspective, almost all countries have a local tax
on domestic property. It has advantages—for example, it
is relatively easy to understand and to collect. Indeed overall
in 2002-03 local authorities in England collected over 96 per
cent of the council tax due within the financial year.
19. What kind of reforms to the council
tax might be made? A revaluation of domestic property is already
planned for 2007. This will make sure that a council tax bill
is based on a more up to date value of the house rather than its
value in 1991. It is vital to note that revaluation is not designed
to raise more tax overall; the 2001 local government White Paper
made clear that its overall impact will be neutral. At the same
time as the revaluation we will consider the case for change to
the existing bands.
20. A point that came through strongly in
the consultation was that people thought that council tax should
reflect more closely people's ability to pay and should more accurately
reflect variations in property values. Ways of doing this mentioned
during the Review include, for example, introducing new bands
or a "regional banding" system. However, the Government
is not committed to any particular changes in the banding system.
Indeed, before changing the banding system for council tax, we
would need to examine carefully the impact on those groups such
as pensioners on low or fixed incomes living in high value properties.
21. But the Review has identified that a
key issue is resolving the problems of Council Tax Benefit, which
helps people on low incomes, including many pensioners, with their
council tax payments. The problem is that many people are not
aware of their right to this money—1.4 million pensioners
are eligible but not claiming. Some of those who are aware are
put off by the perceived stigma of claiming a benefit and are
therefore reluctant to claim other than the state pension. Central
and local government together are doing all they can to ensure
higher take up. The Government has launched a major publicity
campaign to encourage take-up. The Government is abolishing the
restriction which limits the maximum Council Tax Benefit for people
in council tax bands F, G and H from 1 April. And it is also considering
whether any other improvements can be made to the system.
Which potential local taxes have been considered
by the Balance of Funding Review? Which, if any, have been ruled
out? Which options are having further work done on them?
22. The four options on which the Balance
of Funding Review has asked for further evidence are:
— a reformed council tax (see above);
— re-localisation of the business rates;
and
— a "mixed" or "basket"
option of further small taxes and charges, which might include
any of the following:
— localised vehicle excise duty,
— localised Stamp Duty on property
transfers,
— tourist taxes (ie a form of local
sales tax on hotel beds),
— more freedom to charge for local
authority services and to trade,
— local charges for utilities'
street works,
— local congestion charging,
23. The Review has asked for further analysis
of aspects of the reform of council tax (for example, increasing
the take-up of Council Tax Benefit), and will discuss re-localisation
of the business rate further. It has decided to establish a technical
sub-group to work with CIPFA in preparing a supplementary report
on some of the more detailed issues involved in developing options
for local income tax. And it has not yet discussed the "mixed"
option, on which the LGA will present evidence on 27 April. All
these options will be discussed further in later meetings of the
Review Steering Group.
Should businesses contribute directly to local
services?
24. The Review has also invited further
evidence on the option of re-localisation of the non-domestic
(business) rates. On 15 January, the LGA and CBI presented the
case for and against re-localisation to the Review Steering Group.
For the last 10 years, although local authorities have collected
business rates, they have not set the level of rates or kept the
proceeds. Central government now sets a national business rate,
which by law cannot rise by more than the level of inflation,
and redistributes the money to areas on a per capita basis. Re-localisation—a
return to the pre-1990 system—is not something the Government
has favoured in the past, but there is strong demand for it from
many in local government. Most consultation responses from councils
argued that re-localisation would help to resolve the balance
of funding problem and encourage better partnerships with local
businesses. But the business community has stated that it would
be strongly opposed to re-localisation. There are also major disparities
between areas in their business rate yield, so equalisation would
be needed. The Balance of Funding Review is continuing to look
at this issue.
What other local taxes might be acceptable? (eg
a congestion tax, workplace parking tax, tourist tax, earnings
related tax or sales tax)
25. The third option that the Review has
asked for further evidence on is the case for a local income tax.
The Balance of Funding Review consultation showed support in some
quarters for this—or at least for considering the case for
it, as most people admit the proposal needs much more work. The
Chartered Institute of Public Finance and Accountancy presented
a paper outlining the pros and cons of such a tax on 4 March.
The Steering Group discussed a number of the difficult issues
highlighted in the CIPFA paper such as set up costs, costs to
business and the treatment of investment income. As the CIPFA's
own press notice about their paper says, LIT should not be seen
as an easy option: it is technically complex and challenging with
much of the devil in the detail. And there are many different
options.
26. The Steering Group decided to establish
a technical sub-group to assist CIPFA in preparing a supplementary
report on some of the more detailed issues involved in developing
options for local income tax. The decision to set up the sub-group
does not mean that the Government accepts that local income tax
should be introduced.
27. Finally, another option for reform put
forward during the public consultation on the Balance of Funding
Review is for a range of smaller taxes or charges. This is also
sometimes called the "basket" or the "cornucopia"
option. The Local Government Association are among those who are
keen to explore this option, and will be presenting a paper on
it at the next Steering Group meeting on 27 April. This option
includes a wide range of possibilities—such as localising
existing taxes like vehicle excise duty or stamp duty on property
transfers, or the introduction of new taxes such as land value
taxes, hotel bed taxes and more charges for the use of local services.
CONCLUSION
28. It is very clear is that there are no
easy fixes or quick wins. The Balance of Funding Review needs
to analyse the options carefully. The Review report will be published
in the summer.
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