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


Memorandum by the Chartered Institute of Public Finance and Accountancy (CIPFA) (LGR 14)

  1.  CIPFA, the Chartered Institute of Public Finance and Accountancy, is pleased to submit this paper as written evidence to the Committee's inquiry into local government revenue.

IS THE CURRENT BALANCE BETWEEN CENTRALLY AND LOCALLY RAISED REVENUE APPROPRIATE?

  2.  In CIPFA's view, if local democratic renewal and greater community involvement are to be achieved, it is essential that local authorities enjoy financial autonomy and accountability.

  3.  In our view, what is needed is a fundamental shift in the balance between local and central tax raising towards a situation where more than half of local authority spending is financed locally. Under the current system, where only around 25% of local expenditure is financed through local taxation, local autonomy is severely constrained—a situation that is further exacerbated where central government seeks to influence how funds are spent locally.

SHOULD BUSINESSES CONTRIBUTE DIRECTLY TO LOCAL SERVICES?

  4.  CIPFA has consistently argued for the return of non-domestic rates from being a national tax to a local tax. This would achieve a significant change in the balance of funding and would underscore and enhance the inter-relationship between local authorities and their local businesses.

  5.  CIPFA also recommends that in addition to the balance of funding between local government and central government, consideration should be given to the balance of funding that is supported by the business community. When the business rate was nationalised in 1990, the government gave a guarantee through legislation that increases in business rates would not exceed inflation. During this period the increases paid by local electors through the council tax have increased by significantly more than inflation. CIPFA suggests that the consequences and equity of the policy of pegging business rates to inflation over the longer term should be re-examined. We suggest that this be done whether or not business rates are re-localised.

  6.  CIPFA recognises that there is considerable anxiety in the business community about the level of increases that might follow if business rates were relocalised. To allay these fears it may be helpful to establish, for example, an explicit linkage between increases in council tax and increases in business rates that is transparent to all and is applied consistently.

IS THE COUNCIL TAX A VIABLE AND ADEQUATE SOURCE OF LOCAL REVENUE?

  7.  In CIPFA's view, it is right that a proportion of the local tax raising capacity nationally is based on a property tax or taxes.

  8.  CIPFA agrees with commentators that recent levels of council tax have reached—and in some cases have arguably exceeded—the levels of acceptability of such a tax. The council tax is not a particularly progressive or buoyant tax and so has not been able to cope well with the levels of increases in recent years. This is not an argument for the abolition of the council tax. However, it is an argument for reducing the absolute proportion of the total tax raised through the council tax.

  9.  CIPFA also supports proposals for the reform of the council tax , which are well argued in the research carried out by the New Policy Institute for the Balance of Funding Review. [2]

WHAT OTHER LOCAL TAXES MIGHT BE ACCEPTABLE?

  10.  CIPFA has been keen to encourage research into possible alternative sources of funding for local government. An obvious starting point is to consider systems that appear to have operated successfully in other countries, including in particular local income tax.

  11.  We recognise that there are a number of other specific taxes (such as a congestion tax or a tourism tax) that can make significant contributions to income generation in particular locations and which may also have policy benefits in terms of influencing behaviour (eg congestion tax). However, in our view these should not be seen as a substitute for options such as local income tax or the relocalisation of the business rate, which are likely to have a much more radical impact upon the balance of funding.

  12.  In respect of local income tax, CIPFA has prepared an initial report for the Balance of Funding Review[3] and is currently undertaking further, more detailed research. CIPFA has examined a number of variants that a local income tax could take including whether it would be "assigned" by central government or a "variable" precept set by local government; and whether it would supplement or replace council tax. The work also examines key questions such as how it would be administered, and perspectives from other countries that operate a local income tax.

  13.  Work undertaken by CIPFA demonstrates that local income tax is a realistic option, but a complex one, with much of the "devil in the detail"—not least the redistributional effects that it would have. It would require extremely detailed planning and preparation—and the time necessary to achieve this.

  14.  If it were implemented to supplement rather than replace the council tax, it would be possible to increase local income tax progressively, whilst in parallel making broadly matching adjustments to national income tax rates. In this way it would be possible to demonstrate "neutrality", ie no overall increase in taxes, to taxpayers.

WHAT IS THE ROLE AND PURPOSE OF GOVERNMENT GRANT IN ENSURING ADEQUATE LOCAL GOVERNMENT REVENUE?

  15.  In CIPFA's view, the overriding objective of grant distribution should be to distribute funding fairly between authorities, taking account of differences in need and available resources. It is clear that, whatever the system of local taxation in operation, a grant system will need to run in parallel to achieve "equalisation".

  16.  The use of specific grants, passporting and hypothecation are particularly sensitive issues and it would be helpful if there was clarity across all services about the circumstances when these are appropriate. For example, relevant criteria might include:

    —  the local authority is effectively acting as "postman" for central government—for example the administration of mandatory grants;

    —  a new function is being introduced—during the period of transition;

    —  spending is "lumpy"—for example in the case of homelessness;

    —  there is a desire to encourage experimentation; and

    —  paving the way for a new source of income.

  17.  The introduction of the prudential framework for capital finance in local government should be used as an opportunity to move to a position where central government support for both revenue and capital finance are combined. CIPFA recommends that government support for local authority capital investment be focused on support to the revenue account, to support future depreciation and interest costs. This would assist asset management planning and strategic service delivery, and would be consistent with the government's fiscal rules.

TO WHAT EXTENT DOES CENTRAL GOVERNMENT CONTROL OR INFLUENCE CONTRIBUTE TO LOCAL GOVERNMENT EXPENDITURE AND TAXATION?

  18.  In CIPFA's view, a robust and effective approach to financing local authorities must be underpinned by a clear understanding of the relationship between central and local government. Whilst CIPFA recognises that local government needs to act in partnership with central government to deliver a range of desirable policy objectives, a balance needs to be struck to ensure that local democracy is not undermined and local authorities do not become mere agents of central government. In many areas local authorities clearly are in the best position to judge the needs and priorities of the area and communities they serve and the appropriate basket of taxation and expenditure proposals. However well intentioned, central government intervention in these essentially local matters will inevitably cause confusion about accountability.




2   Local Government Finance Balance of Funding Review-4th meeting-15 January 2004-"Reform of Council Tax"-paper by the New Policy Institute. Back

3   Local Government Finance Balance of Funding Review-5th meeting-4 March 2004-"Reviewing the case for a Local Income Tax"-paper by CIPFA and accompanying Powerpoint slides. Back


 
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