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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