The Balance of Power: Central and Local Government - Communities and Local Government Committee Contents

2  Key issues

Key challenge 1: Public expectations

39.  There are a number of reasons why central government moves cautiously if at all to introduce greater autonomy for local government. One of them is concern that the public has yet to be fully convinced of the merits of "localism", particularly when it results in varying standards of service delivery, the so-called "postcode lottery". The Lyons inquiry found that 57% of people objected to the idea of local levels of service not being the same in different areas of the country. In our view, the media, both national and local, does not see that one of its duties is explaining or contextualising issues, but instead seizes on every failure as a stick to beat local government. Much of the public in England appears to equates variation of service with unacceptable standard of service. Behind this connection may lie a continuing doubt that local government is able to deliver on its promises—what Sir Michael Lyons, during his oral evidence session, referred to as "[…] the problem of a debate with the public of this country which, when surveyed, believes that more decisions should be made locally but still has some anxieties about those decisions being made by local government."[31]

40.  The problem may be that centrally-imposed solutions sound fair and efficient in principle, even though in practice the challenge of imposing a uniform national standard of service delivery from the centre can prove particularly intractable. Fifty years of the NHS has not guaranteed a uniform standard of healthcare everywhere at any time. But when local government fails to deliver a satisfactory level of service, the public—and the media—in England automatically looks to central government and constituency MPs to intervene. Moreover, the British electorate appears to have unusually strong expectations about equal treatment of people in different parts of the country and in different circumstances. A number of witnesses to our inquiry echoed Professor Vernon Bogdanor's view that "all too often national politicians are held to blame for local matters and that is incompatible with a healthy local government system."[32] In effect, as Professor Tony Travers put it to us, public and media expectations "[put] the Prime Minister in the position of being mayor of England."[33] Clearly, if national politicians know that they are going to be held ultimately accountable for the sins of local government, then they will want to retain the ability to direct and influence it.

41.  England's centralist culture inhibits further devolution. We do not, however, believe this challenge to be insurmountable. There is certainly evidence that when local authorities engage more deeply with their public, they can shift attitudes. The Lyons inquiry found that, once the concept of successful public consultation was introduced, two-thirds agreed that it did not matter if local councils provided a different level of service as long as people were consulted and were happy with the service they receive. This survey evidence is backed up by the practical experience of Maidstone District Council, whose Chief Executive, David Petford, informed us of the tremendous feedback they have received as a result of their engagement with the public at parish level and on a larger scale when, for instance, "we have taken over the local picture house and called the public, it has been packed out, and the cabinet, and leaders of the opposition within the council, have had a debate with the public."[34] Acknowledging that deepening council engagement with the public "is hard, it takes a long time", he pointed out that "it is certainly worth it in terms of localism, and that for me is all that localism is about".[35]

Key challenge 2: An unequal society

42.  The second challenge that makes the tenets of localism harder to introduce in England is the degree of income inequality in England. The combination of the demand for fair treatment and the level of inequality in Britain creates a pressure on local authorities that can result in their being put under significant pressure by central government to deliver outcomes that exceed plausible expectation. This is, of course, a challenge for all providers of local services—including the NHS and police. However, because local authorities are responsible for so many local services, and are linked so clearly in peoples' minds with local matters, arguably they feel this challenge most acutely. One way of summarising trends in overall income inequality is to look at the Gini coefficient—an internationally-recognised measure of income inequality which condenses the entire income distribution into a single number between zero and one hundred: the higher the number, the greater the degree of income inequality. The chart below shows comparable 2007 Eurostat Gini coefficient data for EU countries. Although data are not available for England, the UK coefficient serves as a helpful comparator. In 2007 the UK Gini coefficient was 33.0. By this measure, only four EU countries had a higher coefficient (i.e. greater income inequality) than the UK.

Table 2: Income Inequality: gini coefficient in EU countries (2007)

43.  Where income inequality is relatively high, this can increase the challenge faced by local authorities, and others, to deliver services of acceptable standards to all. By way of example, families on lower incomes are likely to have very different health and welfare needs and expectations than families on higher incomes. Under these circumstances, it can be very challenging for local authorities and others to deliver health and welfare services that those at both ends of the income distribution find acceptable. The harder it is for local councils to convince their local population that they are performing well, the harder it is to make the case for localism, and the more likely it is that central government will be tempted to intervene, as with, for instance, the delivery of healthcare.

1. The extent to which the scale of inequality varies between authority is a further complication. The following table, showing the local authorities in England with the highest and lowest estimates on various deprivation measures, gives a good indication of this.

On the one hand, these statistics strengthen the argument for greater decentralisation of power, as such heterogeneous local authorities will have very different needs and priorities. On the other hand, one consequence of this heterogeneity is that local authorities in England have very different expenditure needs and tax bases. To prevent an iniquitous position whereby the poorest authorities are unable to fund essential welfare services, it is generally accepted that there is a requirement for a redistribution of resources between areas—an equalisation process. Knowsley Borough Council, for instance, informed us that:

For an authority such as Knowsley with a low tax base, the opportunity to raise a greater proportion of its expenditure locally is very restricted. The ability to raise income from fees and charges is minimal and is incomparable with the income generation potential of some boroughs, such as London Boroughs. The ability to generate income needs to be taken into account as part of methodology for distributing formula grant as part of resource equalisation which will not disadvantage those local councils with low tax bases.[36]

45.  There is little debate about the need for an equalisation mechanism in the funding system. Where there is more debate is how the equalisation process should be managed. In England, the means of equalisation is by central government grant, which is determined by means of a complex calculation. Our predecessor Committee analysed this process in some detail in an earlier report:

The formula grant system sets spending totals, which, in theory, take account of the costs faced by local authorities in providing local services. If all authorities of the same type were to spend at the level of their Formula Spending Shares (FSS), they would all, in theory, be able to set the same level of council tax […] If a local authority budgets to spend at a level above its FSS, the whole of the extra spending falls on the local taxpayer. If a local authority budgets to spend below the level of its FSS the whole of the "saving" is passed on to the local taxpayer. Council tax rates vary across the country mainly because of local spending decisions.[37]

46.  Our predecessor Committee also assessed the impact of this process on the balance of power between local and central government. It concluded that "the government grant can be significantly reduced from its present level and still fully meet its functions of equalisation", and, crucially, that "the only purpose of keeping grant so much higher than necessary is to have a greater control of local authority expenditure, as a tool of macroeconomic policy."[38] In the next section we will consider in more detail the extent to which the balance of funding between central and local government in England inhibits a substantive shift in the overall balance of power between them.

Key challenge 3: Financial reform

47.  In England the main means by which local councils raise their own revenue is a property tax—the council tax. However, most authorities are able to fund only a minority of their spending requirements from local revenue streams. In 2006-07, across local government 75% of revenue expenditure (including schools) was funded from government grant, and only 25% from local taxes.[39] The government grant includes general revenue support grant and specific (ring-fenced) grant, as well as revenue from the non-domestic rate (business tax), which is levied by central government and redistributed to local government on a per capita basis. As the table below shows, the locally-funded percentage increased slightly after the introduction of the council tax in 1993-94, but has remained broadly stable since 1998-99.

Table 4: Sources of local authority income (at 2006-07 prices)

48.  As we have seen above, English local authority areas are very heterogeneous, and although in total only 25% of total local government revenue is raised locally, the proportion of income raised locally by individual councils varies hugely—our predecessors' report gave a range of between 13% and 69%.[40] Those councils at the lower end of the spectrum, however, face a real challenge if they wish to raise spending above the level set by central government. For example, a council which finances 25% of its spending from council tax and has a formula spending share calculated at £100 million would need to raise £25m in council tax, and would receive £75m from central government. If it wished to increase its spending by 1% (£1 million), it would have to increase council tax receipts by £1 million—an increase of 4%—so the percentage increase in council tax is four times the percentage increase in spending. Conversely, a council which finances 75% of its spending from council tax and has a formula spending share calculated at £100 million would need to raise £75m in council tax, and would receive £25 million from central government. If it wished to increase its spending by 1% (£1 million), it would still have to increase council tax receipts by £1 million—but in this case the increase would be only 1.3%—so the percentage increase in council tax is much nearer the percentage increase in spending This is referred to as the gearing effect, a ratio of two different percentages—the percentage change in local authority expenditure, and the percentage change in council tax required as a result. The higher the gearing ratio, the more sensitive council tax levels are to local spending decisions, and the harder it is for the local authority to provide additional funding to support projects which are a specifically local priority. Arguably, the decision to fund schools through a ring-fenced grant has dampened the gearing effect, which is really only applicable to discretionary spending. It has, however, done so only at the expense of local government autonomy and flexibility in this particular policy area.

49.  Unsurprisingly, a number of witnesses were critical of the current local government finance system. Even a former Minister in the current government, Nick Raynsford MP, accepted that there is a problem with accountability:

Unfortunately the financial regime we have is one in which it is so opaque […] that it is very difficult for the average voter to have an idea as to who is responsible for either an unpopular council tax increase or a failure to deliver a service which they want because in some cases the council will say it is the responsibility of central government and we are not given enough grant […][41]

A number of witnesses argued strongly that a greater ability to raise a higher proportion of its own revenue, rather than having a grant from central government, is an essential prerequisite for truly independent—and accountable—local government. To independence and accountability may be added the additional benefits of simplicity, equity, and transparency. After all, as Professor Tony Travers pointed out to us:

It is worth remembering that overwhelmingly for local authorities in England most of the money that their tax payers pay in all taxes just goes up to Whitehall and then is handed back in various means to them or to other institutions in the area by the government. So most of the money in Sheffield is paid by Sheffield tax payers and then handed back to Sheffield in a way that could easily be by-passed by Sheffield keeping more of the money.[42]

50.  It is unfortunate, then, that in the English political context reforming local taxation is so politically high risk. The unpopularity of the poll tax casts a long shadow, and successive Prime Ministers since Margaret Thatcher have been, understandably, extremely reluctant to countenance radical change. Even revaluation of the base for the current council tax is seen as highly problematic. The current government was quick to rule out this particular Lyons recommendation, and in evidence to us, the current Secretary of State was very keen "not [...] to set any hares running",[43] and refused all invitations to speculate on future revaluation other than to restate the Government's position that it has been rejected for the life of this Parliament. In his evidence to us, Sir Michael Lyons showed that he too was acutely aware of the sensitivities when he wrote his report, observing when we asked him whether it was possible to bring about any significant change, certainly without some funding to cushion the effect on losers:

It was very much not only that thinking but that experience through the life of this project that led me to believe that this could only be achieved by a combination of what I would describe as a mosaic, a number of small changes […] and that would have to extend over the life of more than one government if any progress was going to be made.[44]

The problem is that the alternative of incremental change, as proposed by Sir Michael Lyons, has not so far delivered any substantial financial rebalancing. We will return to this issue in a later chapter.

51.  Given the strength of political resistance to radical financial reform, we need to test the Government's contention that radical change of the role of local government can be achieved by developing current frameworks.

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31   Q 45 Back

32   Q 436 Back

33   Q 436 Back

34   Q 227 Back

35   Q 227 Back

36   Ev 180 Back

37   Office of the Deputy Prime Minister (ODPM) Committee, Ninth Report of Session 2003-04, Local Government Revenue, HC 402-I, paras 20 and 22. Back

38   ODPM Committee, Local Government Revenue, para 50. Back

39   Communities and Local Government, Local Government Financial Statistics England, No 18 2008. Chart K3a Back

40   ODPM Committee, Local Government Revenue, para 21. Back

41   Q 468 Back

42   Q 438 Back

43   Q 605 Back

44   Q 29 Back

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Prepared 20 May 2009