Memorandum by Chartered Institute of Public
Finance and Accountancy (BOP 25)
CIPFA welcomes the opportunity to make this
submission to the Communities and Local Government Committee's
call for evidence to the inquiry on "The Balance of Power:
Central and Local Government." We would like to respond specifically
on the questions around financial autonomy.
Our key arguments are that:
— financial autonomy is key to local authorities
effectively carrying out their strategic place shaping role;
— best practice frameworks can be used
effectively to increase financial autonomy for local authorities;
— failure to address balance of funding
issues will further undermine the credibility of local taxation
systems; and
— capping works contrary to the increased
emphasis being placed on citizen empowerment.
Does local government need greater financial freedom?
If so, in what ways?
1. CIPFA has long supported financial freedoms
for local authorities. We believe that the introduction of the
new capital finance regime under the Prudential Code has provided
a model for greater financial freedoms underpinned by best practice.
Local authorities have proved that this additional power is being
used responsibly and that financial prudence is being maintained.
2. Of the new projects being funded by the
new borrowing powers, a number include local authorities working
together with PCTs or other local bodies to develop joint facilities,
strengthening their place shaping roles at a very local level.
In addition, another key group of projects has been authorities
investing in "spend to save" schemes that will ultimately
increase financial flexibility in other areas.
3. CIPFA firmly believes that the non-hypothecation
of grant is of fundamental importance to the strategic role of
local government. If local authorities are to be effective in
their place shaping role they need to have the freedom to direct
resources to where they will have the greatest impact. The introduction
of Local Area Agreements and Comprehensive Area Assessments directly
acknowledges that the success of an area is a result of the interaction
of a number of different services rather than the concentration
on a single one, however important. We believe the circumstances
where hypothecation of grant is appropriate are limited, for example
to those areas where local government is merely acting as an agent
of central government.
Should local government be able to raise a greater
proportion of its expenditure locally?
4. CIPFA has been clear in its responses
to the previous Balance of Funding Review carried out by the Office
of the Deputy Prime Minister and the Lyon's Enquiry that it believes
the balance of funding is fundamental to the revitalisation of
local democracy and local authorities' abilities to fulfil their
strategic place shaping roles.
5. A key issue resulting from the current
balance of funding is the impact of gearing. Because the entire
impact of a marginal change in budget falls upon the council tax
it leads to a greater focus on such marginal budget decisions
rather than the soundness of the budget in its entirety. More
fundamentally the impact of gearing is seen in the wide variation
in council tax levels between authorities and its increasing loss
of credibility among both the electorate and informed commentators.
6. There has been much debate about the
future of the Council Tax and the pressure for its reform is only
likely to increase. However, without addressing the balance of
funding, attempting to either reform the current tax, through
revaluation and additional bands, or to introduce a new tax is
likely to be problematic. Many of the issues associated with the
council tax are caused not by fatal flaws in the format of the
tax but by its absolute level and the impact of gearing.
7. Not only is the balance of funding between
local and central government an issue, but also the balance of
funding between the council tax and other forms of taxation causes
problems. The annual increase in council tax has consistently
been above that of non domestic rates (linked to inflation) and
income tax. This has resulted in a shifting of the tax burden
towards council tax and increasing issues of perceived affordability
and fairness.
8. CIPFA has long supported the return of
business rates to local authority control. This would provide
the greatest potential for having a significant impact on the
balance of funding and reducing the impact of gearing. In addition
it would provide for a meaningful dialogue between business and
local authorities about the balance between the funding of infrastructure
(including social and economic infrastructure) and the level of
taxation.
9. Access to additional taxes and funding
sources other than business rates would be welcomed but, if affordability
and fairness are not to become an issue, it is unlikely that such
sources could provide enough additional capacity to take the pressure
off the council tax.
What effect does the capping of council tax rises
have on local accountability?
10. The Community Empower White Paper is
based upon the fundamental aim of increasing citizen empowerment
and addressing the democratic deficit. It seems contrary to this
very laudable and correct target to retain capping powers where
it is clear that local authorities are effectively engaging with
their communities on budget decisions.
11. Budget decisions should be seen clearly
as being made by accountable local authorities after appropriate
consultation with local stakeholders. There is a real danger that
capping clouds this accountability as budget decisions become
seen as a trade off between local decision making and central
constraints. This could potentially lead to capping, and by default
central government, being help to blame for failure to act locally.
12. CIPFA is currently engaged in a project
to build upon existing best practices to ensure that communities
as citizens, council tax payers and service users have the information
they need to hold local authorities to account for their performance
and expenditure. The recent consultation documents Telling the
Whole Story and Back to Basics are very much in line with the
community empowerment aspirations which we would argue, if properly
implemented should make capping obsolete.
September 2008
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