Localisation issues in welfare reform

Written evidence from the New Policy Institute (NPI) (LWR 12)

This submission from the New Policy Institute (NPI) is in response to the Committee’s invitation to its inquiry into the implications of welfare reform insofar as it affects matters in the remit of DCLG. Our remarks are restricted to the localisation of council tax benefit (CTB). NPI has studied council tax and how it might be reformed since 1998. We were particularly active both prior to and during the 2004 Raynsford Review. If there is one thing we learned – and it was some time before we did – it is that it is a huge mistake to suppose that CTB is just the tail on the council tax dog.

The submission is divided into two parts. In the first, we set out the key features of CTB and, in particular, the way in which it modifies the ‘normal’, property-based council tax. We refer to this combination of ‘normal’ council tax and CTB as the council tax system. In the second part, we respond to four of the questions of interest to the Committee.

Part I: Some key features of CTB

CTB has a profound effect on the council tax system, transforming it into a hybrid property and local income tax. To grasp what CTB really does requires a shift of perspective. Instead of looking at CTB itself – that part of ‘normal’ council tax that a householder entitled to CTB does not have to pay – look instead at the householder’s liability to council tax that remains after CTB has been deducted. In figure 1, which shows the liability for a single working-age adult without dependent children, this means shifting attention from the black area (CTB) to the white (the remaining liability).

Figure 1: CTB received and council tax paid by a single working-age adult with a ‘normal’ council tax liability of £15 p.w. Tax is paid on the income basis to the left of point Y and on the ‘normal’, property basis to the right.

The key thing that CTB does is this: for so long as the household is entitled to some CTB, its liability to council tax does not depend on the value of its property or the band it is in but rather on its income. For example, the liability of the single adult without dependent children works out at 20 pence for every pound of weekly income (net of income tax and national insurance) above £73. For those entitled to it, CTB turns council tax into an income tax. As income rises, so the tax payable rises until the point at which the liability under this local income tax is equal to the ‘normal’ property-based council tax. After that, further rises in income have no effect on liability since the ‘normal’ property-based tax acts as a cap or ceiling on the amount to be paid. Leaving aside complications such as the impact of savings on CTB entitlement, the liability of any household to council tax can be expressed as the lesser of (i) the normal, property-based council tax and (ii) the local household income tax in which the marginal rate of income tax is 20 per cent. If CTB were just a fringe benefit, going to a few tens or even hundreds of thousands, then this might be no more than a curiosity with no political import. In fact, however, some 22 per cent of households in both England and (coincidentally) Great Britain (some 5 million and 5.9 million respectively) receive CTB. More people receive CTB than any other means-tested benefit.

The detailed design of CTB means that council tax is the first tax that low income households pay as they move into work and increase their hours. CTB starts to fall from its maximum when weekly household income is £5 (for a single adult) or £10 (for a couple) above the level of working-age means tested income replacement benefits (income support, jobseeker’s allowance, income-based employment and support allowance). A single adult paid the minimum wage needs to work only 12½ hours a week before they lose their entitlement to full CTB and start paying some council tax. Earnings at this level (around £75 a week or £3,900 a year) are barely more than half those at which income tax becomes payable.

CTB acts as a shock absorber, both for people who lose their job, for pensioners whose council tax rises by more than their pension, and for local authorities. Like any other means-tested benefit, CTB responds rapidly to households’ changing financial circumstances. While in the first instance, the award of CTB means reduced income for the local authority, central government makes up the difference, that is, it picks up the bill for CTB. CTB also protects households against rises in normal council tax. Households don’t have to be receiving full CTB to enjoy this protection: on the contrary, provided a household gets some CTB then if ‘normal’ council tax rises by more than income, CTB makes up the difference. Pensioners in particular have demanded that council tax should not rise by more than their pension. If they get any CTB at all, that is what happens – although not many people seem to know that. Thanks to the relative generosity of the savings element of pension credit, the pensioners who gain from this, though not well-off, are by no means just the poorest.

Part II: Response to committee questions

In the remainder of this submission, we respond to four of the Committee’s questions. They are: the advantages and disadvantages of localisation; what should be off-limits; the procession of policy formation; the realism of the timescale; and the process of policy formation.

The advantages and the disadvantages of localisation

Once it is appreciated how central CTB is to the council tax system, the idea that it is to be abolished and replaced with diverse local schemes is, quite simply, incredible. As a key component of a nationally-designed tax system, CTB has systemic implications that make it unique. No benefit is less suitable for this treatment than CTB.

Localisation will likely also undermine CTB’s role as a shock absorber, in the first instance for local authorities and then for individual council tax payers. It is true that localisation could bring stability and control to central government’s spending on CTB. But what stabilises central government here destabilises local government. If local government in turn adopts a scheme that stabilises its expose to CTB, then the instability will be transferred to council tax payers. In this case, it is not just those receiving (or hoping to receive) CTB who will be affected but also all other tax payers in the area who will have to pay for it. Localisation of poor relief will return us to the 1920s.

What should be off-limits?

In inviting responses to its inquiry, the Committee notes the DWP’s insistence that localisation of CTB should not jeopardise the single taper feature of universal credit (UC). What exactly is meant here by ‘jeopardise’? Since CTB is (quite rightly) outside of UC, no replacement can in itself affect the UC taper. However, unless CTB is either (i) abolished without replacement or (ii) granted in full until all UC has been tapered away (neither of which is plausible), it will have to have a taper of its own. This means that at least some recipients of UC and CTB must inevitably experience a total taper greater than the UC taper alone. Far from being ruled off-limits, it should be explicitly recognised that this will happen.

How high that total taper goes is another matter, however. To give an example, if CTB were to continue in its present form with its 20 per cent tax rate on net income, a recipient of UC and CTB would face a total taper of 72 per cent (UC’s 65 per cent plus CTB’s one fifth of the remaining 35 per cent taper). Since this is some four percentage points less than the 76 per cent total taper faced by a UC recipient who is also paying income tax and national insurance, there can be no principled objection from the DWP to a total taper of just 72 per cent. This suggests that a serviceable rule is that the taper on any CTB replacement is not more than the 20 per cent net income taper on CTB today. If in some circumstances that is still felt to produce too high a result (e.g. a UC recipient receiving CTB and paying income tax and national insurance would face a total taper of about 81 per cent), some supplementary limit – perhaps 80 per cent? – could be placed on the total.

The realism of the timescale

For all that it has a big effect, CTB is not complicated. The 30 months notice of its effective abolition that was given in the Spending Review ought to be enough time to bring a suitable replacement into being, assuming of course that such a thing exists. The fact that the first nine of those 30 months have now passed with no sign of the promised government consultation paper suggests that it does not exist. If even central government – with some input from local government – cannot agree on the way forward within this sort of timescale, time in itself is not the real problem.

In these circumstances, the wisest course would be to retain CTB in its present form in 2013 and for the foreseeable future thereafter. The concerns that DWP have about how CTB fits with UC could then be addressed directly by that department. Having made whatever detailed revisions are necessary to ensure the maximum level of compatibility with UC, central government could then invite both individual local authorities, groups of local authorities and perhaps most importantly of all, the Welsh and Scottish Governments, to come forward with proposals to vary the design of CTB in their area. If the reversal of policy on CTB needs a justification, it can quite properly be that it is a tax cut which, for the most part, will benefit low income, working households.

The process of policy formation

As is perhaps by now apparent, we are very critical of the way this whole matter has so far been handled. This is not because CTB does not need changing: on the contrary, some of the principles that have motivated the design of UC could be applied to CTB too. DWP should have treated the reform of CTB as a necessary adjunct to the introduction of UC.

Neither are we critical because of what it might mean for CTB recipients. The interests of these low income households should be uppermost when it comes to assessing the merits of what is proposed – but until such a proposal is on the table, replete with all the necessary details, little worthwhile can be said.

Our criticism instead is directed at the way that policy regarding CTB has been made. The original Spending Review announcement that CTB spending was to be limited made no sense given the way CTB actually works. The Welfare Reform Bill was rash to announce CTB’s abolition before a plausible replacement had been identified. The delay in producing a consultation document suggests that the seriousness of the situation has still not been properly grasped. The replacement of CTB is not some minor procedure for the out-patients department of welfare reform but a major piece of surgery. We think the operation should just be cancelled. If it is to go ahead, it should be remembered that the losers from a botched job will likely be pensioners with small private pensions and working-age people in low-paid, part-time work. In other words, much the same group as lost out when the 10p tax band was abolished.

June 2011