Councils in charge

Local authorities are about to become a lot less dependant on central government
May 19, 2006

The May local elections will be seen, in the main, as an opinion poll on how long Tony Blair should remain as prime minister; with sub-themes being the progress of David Cameron and the challenge of the BNP in some parts of the country. This "nationalisation" of local elections is an old story. But meanwhile some rather big things are happening in local government, largely unremarked on by the national media, and "localism" has moved closer to the top of the policy agenda of all three main parties.

The first notable change is that one of the main complaints about local government—that it raises only a small proportion of the money it spends and is thus always subject to central control—is becoming much less true, at least for larger authorities.

As a result of reorganisations over the past 40 years, local authorities no longer produce or distribute gas and electricity, nor do they control higher education, and oversight of police and fire services has been transferred to independent bodies. In spite of this reduction in activities, in 2005 local authorities in England were still responsible for about 15 per cent of all state expenditure—£70bn. However, less than a third of that was raised from councils' own resources: council tax amounted to £21bn, and a bit extra was earned from charges and fees.

But the government's latest system for calculating and distributing grants to councils, for the financial year which started on 1st April, includes something called the dedicated schools grant. This will cover all the costs of running schools directly from central resources. At a stroke, this effectively reduces the budgetary requirement of education authorities, and increases the proportion of discretionary spending covered by council tax. For example, Hampshire's current spending is set to rise from £1.1bn to £1.2bn in 2006-07. But if you strip out the amount covered by the dedicated schools grant, spending will rise from £540m to £568m. Council tax will now cover almost 80 per cent of discretionary spending, compared with 38 per cent last year.

The new arrangements will not affect non-education authorities such as district councils, but had they been implemented for 2005-06, the overall effect would have been to reduce the 2005-06 total budget requirements of English authorities from £70bn to £45.5bn, while council tax would have covered 47 per cent of expenditure rather than only 30 per cent.

There is much to be said for local authorities concentrating on fewer functions over which they have more real discretion rather than acting as the conveyor belt for national policy. But even with education removed as a big spending item, larger authorities still have an important range of functions: social services; planning (housing, town planning and the environment); refuse disposal; local road networks; libraries, recreation and culture. With a revised council tax, plus some new forms of local authority dedicated revenues, it ought to be possible to bring the proportion of councils' own money spent on these services close to 70 per cent.

This has implications for the government's double review of council tax and the broader structure of local government, headed by Michael Lyons, which is due to report at the end of the year. Labour has been talking about pushing the important planning powers of local government upwards from county councils and metropolitan authorities to wider—and not necessarily fully elected—regional bodies, while at the same time pushing some of the functions of the lower-tier authorities further downwards to a variety of local, civic and community groups.

The Conservatives, by contrast, appear to be set on removing most of the strategic powers of regional assemblies and development agencies. As for the Liberal Democrats, they have yet to resolve the contradiction between strong advocacy of elected regional authorities and diffusion of power at lower levels of local government. This would seem logically to involve the abolition of county councils, but Lib Dems are always the first to protest against any such move.

Whatever new forms of local government emerge from the Lyons report, everyone is agreed that council tax cannot continue in its present form. There are several problems with it. First, it is a regressive tax. It is levied at eight different rates, with properties assigned to bands related to their value in 1991. These range from under £40,000 to over £320,000. But the tax on the top band is only three times that on the lowest, with the result that in 2004-05 the tax absorbed 4.9 per cent of the gross income of the lowest quintile of households, and 1.7 per cent at the top.

Second, because of the cowardice of successive governments, the valuation of homes has never been updated, with the result that any sudden change is bound to create anomalies and trouble.

Finally, council tax is unpopular with local authorities themselves as it has offered central government a perfect alibi for controlling local council spending, while providing them with declining real resources and then blaming them for the results. Central government grants are based on spending going up at a rate related to general inflation. By definition, local government provides services and their main cost is the pay of employees. For the last eight years incomes have risen faster than prices—hence inflation in local government has risen faster than the retail price index. Government can therefore claim to have funded local councils to cover inflation when they have done nothing of the kind. The result is that many pensioners are finding up to half their annual rise in income swallowed up by council tax increases.

In reforming local government finance, the great conundrum, especially for parties of the centre-left, is how to give local authorities more real discretion—which means more direct control over their income—without increasing inequality. If poor areas and rich areas are dependent on local revenue-raising for most of their services, then clearly the rich areas are going to do far better.

This is not quite the problem it seems. Countries like Germany, which are often seen as models of devolved power, have nationally agreed formulas for the distribution of tax revenues to states and local authorities that allow for national redistribution but then give the local council complete discretion over how it spends its money. A similar principle works in relation to the annual grant of around £26bn to the Scottish executive.

There is a strong case for retaining a tax of some kind on property. It is fixed and visible and therefore difficult to evade. Currently council tax represents about 0.5 per cent a year on the value of the average house. A levy of half that amount, more directly related to current values of property and therefore varied annually, would produce £12bn (an average annual charge to the householder of around £525 compared to the average charge today of £1,050). That scaled-down property tax should be supplemented by transferring from the centre a share of the national income tax raised locally (rather than a local income tax), and VAT, and perhaps road fund licences.

It would have to be legally enshrined that these sources of revenue are local authority entitlements, and not the gift of central government to be bestowed, withheld or varied at a whim. And to deal with the equity issue the tax distribution formula would have to take account of the special needs of different areas and the extra funds required by poorer areas to meet national minimum standards. This could either be reflected in an overtly redistributive formula or through top-up grants from central government.

Even with a more effective system of finance in place, there is still a question mark over the extent to which decision-making can be devolved. The comparison is often made between English district councils, with an average population of 118,000, and French communes, with typically less than 2,000 people, each with its own mayor. But communes have little effective power and France remains a highly centralised country administratively.

Nevertheless, there is one tier of the present English system that could well be developed. That is the parish council, often regarded as quaint and irrelevant. However, parishes are able to take many very local decisions—on village halls, local road improvements and so on—and it is involvement at this level that appeals to most people. It is time the localists designed something similar for the urban ward.