07 October 2005
The council tax issue is not going to go away, says Tony Travers. The government might have postponed the revaluation but this won't stop the annual rises and accompanying protests. It's time to take action
Tony Blair is in for the long haul. The prime minister's party conference speech was widely interpreted as a statement that he intends to be around for another four years. He did not sound like a leader cutting and running. The decision to postpone council tax revaluation indefinitely, announced the previous week, was surely further evidence that he wants to stay in power for as long as possible.
The PM's capacity to read the political runes and then act in his political self-interest remains unchallenged. Margaret Thatcher utterly misread the extent to which local taxation could damage a British leader. Her decision to push through the community charge cost her sufficient votes in her leadership battle with Michael Heseltine that she fell short of the majority needed to be certain of staying in office. From then on, she was politically dead. Blair has understood enough about this history to want to avoid the risk of a similar fate.
Thus, the possibility that April 2007 would be the occasion for millions of council tax bills to jump by 15% or more ahead of inflation has been avoided. Indeed, however long the prime minister hangs on, even until 2010, he will not face the nightmare of 'the losers'. But in opting for this self-preservation strategy, he has demonstrated just how difficult it now is to do anything other than freeze the council tax. The implications of this decision will surely affect each year's local funding settlement from now on.
Council tax is too hot to handle. It frightens even the most powerful political leader in Europe. Moreover, the need to put off the evil day of revaluation has led to another delay in the final conclusions of the Raynsford-then-Lyons inquiry. Nick Raynsford's Balance of Funding review got under way in April 2003. Lyons Mark 1 took over in July 2004 and was due to report in December 2005. Lyons Mark 2 will finally complete its work at the end of 2006.
Almost four years is a very long time to spend on official examinations of council tax and other possible finance reforms. The Layfield Committee took just two years from its establishment in 1974 to complete its encyclopaedic study of the same subject. True, the delay in Sir Michael Lyons' report was due to an extension in his remit to include other aspects of local government, such as the type and quality of services provided and the need to decentralise finance to neighbourhoods. But the original purpose of the Balance of Funding review was straightforwardly to look at funding. This element of the exercise truly will have stretched out over the better part of four years.
It was never very likely that Lyons would propose a radical change to the system of local government finance. He, like the rest of us, must work within a constitutional and political framework that appears to preclude a move towards a very different kind of funding regime. The idea that the Treasury would accept the introduction of, say, a local income tax looks so wild that very few commentators can seriously contemplate such a move. Thus, a degree of self-censorship becomes inevitable. Everyone finds themselves working within limits set by central government's unwillingness to consider any fundamental change.
But it is unlikely that the government will be able to soldier on with local authority finance in its present form for much longer. The relentless real increase in council tax appears to have reached some kind of a pain threshold. Pensioners volunteering to go to prison to protest against local tax rises undermine the political benefits of postponing or cancelling the 2007 revaluation. Already, it appears likely that council tax will rise by two or three times the rate of inflation in 2006/07.
The government finds itself in a fine old mess as it steers council tax from year to year. Whitehall must now take most of the responsibility for these local tax changes. The government has pushed up expenditure plans for education, personal social services and the police at a breathless pace in recent years. Three-quarters of councils' income comes from central support, while the quarter from council tax is capped if it is deemed 'excessive'.
As a result, the growing gap between local spending and central support is, by any standards, the direct result of government policy. This impact was very clearly demonstrated in 2003/04, when a redistribution of central support contributed, in the view of the Audit Commission, to council tax rises of 13%.
In parallel with this rapid rise in local authority spending and taxation, central government has also increased its own spending and tax take. Between 1997/98 and 2004/05, central government increased its current expenditure by 47%, and its tax take by 41%. In the same period, local government current spending rose by 57%, but council tax by 81%. Central government has used borrowing (and the move away from a budget surplus) to allow itself to push up expenditure more quickly than its tax take. Local government has witnessed the opposite effect.
So council tax has risen at twice the rate of central government revenues. The government has been willing to tolerate these real local tax increases as a partial payment for rapidly increasing local expenditure. Central support – including the business rate – has been held down relative to what would otherwise have been necessary if council tax had risen only in line with retail prices. There has been a relative shift from central to local taxation.
Thus, income tax, VAT and many of the chancellor's other taxes have risen by far less than council tax in the years since Labour took office. It seems unnecessarily masochistic of the government to have nudged council tax up faster than many other, less perceptible, revenue sources. Income tax is buoyant and widely seen as 'fair', and for most people is deducted before they receive their pay. VAT is hidden in the cost of goods and services. Many customs and excise duties are also buried in the cost of items such as drink or tobacco.
Council tax, on the other hand, is by far the most visible tax paid in Britain. Bills are sent out to tens of millions of homes. Cheques and direct debits must be signed. For people on lower incomes, the tax can be seriously regressive. Yet the government has seen fit to push up this most awkward and difficult of taxes in order to hold down easy-pay, painless revenues such as income tax and VAT. This is politically bonkers.
Why has the government, in effect, created a running council tax 'crisis' for itself? This has probably occurred because ministers and civil servants believe that unless the local tax is put under continuous pressure, councils will be inefficient. By keeping council tax rises at 6%–7% per year, the Treasury can be certain that councillors will set their budgets with great care. Judging by the vastly expensive budget meltdown in the NHS, this approach to local government funding appears to have induced the hoped-for discipline.
But it cannot go on. If Blair will not risk a revaluation, he is surely not going to put up with year after year of 'council tax crisis' headlines. The big question is: what will the government do next to avoid the need for widespread capping and the risk of ever-more pensioners being locked up? Herein lie risks for local government. It is worth remembering that the Major government considered abolishing local taxation. The possibility that during a radical final term Tony Blair might decide to kill off the council tax issue cannot be ruled out. One more difficult year might be enough to trigger a freeze or, in desperation, outright abolition of local tax.
What might local government do next? Should councils simply continue to lobby the new Lyons inquiry on the assumption that a revaluation will eventually occur and that additional local taxes remain a possibility? Or should the case be made, once more, for radical, localist constitutional reform? Or would it be wiser to consider a narrower – and more awkward – course of action? There is little time left to reach a decision.
The Local Government Association could continue to lobby for its 'combination option', which would support the retention of council tax, the introduction of an element of local income tax and the relocalisation of the non-domestic rate. They could ask for a more dramatic change. Alternatively, and more controversially, it might be decided that the time has now come to draw a line and argue for a new, realistic beginning. Specifically, there could reasonably be a debate as to whether education and social services should become fully centrally funded. It appears that the government might anyway be considering such a policy for schools.
If local government no longer funded these expensive 'welfare' services, its remaining services would be around 60% funded from local tax. There would be less need for full equalisation and a far smaller gearing problem. The year-on-year pressure to spend more on education and social services would be shifted once and for all to the Treasury. As long as the government then maintained central funding increases in line with spending rises, the pressure on council tax would be significantly more manageable. Such a result would be attractive for both central and local government. Councils could then argue for a greater degree of freedom.
Some would see the latter option as a despairing failure to hold the line against centralisation. It would be. However, what remained in the slimline local government would be many of the services that the public cares most passionately about. English councils would be in no worse a position than the much-admired French system, which does not run education or social services. Indeed, with fewer 'big' services within local government, it would be possible to envisage a return to smaller-scale local authority units.
The prime minister is seeking a legacy. His third term is going to be about creating a Britain that will embed New Labour's values for years to come. Despite years of effort, the current local government arrangements do not look robust or thought through. At the Labour conference, Blair stated that his government would introduce 'a new and ambitious blueprint, strengthening the leadership of our cities, giving good councils new freedoms and devolving more power to neighbourhoods'. Unless the financial underpinning of this blueprint is sound, local government will surely continue its inexorable decline. This time, it really is now or never.
Tony Travers is the director of the Greater London Group at the London School of Economics