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The truth will out, by Dennis Reed

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09 December 2005

Announcing the local government finance settlement at the same time as the Pre-Budget Report might have pushed it into the news background. But the government cannot hide from the issues forever

Betraying their unease on the subject of local government finance, the spin doctors in Whitehall decided to include the settlement for 2006/07 on the same day as the chancellor's Pre-Budget Report. The talk of the day, as expected, centred on overoptimistic macroeconomic estimates and climbdowns from the Treasury, leaving local government to leave silently through the back door.

However, such a stinging issue for the government cannot be so simply ignored. The Pre-Budget Report and the settlement have thrown up some real issues that the government will have to tackle.

First, the chancellor only plugged some of the gap in a two-year deal to fund local government — way short of the Local Government Association's estimated funding gap of £2.2bn for 2006/07 alone. On a yearly basis, this is only just over a quarter of what was received in last year's bail-out and undermined the chancellor's claim that the Pre-Budget Report reinforces the government's commitment to 'families, the elderly and young people'.

The fact is that frontline services do not come cheap and, with the challenges of changed demographics, are likely to become increasingly costly. For example, the LGA estimates that almost £700m more is needed for services to adults, largely because of the ageing population.

Key areas such as social services will be particularly affected by the chancellor's statement, although the Commission for Social Care Inspection has said that there will need to be a 'significant increase' in budgets to meet demand. The government's 2% increase for social services falls way short of the mark.

Year on year, the Office of the Deputy Prime Minister will be forced to take off its cap and go begging around Whitehall unless the current structure of local government finance is reformed. Prior to the settlement, the Local Government Information Unit proposed that an 'opt out' clause should be introduced, which would allow overstretched councils to argue about undertaking new Whitehall-led initiatives deemed unsustainable within the current funding structures.

However, this is only a short-term measure and more far-reaching reform is needed if finances are once again to be sustainable. Additional council tax bands need to be introduced so that those in the top band pay ten times as much as those on the bottom band, instead of three times as much as at present.

Also, replacing the national banding system with regional ones to reflect the wide variations in property prices and housing market inflation over the past decade is a must. This should be coupled with a fundamental redesign of council tax benefit so that it is treated as a tax credit rather than a means-tested welfare benefit.

Finally, business must be required to pay its way — its share of local government finance has plummeted from 29% to 19% over the past decade.

Turning back to Monday's announcement, it is the chancellor's failure to reform council tax benefit and housing benefit that is most disappointing. This is particularly stark when contrasted with the rhetoric bandied around by the Treasury concerning the 'poverty trap'. There is a lack of tangible policy focus.

The government's provision of funds to enable local authorities to visit at least 50% of housing benefit claimants to ensure more effective collection is welcome. But this does not deal with the fact that council tax benefit is 'mean' for working age households.

Likewise, while it is certainly welcome that the government has introduced a package of policies to deal with the problems of overpayment of tax credits by raising the threshold from £2,500 to £25,000, the devil is in the detail. The fine print reveals that this is a one-year issue because, by 2007, recipients of Working Tax Credit will have to report monthly on changes in a wider range of circumstances. This is potentially unworkable and could throw up a whole host of unintended consequences.

What was really needed was a realignment of council tax benefit with the tax credit system. This was nowhere to be seen, meaning those benefiting from the chancellor's tweaks to the tax credit system will still be hit by a 20% tax on their income.

The government has been evading the long-term decisions on local government finance for many years — the extended Lyons review got the government past the last general election. But there is now a widespread recognition that the council tax crisis must be tackled in the next two years, or the government will pay dearly for its apathy in the polls.

Dennis Reed is the chief executive of the Local Government Information Unit

PFdec2005

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