28 April 2006
The structure of local government, as well as how it is run and financed are all under scrutiny. This offers the perfect opportunity to explore lasting reforms after years of tinkering, argue Frank Wilson and Tom Startup
Local government reform has been a semi-permanent feature of government programmes for at least 30 years. But it is relatively unusual for the three main aspects – finance, function and structure – to be under review simultaneously.
The first two fall within the broader remit of the Lyons review and the last is under consideration by the Office of the Deputy Prime Minister as part of a white paper expected to be published this summer.
It is logical and sensible that these be considered together. But how exactly do finance, function and structure relate to each other? And what does this mean for the strategic options facing government?
As far as central government is concerned, reform is needed to address problems in the finance and scale of local government. On the one hand, there have been steady, above-inflation increases in council tax over the past 15 years, which are increasingly unpopular and often perceived to be unfair. Related to this is the concern that poor turnouts in local elections are partly a reflection of broader weaknesses in councils' role.
On the other hand, the government has begun to question whether the current structure of local government is appropriate for meeting long-term challenges, in particular whether there might be a case for governance at a city-regional level, or a role for neighbourhood-level organisations in service delivery.
Hence government is looking to reform the finance system to promote fairer and more predictable local taxation, while at the same time considering reforms of the structure to enable a more effective delivery of services. To better understand the nature of the problems, it is worth noting that local government in England differs from international standards in several respects. First, its finance is unusually centralised – and reliant on a single tax that raises just a quarter of its spending needs and is subject to capping by central government.
Second, it is subject to a high level of scrutiny and performance management from central government, in the form of targets, audit, inspection and intervention from several different bodies.
Third, it has an important role in some services that are considered to be of strong national interest, such as education.
Finally, its upper tier operates on a smaller scale (covering a smaller population) than the upper tiers of sub-national government in most other countries.
Taken together, these features can help to explain the current impetus for change. A centralised finance system means that central government tends to see itself as largely responsible for the quality and type of services being provided by local government.
It is therefore likely to invest in a centralised performance management system that places pressure on local government to improve services in return for increased central government spending.
Such pressures might cause local government to raise additional finance in the only way that is possible – by increasing council tax. The gearing effect, whereby local authorities must typically raise council tax by 4% to achieve a 1% increase in their budgets, might then lead to disproportionate and unpopular increases.
In turn, as central government is seen as publicly 'taking responsibility' for local government, it faces strong pressures to respond to unpopular increases in council taxation through capping, further exacerbating the centralisation of finance.
This problem is also affected by the scope and scale of council services. As long as local government has an important role in a broad range of services, particularly in areas of strong national interest, central government will seek to ensure that those services are properly funded and provided to at least minimum standards.
This too implies that central government might be reluctant to let go, in either the financing or management of services. But this might have the effect of undermining local democratic accountability for services – possibly leading to falling turnout in local elections.
One of the reasons why it is difficult for local authorities to have greater fiscal autonomy is because of their small scale. Other things being equal, countries that have sub-national government at a higher scale raise a higher proportion of sub-national expenditure through that tier of government. This stands to reason. The higher the scale, the less inequality there is between areas and the more robust the tax base in each area.
Correspondingly, significant central government finance is needed in part because local government has fairly broad responsibilities, but its scale is such that it generally lacks a sufficient tax base to finance them.
So what options does this leave? The basic high-level choice, as pointed out by Sir Frank Layfield in his 1976 report on local government finance and reiterated in Lyons' interim report, is between making local government more democratically accountable to its electors, or more within Whitehall's control.
And, as Layfield implied, this choice is primarily driven by the issue of finance – on the principle that the entity that pays the bills will be the one to which accountability will flow.
It follows that if the government wants to increase local democratic accountability, as seems to be the thrust of its recent policy, it will need to increase the proportion of local government expenditure financed through local taxation and reduce the gearing effect.
This objective could be achieved in one of two main ways. The first would be to reduce the scope of local government services, for example, in areas of strong national interest. This would mean taking out of councils' control services deemed to be subject to national standards. This would increase the proportion of spending raised locally (because the overall level of spending would be lower), while reducing the extent to which central government would feel bound to hold local government accountable for its provision of services.
The other option would be broadly to maintain the current scope of services but to extend additional tax-raising powers to local government and reduce the extent of financing through central government.
These new powers could perhaps be implemented alongside measures to increase the scale of some local government structures – perhaps at a regional or city-regional level. This might help to take some of the pressure off council tax, while enabling local government to be more accountable to its electors.
However, both options have clear disadvantages. The first requires a significant reduction in the role of local government and the assumption by central government or regional agencies of new responsibilities for which they might be ill suited.
The drawback of the second option is in ensuring that the balance of funding is improved enough to reduce the gearing effect, while maintaining the overall acceptability of the tax burden. In addition, depending on how structural reform was implemented, there would be a range of complexities in ensuring that it was achieved speedily and without unnecessary cost.
The history of reform in this area illustrates how difficult it is to forge a sustainable settlement for local government. Successive governments have sought to change elements of the finance system, the service responsibilities and the structures, but have largely failed to recognise the need for an integrated strategy that addresses all three together.
The government now has the opportunity to provide just such a strategy.
Frank Wilson and Tom Startup are respectively head of local and regional government practice and head of UK public sector research at Deloitte. Public Finance held a round table debate on local government reform in association with Deloitte on April 25. Full coverage will be included in a special issue next week
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