Passing the buck

5 Dec 11
At first sight, the government’s plan to give councils control of business rates and Council Tax Benefit was a fine case of ‘localism’ in action. In practice, it means town halls will take the rap for deep cuts in support and services
By Sarah Philips | 1 December 2011

At first sight, the government’s plan to give councils control of business rates and Council Tax Benefit was a fine case of ‘localism’ in action. In practice, it means town halls will take the rap for deep cuts in support and servicesEric Pickles REX

Communities Secretary Eric Pickles appears to have united local government in England over proposed changes to council funding. At first, his plans to localise business rates and replace Council Tax Benefit with local schemes were greeted with optimism. But now unitaries, districts and counties, wealthy and disadvantaged areas and urban and rural councils of all parties are unhappy with the detail. Together, the proposals will fundamentally change local government and affect millions of individual experiences of services and of paying for them. If Sir Humphrey were still around, he would say ‘Very bold, minister’.

Currently, business rates are collected by local authorities, pooled by central government then redistributed back to councils through a formula grant. The rates income makes up around 76% of the grant but this will reach 100% by 2014, under the Comprehensive ­Spending Review cuts. The plan then is to abolish the grant and let councils keep the business rates. After 2015, central government will take back any rates income that exceeds the limit in the CSR – possibly to fund other local public ­services such as police and fire.

The current funding system aims for ‘equalisation’ of resources to enable each authority to provide services to a similar standard. The grant formula is based on local needs and local income from council tax but is also ‘damped’ to enable stability. Although nationally the total business rates are more than enough, the local distribution of the business rate base is very uneven, as are the opportunities to grow it, and it does not reflect population or need.

The proposals suggest that councils, given this incentive to work with business, will be stimulated to ‘grow’ their business rates. The starting point of the new system will replicate the final year of grant resourcing, and there will be some annual redistribution through new tariff, top-up and levy mechanisms. The technical papers and modelling template illustrate the complexity of these, and how individual authority funding outcomes could change according to different inflation rates and other inputs. Councils are encouraged to voluntarily pool funding for regional economic development, and to share some of the risks of financial fluctuations. Central government might also stop and ‘reset’ the system if problems arise, and would continue to set both the national rate level and the ­exemption rules.

The other planned localisation change is to Council Tax Benefit. This is ­currently paid to 4.9 million means-tested recipients across England, averaging £15 a week at a total cost of around £4.7bn. In 2013, the national benefit will be abolished and the budget will be cut by 10% and distributed to authorities to allocate by local formulas.

There is a national guarantee to maintain current support to pensioners, so local schemes will focus on how to distribute the reduction to working-age claimants. They will also have to support incentives to work, mesh with the new Universal Credit and meet the duty to reduce, and mitigate the effects of, child poverty.
The inevitable outcome will be a big reduction in support for single claimants. The funding will be fixed, not demand-led as now, and the risks of increased take-up, low collection and fraud will be borne locally. Nationally, these fluctuations and under-claiming amount to billions of pounds, and will have significant effects on some authorities. Many pensioners do not claim their entitlement because it is a ‘benefit’ but might choose to claim a local tax rebate. Delivery will be complicated and expensive as many of the same claimants receive Housing Benefit, which is moving out of authorities to be absorbed into the national Universal Credit. This affects millions of individuals with different circumstances, who are the least likely to use the internet and online services.

The government’s repeated use of the term ‘local’ in relation to the planned changes hasn’t been enough to persuade councils that these will be an improvement. Current local government funding is incomprehensible, but these proposals taken together are even more complex and opaque. They have been criticised by councils, commentators and the communities and local government select committee – on most of the criteria the government set for itself and others. As with the health reforms, just because they are expensive, complex, incomprehensible and very risky does not mean they will not go through into legislation – and be clearly seen as a ­government decision.

The complexity and the scale of other pressures have limited discussion so far. Nobody wants to be a whinger when optimism is the order of the day, certainly for serving local politicians or finance directors. But there are serious risks across the country to individuals as well as to councils and services. If electors (national as well as local) come to believe this affects ‘us’ as well as ‘them’, then complexity will not be a defence.

The local political challenge is always to balance between competing communities of interest or geography. The common measure of success is that the outcome is accepted by those who are not winners. Few politicians have experience of ­persuading so many potential losers.

Margaret Thatcher identified ­herself with the simplicity of the poll tax in 1990 – and the public rejected both. This time there is no simplicity, nor is the prime minister fronting the changes. It is still risky to take on the public’s expectations of  ‘fairness’ and their desire to continue receiving many local services beyond weekly bin collections.

This debate opens up the thorny issues of who pays, who benefits and who doesn’t. It also raises the question of how accountability actually works for decisions about public resources. Democracy and detail clash awkwardly – there are wider concerns about the continuing discounts and exemptions for both council tax and business rates and the credibility of the council tax being based on 1991 valuations.

I was an adviser to the Lyons Inquiry into Local Government, which reported in 2007. In very different political and economic contexts, we explored the wider organic system linking local people, local government and services, and the funding streams between them. It is not easy if there is no coherent definition of council functions. The latest  proposals chose to focus on just two ­specific aspects. Other related issues might need to be dealt with to ensure success.

Future increases in local government funding will come only from growth in the business rates (as council tax is frozen and the actual business rate will be set nationally) yet the big expenditure ­pressures are from demand for social care based on inexorable demographics.

Local politicians will now decide which local citizens should have cuts in financial support and which should be maintained by more cuts to services enjoyed by others. In some areas of high unemployment, the prospects for local economic recovery are fragile. It is not credible that this is due to a lack of the ‘incentive’ to create new growth.

To grow local resources would mean increasing business rates by approving new developments. Local communities do not always see the benefits of development. Some opposition comes from individuals and communities who would lose something or experience damaging effects without benefiting from the development. Neither would they benefit from the council ­increasing spending on social care.

For political leaders, the financial incentives must be enough to cover the potential political costs of taking decisions for the wider good. Specific angry communities react ever faster, using new media and this is uncomfortable especially given annual elections.

There are also awkward issues for developments on boundaries across areas and in counties where the districts would agree the planning and share the proceeds with their county. How will the political tasks, benefits and costs be shared? Agreeing a large development that will increase business rates, such as a retail park, factory or waste recycling facility, could use up political capital. It might create much-needed jobs but they won’t necessarily be taken up by those affected by the development.

‘Rich’ councils were looking forward to keeping most of their business rates and being free of central control. ‘Poorer’ councils were hoping for some continuation of equalisation, to recognise the huge range of needs and council tax revenues and their limited scope to increase business rates. The proposed tariff and top-ups and central levy limit incentives for growth, yet do not give much hope that services in ‘poorer’ areas can continue undiminished – or that it will be possible to prevent a two-tier system.

The proposals acknowledge only implicitly the risks of localised funding. In Europe and Australia, many smaller authorities and those in poorer areas have struggled to provide quality services and many have gone bankrupt or merged. The plans threaten the technical and financial viability of small district councils. Losing Housing Benefit will remove an economy of scale with processing the council tax support – limiting the ability to maintain a corporate centre.

In a closed system, each gain can be only at another’s expense, unless the total pot keeps increasing – as local ­government funding has for the past ­decades. Now it is fixed to decrease and these substantial changes are to be implemented in the midst of the economic downturn. There is increasing anger that local government has to manage unprecedented tough trade-offs between individuals and services while central government will ‘set-aside’ more than £3bn worth of business rate receipts above the CSR limits after 2015.

Elected mayors and Cabinets will want to be briefed on potential opportunities, costs and risks. They will need to be able to take a strategic grip and lead the difficult debates in their localities to ensure informed decisions. They will also need to consider if it would be sensible to collaborate with other councils or Local Enterprise Partnerships to attract business and growth, share financial risks, agree wider sub-regional sets of policies or implement the new council tax support. But the business-led LEPs were not established to play a role in deciding the core funding between local authorities, nor probably would they want this.

London Councils’ response to the current proposals is damning in their disappointment that the business rate localisation proposals are ‘overly complex and lack the significant elements of incentive and reward that we believed ministers were seeking… and do not deliver the obvious link to business and economic development’. They also regretted the lack of an incentive for pooling between authorities, in part because the national top-up and tariff schemes could override voluntary decisions.

A  report from the communities and local government select committee said the Council Tax Benefit proposals offered ‘only the illusion of local discretion’. It found that the 10% cut in the benefit’s total budget would fall on a small proportion of claimants. The change would also transfer ‘significant financial risk’ to councils at a time when they need financial flexibility, it said. This runs the risk of increased take-up of the benefit leading to ‘local authorities either rationing support or raiding other budgets in-year’.

It isn’t localism as many wanted it, but it can be shaped. Other factors will interact, the outcomes will vary. The reputation of both national and local politicians will be affected by how this develops. Success and failure will be clear only several years after the radical shift away from funding by a formula based on need and equalisation – probably by 2015 – in time for the general election.

Changes to local government funding and support for council tax together pose immense technical, operational and political challenges. They could risk the viability of some services and individual councils – but there is also a chance the ensuing debates could reinvigorate local democracy.

Sarah Phillips has worked across local and central government and is now a consultant and deputy director of the Centre for Public Service PartnershipsTransparent

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