By Andy Sawford | 1 April 2012
Ministers talk the talk on local financial freedoms. But without the right to vary both taxation and service levels, town halls will remain at the mercy of Whitehall
Reform of local government finance has been such a long running and complicated debate that it has attracted little general interest. Now though, this might be about to change as ministers’ plans become clearer.
When the Local Government Finance Bill was presented to Parliament just before Christmas, the details were kept narrow and practical. The expressed intention of the Department for Communities and Local Government is to create a more effective and coherent financing system by allowing councils to retain business rates income. The aim is that local authorities, bolstered by their new powers, will be able to encourage growth, attract business, share large new financial risks and run good, value-for-money services.
But to make the most of this change, officers and councillors need to feel confident that these powers will give them a stable foundation on which to build and experiment. Unfortunately, this does not seem to be the case. In fact, local government is finding it difficult to see beyond the next few years.
Not all the substance coming out of Whitehall matches its style. While the Bill shuffles some levers down to the town hall, the powers to set rates and other mechanisms all continue to reside firmly with the secretary of state. This sense of masked central control can be seen most clearly in the pressures applied to local authorities to freeze their council tax in 2012/13.
Local authorities around the country have just set their budgets for the year ahead. Many have opted to freeze the tax and accept the deal offered by the government of the equivalent of a 2.5% increase. On the face of it then, the vast majority of councils were happy to work with the DCLG on this one. The Conservatives can now claim to have fulfilled the first half of their pre-election promise that they would ‘freeze council tax for two years whilst maintaining services’. They are also only two years away from freezing council tax for a whole parliamentary term.
But ministers did not have quite such an easy time with council tax as the figures suggest. Local government minister Grant Shapps has branded authorities increasing their bills as ‘democracy dodgers’, saying: ‘None of them have dared put the increase to the people in a referendum.’
The alleged ‘dodging’ refers to councils setting rates just below the 3.5% amount decreed by the secretary of state to trigger a local referendum.
Shapps has also warned that the council tax refuseniks might not be looked upon too kindly when future grant levels are decided. ‘We are not impressed with areas that have deliberately rejected money to freeze council tax and they may well not be rewarded for having done so,’ he says.
This is strong rhetoric – especially since the number of Conservative authorities that have opted to raise council tax above 2.5% is somewhere around the low-teens. So why have councils knowingly brought such pressure on themselves from Westminster?
Some clues lie in the data recently unearthed by a Local Government Information Unit survey. We asked 80 heads and directors of local government finance about the medium and long-term pressures on local government finance. There appears to be some overlap here with the councils opting to increase their council tax.
One major pressure on councils opting to raise the tax level is local demographics. Surrey County Council, for example, has had to contend with a 25% increase in its birth rate over the past eight or nine years; almost 10% of the population is now under the age of seven. Council leader David Hodge says that this means an extra quarter of a billion pounds is needed for additional school places.
Indeed, most of the finance officers we surveyed identified demographic pressures as the most significant medium and long-term demand on local government finance. Has the government underestimated the funding needed to maintain services during a period of such radical demographic change?
But while school places and child protection are clearly on the radar, the biggest collective headache seems to be the funding of adult social care, councils’ highest area of expenditure. In the present financial climate, and with uncertainty over future funding models, steps are urgently needed to alleviate some of this pressure.
The LGIU has just launched an inquiry into the long-term future of care and support for the elderly. Backed by the All Party Parliamentary Local Government Group, it will also contribute to the government’s social care funding white paper. An alliance of charities, care homes and housing providers has thrown itself into the debate, urging Health Secretary Andrew Lansley to act quickly on the earlier Dilnot Report and set about creating a ‘sustainable and clear social care system’.
One area where local authorities can make quick and impactful changes is in relation to people who fund their own residential care. At present, one in four self-funders falls back on the state because the financial arrangements they have made become unsustainable. This is not only a problem for the individuals but for the local authorities that pick up the bill, which is estimated at £1bn a year. Councils could help support self-funders and reduce future costs by providing better signposting to independent financial advice.
Other long-term pressures identified by finance officers included continued spending cuts into 2017 and the need to meet capital costs, such as replacing infrastructure. Six out of ten councils plan to borrow money over the next three years. While most envisage borrowing from the Public Works Loans Board, many will look to borrow from the capital markets, possibly through a bond issue.
But it is hard for councils to see into the future. Many are playing a waiting game, deciding when is the best time for more borrowing between now and 2015. The same goes for the new Tax Increment Financing powers. The 34% who indicated they were planning on using Tif powers marked infrastructure and regeneration as the target areas. The rest thought it was too early to say whether they would use the powers at all.
There was also a varied response to the localisation of business rates. Those who expect to gain from the system (53%) only just outweigh those who expect to lose (47%). Unsurprisingly then, 86% of finance officers expect the changes to create a two-tier system of top-up and tariff councils.
Views on these and other measures are clearly going to vary across the country. This is okay, providing councils have sufficient powers to determine their own destinies. However, almost 40% of respondents believe that the local finance legislation will either be more centralising – or will have no effect at all.
This is worrying. As localists we should welcome the ambition behind the Bill. Economic localisation can be the first step in a fundamental shift in the centre of political gravity, with the local becoming the first point of political and economic identification. However, to return to the council-tax freeze, this seems to reflect a centralising approach from Whitehall. While many authorities welcome the financial incentives from government, 80% of council finance chiefs want more freedom in future years. Local authorities are concerned about these centralising tendencies from a financial point of view, and from a political point of view about effectively being dictated to by Whitehall.
The new approach on referendums seems little different from the way that capping worked in the past; namely, as a way to get councils to raise taxes by just small increments each year. We need to break this whole cycle by more fundamentally reforming local taxation. The survey threw up ideas such as local hotel bed tax or a local sales tax. This is a cause that the Commons constitutional affairs select committee has now enthusiastically taken up by issuing a call for financial freedoms for councils to be written into law.
Meanwhile, the government’s pledge to maintain services, while freezing council tax for two years, might turn out to be more real in some areas than others. Some councils maintain that they have been able to make savings through efficiencies, with no major impact on the ‘front line’. But most acknowledge that the combination of cuts and rising costs have led to service reductions.
Should the government be criticised though for not meeting its pledge to maintain services? Not really. The fault was in making the pledge in the first place. Real localism means councils having the freedom to vary both taxation and service levels. Ministers should recant these pledges and embrace local diversity to show a real long-term commitment to decentralisation.
Andy Sawford is chief executive of the Local Government Information Unit
This article first appeared in the April edition of Public Finance
Ministers talk the talk on local financial freedoms. But without the right to vary both taxation and service levels, town halls will remain at the mercy of Whitehall
Reform of local government finance has been such a long running and complicated debate that it has attracted little general interest. Now though, this might be about to change as ministers’ plans become clearer.When the Local Government Finance Bill was presented to Parliament just before Christmas, the details were kept narrow and practical. The expressed intention of the Department for Communities and Local Government is to create a more effective and coherent financing system by allowing councils to retain business rates income. The aim is that local authorities, bolstered by their new powers, will be able to encourage growth, attract business, share large new financial risks and run good, value-for-money services.
But to make the most of this change, officers and councillors need to feel confident that these powers will give them a stable foundation on which to build and experiment. Unfortunately, this does not seem to be the case. In fact, local government is finding it difficult to see beyond the next few years.
Not all the substance coming out of Whitehall matches its style. While the Bill shuffles some levers down to the town hall, the powers to set rates and other mechanisms all continue to reside firmly with the secretary of state. This sense of masked central control can be seen most clearly in the pressures applied to local authorities to freeze their council tax in 2012/13.
Local authorities around the country have just set their budgets for the year ahead. Many have opted to freeze the tax and accept the deal offered by the government of the equivalent of a 2.5% increase. On the face of it then, the vast majority of councils were happy to work with the DCLG on this one. The Conservatives can now claim to have fulfilled the first half of their pre-election promise that they would ‘freeze council tax for two years whilst maintaining services’. They are also only two years away from freezing council tax for a whole parliamentary term.
But ministers did not have quite such an easy time with council tax as the figures suggest. Local government minister Grant Shapps has branded authorities increasing their bills as ‘democracy dodgers’, saying: ‘None of them have dared put the increase to the people in a referendum.’
The alleged ‘dodging’ refers to councils setting rates just below the 3.5% amount decreed by the secretary of state to trigger a local referendum.
Shapps has also warned that the council tax refuseniks might not be looked upon too kindly when future grant levels are decided. ‘We are not impressed with areas that have deliberately rejected money to freeze council tax and they may well not be rewarded for having done so,’ he says.
This is strong rhetoric – especially since the number of Conservative authorities that have opted to raise council tax above 2.5% is somewhere around the low-teens. So why have councils knowingly brought such pressure on themselves from Westminster?
Some clues lie in the data recently unearthed by a Local Government Information Unit survey. We asked 80 heads and directors of local government finance about the medium and long-term pressures on local government finance. There appears to be some overlap here with the councils opting to increase their council tax.
One major pressure on councils opting to raise the tax level is local demographics. Surrey County Council, for example, has had to contend with a 25% increase in its birth rate over the past eight or nine years; almost 10% of the population is now under the age of seven. Council leader David Hodge says that this means an extra quarter of a billion pounds is needed for additional school places.
Indeed, most of the finance officers we surveyed identified demographic pressures as the most significant medium and long-term demand on local government finance. Has the government underestimated the funding needed to maintain services during a period of such radical demographic change?
But while school places and child protection are clearly on the radar, the biggest collective headache seems to be the funding of adult social care, councils’ highest area of expenditure. In the present financial climate, and with uncertainty over future funding models, steps are urgently needed to alleviate some of this pressure.
The LGIU has just launched an inquiry into the long-term future of care and support for the elderly. Backed by the All Party Parliamentary Local Government Group, it will also contribute to the government’s social care funding white paper. An alliance of charities, care homes and housing providers has thrown itself into the debate, urging Health Secretary Andrew Lansley to act quickly on the earlier Dilnot Report and set about creating a ‘sustainable and clear social care system’.
One area where local authorities can make quick and impactful changes is in relation to people who fund their own residential care. At present, one in four self-funders falls back on the state because the financial arrangements they have made become unsustainable. This is not only a problem for the individuals but for the local authorities that pick up the bill, which is estimated at £1bn a year. Councils could help support self-funders and reduce future costs by providing better signposting to independent financial advice.
Other long-term pressures identified by finance officers included continued spending cuts into 2017 and the need to meet capital costs, such as replacing infrastructure. Six out of ten councils plan to borrow money over the next three years. While most envisage borrowing from the Public Works Loans Board, many will look to borrow from the capital markets, possibly through a bond issue.
But it is hard for councils to see into the future. Many are playing a waiting game, deciding when is the best time for more borrowing between now and 2015. The same goes for the new Tax Increment Financing powers. The 34% who indicated they were planning on using Tif powers marked infrastructure and regeneration as the target areas. The rest thought it was too early to say whether they would use the powers at all.
There was also a varied response to the localisation of business rates. Those who expect to gain from the system (53%) only just outweigh those who expect to lose (47%). Unsurprisingly then, 86% of finance officers expect the changes to create a two-tier system of top-up and tariff councils.
Views on these and other measures are clearly going to vary across the country. This is okay, providing councils have sufficient powers to determine their own destinies. However, almost 40% of respondents believe that the local finance legislation will either be more centralising – or will have no effect at all.
This is worrying. As localists we should welcome the ambition behind the Bill. Economic localisation can be the first step in a fundamental shift in the centre of political gravity, with the local becoming the first point of political and economic identification. However, to return to the council-tax freeze, this seems to reflect a centralising approach from Whitehall. While many authorities welcome the financial incentives from government, 80% of council finance chiefs want more freedom in future years. Local authorities are concerned about these centralising tendencies from a financial point of view, and from a political point of view about effectively being dictated to by Whitehall.
The new approach on referendums seems little different from the way that capping worked in the past; namely, as a way to get councils to raise taxes by just small increments each year. We need to break this whole cycle by more fundamentally reforming local taxation. The survey threw up ideas such as local hotel bed tax or a local sales tax. This is a cause that the Commons constitutional affairs select committee has now enthusiastically taken up by issuing a call for financial freedoms for councils to be written into law.
Meanwhile, the government’s pledge to maintain services, while freezing council tax for two years, might turn out to be more real in some areas than others. Some councils maintain that they have been able to make savings through efficiencies, with no major impact on the ‘front line’. But most acknowledge that the combination of cuts and rising costs have led to service reductions.
Should the government be criticised though for not meeting its pledge to maintain services? Not really. The fault was in making the pledge in the first place. Real localism means councils having the freedom to vary both taxation and service levels. Ministers should recant these pledges and embrace local diversity to show a real long-term commitment to decentralisation.
Andy Sawford is chief executive of the Local Government Information Unit
This article first appeared in the April edition of Public Finance
