Local government finance appears ever-changing, with ministers dictating reforms to grants, business rates, council tax and benefits. Perhaps it’s time to establish an expert panel to review the financial implications of Whitehall policies that affect town halls
I learned recently that public services in South Africa are organised within three inter-dependent spheres of government – national, provincial and local. The reference to 'spheres' is deliberately intended to avoid a sense of hierarchy and to respect and protect the autonomy and sovereignty of each sphere's responsibilities and remit. Most obviously, it acts as a deterrent to any inclination the national government might have to indulge in 'mission-creep'.
In the UK, we prefer to speak about 'tiers' of government, which immediately implies a hierarchy. Perhaps that is why we are so familiar with the problems that South Africa is seeking to avoid. For as long as most of us can remember there have been arguments about the respective roles and responsibilities of local and central government in the UK, and resentments about Whitehall incursions into the domain of councils.
All of this would be much easier to handle if the UK had a written constitution that clearly articulated the roles, rights and responsibilities of different tiers of government but, of course, we do not. As a result, councils live with a level of continuing risk and uncertainty that central government may at any time decide to launch game-changing reforms. These can fundamentally impact their role, financial position and relationships.
Financial reforms have a special status in this debate. If they are poorly engineered, they have the potential to threaten the viability of some or all councils and/or to damage authorities' relationships with their electors and stakeholders. The poll tax, for example, had both of these effects.
Immediately prior to its implementation, councils were raising a healthy 50% plus of their funding locally; three years later, when the council tax was hurried in to restore order, this figure fell to around a miserable 20%. Many of local government's subsequent difficulties and attempted solutions – gearing, capping, even the current plans for business rates retention – can be traced in part to these ill-considered reforms.
Prior to the poll tax, local government finance enjoyed a long period of relative stability. Grant distribution formulae were the main area in which change occurred. Ministers' actions in this area were therefore scrutinised in great detail – and sometimes challenged in the courts – to ensure that subjectivity (aka political bias) did not infiltrate the process.
Fast forward to 2012, and the situation seems to be completely different. Far from stability, local government finance now seems to be ever-changing. Grant schemes come and go – including a vast array of specific grants – as do different regimes for enforcing spending and council tax restraint. And, of course, we are currently seeing the implementation of new arrangements for local retention of business rates and for localisation of council tax benefit.
But do all of these reforms attract the level and intensity of challenge and scrutiny that they deserve? In some cases it seems that they do not. Despite the inherent risks, the overriding assumption is clearly that if governments wish to rearrange grants, or introduce new mechanisms for restraining spending and local taxes, or make more fundamental changes, they can do so.
It is surprising that we have not invested in more checks and balances. After all, if any of these reforms are misconceived or poorly engineered or motivated by political agendas, they may have the potential to undermine the long-term financial viability and local political mandate of some or all councils, and to impact local relationships with electors and stakeholders in a very damaging way.
With such high stakes – even constitutional implications – do we need further protections to ensure that proposals are properly thought through, carefully designed and tested, and exposed to effective consultation with all interested parties?
Take, for example, the recently announced council tax freeze grant and referenda arrangements. I guess our friends in South Africa might begin by asking whether it is appropriate for one sphere of government to use mechanisms of this sort to limit the taxation decisions of another. Perhaps they would seek clarification as to whether the Chancellor was similarly required to organise referenda to validate proposed increases in income tax, VAT, or corporation tax.
Of course, this is the third year of a freeze grant. Arguably it was, and perhaps still is, justifiable in the context of the global financial crisis and the government's austerity strategy. Exceptional times require exceptional measures. But what if the consequence is that public opinion comes to expect local taxes to remain frozen for all time? Will successive governments simply keep writing the cheques, irrespective of the damage to local government's funding base and independence?
This is reminiscent of the perennial delays to revaluation of domestic properties for council tax purposes. The intellectual case for regular updating is overwhelming, but governments have been good at putting off the politically difficult day. As a result we are still working on 1991 valuations, and council tax is significantly less fair as a consequence. In essence, successive governments have put good politics ahead of good tax administration, and who would bet that future governments will behave differently?
Interestingly, the new Growth and Infrastructure Bill includes a provision to delay the next business rates revaluation from 2015 to 2017. I can't help feeling that this is a small step on a very slippery slope.
Parliament, of course, has a critical role in the scrutiny of reforms such as these. But can it represent a balanced view of the interests of both spheres of government, or does it reflect a built-in bias to the centre? After all, all three of the main parties now have 'form' on capping or similar restraint regimes. All three have now been party to decisions to postpone revaluations. Can any of them credibly and convincingly challenge the principle of such policies in opposition?
From time to time over the years we have discussed the merits of establishing a Grants Commission – a standing panel of independent experts – to advise government, openly, on the public record, on grant formulae and distribution arrangements.
Essentially this would provide an additional system of advice and scrutiny, bringing more transparency to ministers' decisions about the important mechanics of grant formulae. It would give additional reassurance that resources are allocated in a manner that is objective, politically impartial, and based on best professional advice.
In 2007, Michael Lyons' landmark inquiry into local government developed this idea further. He saw a commission as an option ‘to improve independent information available to the public and to Parliament’ and proposed a broader remit, advising also on issues such as the costs of new burdens imposed on councils by government, and the extent of efficiency opportunities in local services.
Perhaps, after all these years, the time has come to revisit this option again and to consider establishing a commission with a carefully crafted remit for the modern era. In broad terms, this would be an independent group of experts charged with reviewing the financial implications of proposed central government policies for local authorities, and giving clear and publicly available advice to the government of the day.
Far from diminishing democratic accountability, such an arrangement would improve the quality and transparency of information available to ministers, Parliament, councils and members of the public. It would enable policies to be scrutinised more effectively, leading to better and more enduring results. In many ways it would borrow and build on initiatives with similar aims – most obviously the creation of the independent Office for Budgetary Responsibility – and positive lessons from local government's own experience such as the development of the Prudential Code.
A Local Government Commission might validate and give greater credibility to policies like grant freezes and referenda, or it might encourage government to reconsider. It might conclude that, in the current climate, it is fair and reasonable to transfer a new burden – council tax benefit – to local authorities with only 90% of matching resources, or again it might offer a different view. It might agree that delaying the revaluation of a tax base is appropriate, or it might encourage government to commit to automatic revaluations at an agreed frequency of, say, five or seven years.
Overridingly, a commission would provide a respected, informative commentary on whether policy proposals are likely to meet their stated objectives, and also whether they are likely to have any short-, medium- or long-term adverse consequences.
They have a saying in South Africa: ‘If you want to go fast, go alone; if you want to go far, take people with you’. A change of this type would ideally be made with cross-party support in both central and local government. Taking time to expose policies to expert, independent scrutiny might slow government policy making down slightly. But in terms of building an overall system of governance of public services that is stable, effective and sustainable, that might be a very good thing.
