Local tax changes: walk the line

3 Apr 13
This month, local authorities face one of their trickiest balancing acts yet. They have to meet the twin challenges of government changes to council tax support and business rates, without losing out on potential benefits for local growth, argues Jonathan Carr-West

By Jonathan Carr-West | 1 April 2013

This month, local authorities face one of their trickiest balancing acts yet. They have to meet the twin challenges of government changes to council tax support and business rates, without losing out on potential benefits for local growth

Council tax changes illus Fryer

‘April is the cruellest month.’ While it’s probably fair to say that TS Eliot wasn’t thinking of local government finance reform when he composed the opening of The Waste Land, there will be some in town halls across the country who might be beginning to wonder.

If not the cruellest month, this April will certainly be one of the most eventful, as two flagship government initiatives – business rate retention and the localisation of Council Tax Benefit – come into effect. The new finance system will allow councils to keep a greater percentage of any business rate growth they can generate. At the same time, councils will take over Council Tax Benefit. Or, to be more accurate, Council Tax Benefit will be abolished and replaced with a variety of local alternative schemes, whose funding will, of course, be 10% less than now.

Both schemes involve significant change and both carry extra political weighting as manifestations of the government’s growth and welfare reform plans. Their supporters praise them as part of a significant shift towards a more localist political economy, while their detractors see them as faux localism, shifting the burden of failure onto local authorities and -concealing a retention of power by the secretary of state. And, of course, both take place against the backdrop of last December’s financial settlement, which will lop at least 2% more off council budgets in 2014/15.

In attempting to assess the likely impact of these changes, it’s important that we see them in the context of growth policy and welfare reform and the contested relationship between the two.

Discussions of welfare always risk generating more heat than light, but the need for local authorities to design their own council tax support schemes will raise some significant local issues. Council Tax -Benefit is currently the most widely received means-tested benefit in the country, given to almost 6 million families. When it ceases to exist on April 1, councils’ own locally designed schemes will come into being.

But as the funding has been reduced by 10%, local authorities will have to make immediate decisions about whether to find this extra money from other budgets or reduce the amount of support available. For those that choose the latter course, the government’s rather unlocalist decision to protect pensioners from any reductions means that a saving of about 19% will need to be found from other Council Tax Benefit recipients.

A survey by the Local Government Information Unit found that six out of ten councils were not planning on supplementing their schemes from existing budgets, meaning that they will need to cut the amount of support available. The New Policy Institute estimates a million and a half working-age people will lose some support. Councils will have to think through how to balance these savings with the possible consequences of increased financial hardship for many.

They will also need to take a set of political -decisions from which they have previously been shielded. Do you reduce support for incoming -students, for example, so that they do not benefit at the expense of hard-working local tax payers? Or do you maintain it on the grounds that you want to build a high-value knowledge economy?

Most importantly perhaps, councils will have to make a decision about the taper, the rate at which support decreases as people earn more. This is always one of the most delicate aspects of any welfare system: vital for making it worth people’s while to go back to work, but very difficult to get right. It is also one of the crucial points of intersection between welfare reform and the growth plans.

Meanwhile, the latest development in the -long-running, seemingly endless, debate on the reform of local government finance is beginning to take shape. Some liken this issue to the -Schleswig-Holstein question: equally complex though arguably of less general interest. The Layfield and Lyons inquiries of 1974 and 2007 have come and gone almost without trace and now gather dust on a Whitehall shelf. The remit of the current reforms was therefore kept deliberately narrow and practical. The government’s intention was to allow the retention of business rates to create a system that is more effective and coherent in building growth, attracting business, sharing significant financial risks and ensuring quality delivery and value for money.

Has it succeeded? The new system is not as simple as might have been hoped. Public Finance readers will be familiar with the detail of central and local shares, tariffs and top-ups, and levies and safety nets. The main outcome of the new system, however, is relatively simple. At least 25p in every extra pound of business rates generated locally will stay local.

There was a fairly polarised debate during the development of the scheme. Some critics worried that it would establish a permanent hierarchy between wealthy tariff councils and their poor top-up relations. Others fretted that the new system would not allow councils to keep enough of their business rates to really incentivise them.

As we approach implementation, however, -confidence in the scheme seems to be growing. The same LGIU survey found that almost half of councils expect to make net gains from the new system over the next five years, with about a third forecasting a neutral impact and only one in five expecting net losses. Six out of ten councils are planning to borrow to fund infrastructure, suggesting perhaps that local government takes a more Keynesian view of growth than central government does.

But allowing authorities to keep the benefits of growth works only if they have the tools to create growth. That’s also a crucial test of the policy’s localism. We would expect a truly local approach to growth to produce different results around the country. There would be winners and losers (or at least winners and lesser winners). And that would be politically acceptable only if local authorities and local communities had sufficient clout to make local choices that would improve their prospects.

So we need to assess business rate retention as part of a suite of growth policies that include Local Enterprise Partnerships, City Deals and the single pot funding suggested in the Heseltine review and given the go-ahead by ministers in March. Here we find a more variable picture. A series of LGIU round tables on economic growth strategy uncovered -concerns about the ability of LEPs to effectively engage and involve the officers and councillors who are on the ground driving local growth. This was felt to be a particular problem in two-tier authorities, with members of district councils often being overlooked.

There were also concerns about the spatial -boundaries of LEPs, with a feeling that an opportunity had perhaps been missed to reflect real economic geographies, and that these boundaries did not reflect the way business really worked. There was agreement that a ‘one size fits all’ approach to growth should be avoided, recognising that different communities will have different priorities, needs and attitudes to risk.

There were also, however, great examples of LEPs working well to drive growth, particularly where they were based on strong cross-sector and cross-boundary local relationships, involved elected decision-makers, business leaders and communities and were coterminous, as far as possible, with City Deal areas.

Strong local leadership is needed to make the most of the new menu of economic development powers, flexibilities and resources potentially on the table for ambitious areas – and to align these with ‘traditional’ local government growth levers such as education and training.

Business rate retention and council tax support localisation are certain to present challenges, particularly where councils have to find elusive extra cash to support some of the most vulnerable, but they should not be looked at in isolation. Taken as part of a broader suite of growth strategies, they could form part of a new, more organic, localist approach to economic development. That will require real imagination and leadership, but it could lead to a much richer and more varied conception of growth.

It will also mean risk and diversity. The real test for councils, for government and for all of us will be whether we are truly happy to live with this.

Jonathan Carr-West is chief executive of the Local Government Information Unit. This article first appeared in the April issue of Public Finance


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