26 September 2003
In a frank interview, the local government minister tells Joseph McHugh that freedoms come with responsibilities
We don't want to do it but we cannot stand aside if there are repeated unreasonable increases in council tax.' This clear message from Nick Raynsford should leave town hall leaders in no doubt that the government intends to crack down hard on authorities planning to hike up bills next year.
The local government minister, who gave an interview to Public Finance on September 18, the day that the Local Government Act finally passed into law, is well aware that a succession of above-inflation increases in council tax have brought Middle England to the point of mutiny.
Raynsford and his ministerial colleagues realise that the large increases – this year council tax bills rose by an average of 12.9% in England and Wales – are fast turning into an electoral liability and cannot be sustained.
'There is a quite serious problem building up because of public resistance to unreasonably large council tax increases,' he candidly admits.
This has been brought home by a wave of pensioner militancy: in recent weeks, groups around the country have been mounting non-payment campaigns and lobbying politicians. Reports that council tax bills will next year break the £3,000 maximum barrier have not helped.
But Raynsford acknowledges there are structural problems underpinning the local government funding regime that require urgent attention.
The government's balance of funding review, which is being chaired by the minister and met for the first time in April, is grappling with some of these issues. Currently, 75% of local government's funding comes from Whitehall and the rest is raised locally. The panel has been asked to examine the distortions and problems this situation produces and to recommend solutions.
Not the least of these is the notorious 'gearing effect', whereby if a council wants to increase its budget by 1% it has to put up council tax by 4%.
There is an increasing acknowledgement within government that council tax, as the only real method of revenue-raising open to authorities, is being forced to shoulder too heavy a burden. The question, as ever, is what to do about it.
Raynsford is clear about the need for change. 'There is no doubt in my mind that there are problems. We wouldn't have had a review if we didn't think there were problems.'
He identifies gearing – 'a genuine issue' – and 'unsustainable' council tax rises as the key issues the review has to tackle.
The solution, according to local government at least, is to broaden councils' tax base and allow them to exploit options such as a tourism tax or sales tax.
Raynsford says this approach would have 'certain obvious advantages' and indicates that substantive change may be in the pipeline. 'We certainly haven't ruled out radical changes. Equally we haven't ruled out adjustments to the current system to make it fairer. Both are possible and they're not necessarily alternatives.'
But he and his ministerial colleagues are acutely aware that greater local tax-raising powers would provoke fears among the business community of being used 'as a milk cow for raising masses of revenue'.
Provisions in the Act to allow authorities to keep a proportion of the business rates raised locally, which according to Gordon Brown could be worth £1bn over three years, could act as a confidence-building measure, Raynsford says.
He also gives a tantalising hint that, if successful, the business growth initiative could presage a return of business rates to local control: a dream long cherished by town hall leaders.
'It's a recognition by this government that the framework created by the previous government when they nationalised the business rates did actually take away an area where local authorities could, through their own efforts, increase their own revenue base, their own tax base.
'That gave a real incentive to encourage business investment and taking it away was a mistake, in my view.'
His comments indicate a change in government thinking on the subject of locally raised finance. Celebrations would be premature, however, as the minister scrupulously points out that he is not 'indicating a preference' and will wait for the balance of funding review to report its findings.
The government is clearly looking for evidence that authorities will use any greater revenue-raising powers responsibly. Last week's threat to invoke powers to cap 'unreasonable' council tax increases makes plain it will need some convincing.
The Local Government Association's insistence that inflation-busting rises are down to central government not properly funding commitments such as pension liabilities cuts little ice.
Raynsford concedes there were 'genuine difficulties' for some authorities this year, not helped by the turbulence resulting from the reform of the grant distribution formula.
But he is bullish on the underlying reasons for council tax bills' relentless rise in recent years and firmly rejects the LGA's analysis. 'The big increases last year were in two main sectors: the county councils and the London boroughs. It is no coincidence that neither had elections.'
Raynsford also claims a 'straightforward Tory attempt to discredit the government' is partially responsible, citing figures from his department showing that the average council tax increase for Conservative-run authorities this year was 16%, compared with 10% for Labour and Liberal Democrat councils.
No surprise, then, that he is unrepentant at reversing an earlier pledge not to cap those authorities ranked 'good' or 'excellent' in the Comprehensive Performance Assessment.
Following his announcement last week that the government would intervene if it deemed increases to be excessive, the LGA warned the move would destroy trust between local and central politicians. Raynsford gives this short shrift.
'Much more important is the trust between local government and its electorate. There is very, very serious concern, particularly among elderly people on fixed incomes, about council tax increases and it would be terribly damaging for local government if there were a repeat next year.'
Furthermore, he is happy to explain the reason for his broken promise, pointing the finger firmly at the London Borough of Wandsworth for forcing him down that road. 'There has been a tendency for councils to build up a war chest in the middle period between elections and then, to take the extreme example of Wandsworth, to cut their council tax in an election year,' he says.
'As a voter, I would be absolutely furious to be presented with a 25% cut in an election year and then a 45% increase the year after, because it implies they think you're stupid.'
According to Raynsford, freedom comes with responsibility. It is a maxim that he reiterates in relation to the new capital borrowing regime based on CIPFA's code, which forms the centrepiece of the new Act.
Prudential borrowing, which allows councils to borrow money without first seeking government approval, is intended to provide a new source of investment capital.
A frequent complaint until now has been that the Private Finance Initiative is the only game in town for cash-strapped authorities: the prudential system is an attempt to correct the problem.
Raynsford believes authorities should be free to take decisions based on the best way of procuring a new facility, rather than being influenced by artificial incentives relating to particular types of finance. But predictions of the death of the PFI in local government are wishful thinking.
'It does help to create a more level playing field and we were keen to do that,' he says. 'But they shouldn't say, "Ah, this means we don't have to look at the PFI ever again".'
And authorities hoping to borrow to finance a spending spree will be disappointed. 'This is not going to mean the sudden arrival of large sums of extra money,' he says. 'Authorities will have to be prudent: it is a prudential code.'
The government has reserve powers to impose either a borrowing limit on an individual council if it believes it is not being prudent, or a national ceiling in times of macroeconomic crisis. Raynsford says he 'hopes we'll never have to use them'.
Instead, he is urging authorities to seize the opportunities he believes are on offer with the freedoms and flexibilities agenda and the new Act to show how they can improve local services.
'There's a great opportunity here,' he says. 'I want to see local government being creative and innovative and looking at new ways of doing things.'
Raynsford's upbeat assessment of the government's reforms cannot disguise the fact that many town hall leaders would like ministers to go much further and embark on a more sweeping devolution of power.
For the foreseeable future this is not going to happen. But, if authorities use this opportunity to prove that they can exercise new freedoms responsibly, the logic of their argument will be much harder to resist.
PFsep2003
