Council Tax Benefit localisation fraught with difficulties, says IFS

31 May 12
Local authorities face a ‘tough challenge’ in taking control of Council Tax Benefit at the same time as it is being cut by 10%, the Institute for Fiscal Studies has warned today.

By Richard Johnstone | 31 May 2012

Local authorities face a ‘tough challenge’ in taking control of Council Tax Benefit at the same time as it is being cut by 10%, the Institute for Fiscal Studies has warned today.

In a report commissioned by the Joseph Rowntree Foundation, the economic think-tank has also found that the move is likely to disadvantage poorer working households.

Funding for the Council Tax Benefit will be given to councils in England from next April. The grants provided will be worth 90% of what would have been spent in each area. In total, the benefit is being cut by £500m.

In Scotland and Wales, the money is being given to the devolved administrations to allocate to local government. Scotland has said it will make up the 10% cut from central funds.

In England, town halls have been instructed not to cut the benefit for pensioners, and are unable to reduce the separate single person’s discount. This leaves them with the option of reducing eligibility criteria for working-age people or filling the funding gap themselves. Authorities need to agree their schemes by January next year.

But the IFS warned today that authorities ‘have little experience or expertise in designing means-tested support schemes and very little time to do it’.

Almost 6 million people receive Council Tax Benefit, making it more widely claimed than any other means-tested benefit or tax credit. Around 85% of it goes to households with below-average income, and almost half to the lowest-income fifth.

Unless councils find additional money from elsewhere, the requirement to protect pensioners’ entitlements implies an average 19% cut in support for working-age claimants, the IFS found.

The alternative, protecting all support by filling the funding gap from elsewhere, would require a 1.9% increase in council tax rates, the think-tank said.

Its report, Reforming Council Tax Benefit, also criticised Whitehall’s decision to localise the benefit and exclude it from the Department for Work and Pensions’ new Universal Credit.

This action ‘severely undermines’ the attempt to simplify benefits under the Universal Credit. Its aim is to remove disincentives to work by replacing a number of overlapping means tests with a single one, ensuring that overall effective tax rates cannot rise too high.

However, separate local means tests for council tax support would undermine this, the IFS said. For example, although an ‘aggressive’ means test by councils could protect the very poorest from cuts, to save 10% it would be so severe that some people would be worse off after a pay rise.

‘It is difficult to think of reasons why fully integrating CTB into Universal Credit would be inferior to what is now being proposed,’ the report stated.

Stuart Adam, senior research economist at the IFS and one of the report’s authors, said: ‘Councils face a difficult task to design replacement schemes that protect the vulnerable while maintaining work incentives in the context of reduced funding. The fact that they also need to make these schemes work alongside Universal Credit, which is being introduced from October 2013, makes an already difficult challenge truly formidable.’

Chris Goulden, programme manager for poverty at the
Joseph Rowntree Foundation, added: ‘While there are some sound reasons for localisation, given that it is a rebate of a local tax, it is likely to create headaches for claimants and for local administering agencies.

Not only is the 10% cut likely to affect people already in or close to poverty, the protection from this cut provided for pensioners means that working-age adults are hit that much harder.’

Responding to the report, the Department for Communities and Local Government said that Council
Tax Benefit was best placed within ‘a joined-up council tax system’.

A spokesman added: ‘It is right that councils, who collect council tax, have a strong incentive to put in place a fairer local council tax support scheme based on local priorities that helps residents get back into employment and protects the vulnerable.’

The Local Government Association said that councils were ‘extremely worried’ about how they could protect residents from the 10% cut. They were being put in an impossible position, LGA chair Sir Merrick Cockell said. ‘They can either cease helping the working poor, or continue to support them by taking money from other services or putting up council tax.

‘If the government wants to localise Council Tax Benefit it needs to go all the way and give local authorities the freedom to make savings in a way which will protect the people who most need help.’

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