Local Government Information Unit
News Release

EMBARGOED UNTIL 00.01 hours 23 January 2004

Local democracy thinktank the Local Government Information Unit (LGIU) today publishes new research into the long-term causes of the Government's council tax crisis. It highlights the need to address the historic underfunding of council services as part of Whitehall's current review of the central and local balance within council funding.

The research is summarised in a new LGIU pamphlet entitled Settling the Account - Local Government Funding Investigated. The respected independent finance experts Rita Hale Associates undertook this study for the LGIU in 2003. It highlights the trends in local government finance since the 1980s.

The main conclusions are:

Long-term council underfunding: In the years since 1990-91, planned spending on the National Health Service rose by 140 per cent. However, local government spending in England rose by 130 per cent, despite being subject to similar inflationary pressures to the NHS. With the £69.5 billion spent on services delivered through local government accounting for a quarter of total public spending in England in 2003/04, this gap represents a significant sum of money.
Whitehall's specific grants impose central control: Of the new money available for local government services since 1997, a high proportion has been earmarked by central government for particular uses such as education. For example, specific grants in England for education rose from less than £250 million in 1997/98 to over £3.5 billion in 2003/04. This has meant that local priorities have been overruled by Whitehall ones.
Distorting local spending: Central government's diktats over spending priorities have not been fully supported by funding from Whitehall. This further distorts spending across local services and places more upward pressure on the only tax available to local authorities: the council tax. For example, in 2003/04 79 per cent of English local authorities planned to 'overspend' in education, as measured against central government funding earmarked for schools. Meanwhile, 59 per cent of councils planned to underspend on highways.
The business sector escapes: In 1989-90 the National Non-Domestic Rate covered 31 per cent of local authority spending. By 2003/04 this figure had fallen to 22 per cent. This reflects the falling proportion of spending borne by the Business Rate since it was nationalised and pegged to the rate of inflation in 1990. This trend has been particularly marked within the new funding going into local government since 1997 and has further increased the pressure on domestic council taxpayers.
Council tax in crisis: Whitehall's failure to fully fund its spending priorities has caused an upward pressure on the council tax, with councillors only able to call on the council tax for generating revenue. In England and Wales, this led to an average percentage increase in council tax bills of almost 13 per cent in 2003/04 and the average council tax increase for 2004/05 is only likely to be kept in single figures because of the extra £760 million that the Government is spending on councils this year. With councils raising only a quarter of their revenue locally, this has resulted in the 'gearing effect', where a small change in a council's spending, often effected by changes in central government grant distribution, causes disproportionately severe swings in council tax bills. With the regressive nature of the council tax, penalising those on low incomes just above benefit entitlement levels, this has caused much of the present concern over the sustainability of the council tax and the wider highly centralised system of local government finance. The Government, meanwhile, has threatened to use powers to cap councils, but is less clear about what local services it would want them to cut as a result of such a move.

The publication of Settling the Account follows a recent report by the Audit Commission that found that central government policy was the main cause of rising council tax bills in 2003/04 and the Local Government Association's proposals for a range of new local tax-raising powers for local government.

Cllr Dave Wilcox, Chair of the LGIU, said: "The current local government finance system is unsustainable. Settling the Account seeks to consolidate the growing consensus on this and move the debate on to a positive discussion of the options for change.

"A reformed council tax must be practical to administer and balance a range of factors, such as income versus the wealth held in the form of property; and a fairer split between business and domestic taxpayers that reflects the cost of providing local services to households and businesses.

"The aim must not be to tax the average citizen more heavily than now, but to ensure a broader tax base for local government that raises the revenue required for local services more fairly, while addressing longstanding problems of underfunding, enabling local priorities to be expressed and easing the recent pressures on domestic taxpayers.

"However, many of the issues that have to be faced are complex. Untangling them in any serious programme for reforming local government finance will involve some years of turbulence and transition. Anyone who claims to have simple answers that can be implemented overnight would seem to have been asking some silly questions."

ENDS

For further information contact:

Kevin Morton	Tel. 020 7554 2858	Mobile 07958 314846	E mail kevin.morton@lgiu.org.uk
Mary Wimbury	Tel. 020 7554 2845	Mobile 07958 521344	E mail mary.wimbury@lgiu.org.uk

Notes to Editors

1. The Local Government Information Unit (LGIU) is Britain's foremost independent local democracy think tank, campaigning to extend local authority best practice, freedoms and responsibilities. Recent initiatives have included the Commission on Local Governance and the LGIU is working to influence the debate on local government modernisation. The LGIU and its education service TEN (The Education Network) also provides research, policy briefings, information, advice, training and lobbying services to 150 local authority and trade union affiliates. Previous LGIU news releases and statements can be viewed at www.lgiu.gov.uk.

2. A PDF version of Settling the Account is available to journalists from Kevin Morton on 020 7554 2858, 07958 314846 or Kevin.morton@lgiu.org.uk . The more detailed research data can also be provided to journalists on request.

3. Copies of the Settling the Account pamphlet are on sale at £5 each from Central Books on 0845 458 9910, 0845 458 9912 (fax) or e-mail mo@centralbooks.com . Copies of the full research are available on CD ROM, also from Central Books, at £35.25 (including the pamphlet).

Time for Settling the Account