Second bite council funding boost buys time for ministers

Local democracy thinktank the Local Government Information Unit (LGIU) today welcomed the extra £340 million for councils in England, unveiled by the Chancellor of the Exchequer in yesterday's pre-Budget Report, as "buying time" for the fundamental reform of local government finance.

The move follows the £420 million increase in town hall funding announced last month in the local government settlement. It will assist local authorities in moderating council tax increases in 2004/05 by almost closing the £800 million town hall funding gap identified recently by the Local Government Association (LGA).

Dennis Reed, Chief Executive of the LGIU, said: ""Despite the continuation of the rhetoric about capping, it seems that ministers may be acknowledging that it is no longer tenable to blame local authorities as mainly responsible for excessive council tax increases. This follows recent research by the Audit Commission, and that commissioned by the LGIU, into the causes of council tax rises. These studies demonstrated that the increases were predominantly caused by trends in central government policy.

"The extra money will help many councils around the country avoid council tax increases too far above inflation and cuts in services. Even more importantly, by buying time with this measure ministers must ensure that their Balance of Funding Review comes up with the radical changes that will stop the council tax crisis re-emerging.

"The recent problems will only be overcome once and for all by giving local government a broader tax base, whereby councils raise more than half of their revenue locally. This would take pressure off the council tax and reduce the notorious 'gearing effect'. Meanwhile, the council tax itself needs to be made less regressive by introducing a stronger linkage to income."

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 sister organisations The Education Network (TEN) and the Democratic Health Network (DHN) provide research, policy briefings, information, advice, training and lobbying services to local authority and trade union affiliates. Previous LGIU news releases and statements can be viewed at www.lgiu.gov.uk.

2. Research by Rita Hale Associates, to be published by the LGIU in January 2004, highlights trends in local government finance since the 1980s. There are some stark findings:

* Central diktats: 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 funding. 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.

* Lag in central funding: Central government's direction over spending priorities has 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.

* Council tax crisis: Whitehall's failure to fully fund its spending priorities has caused an upward pressure on the council tax. This resulted in an average 13 per cent increase in English and Welsh council tax bills in 2003/04. With the Local Government Association (LGA) pointing to an £800 million local government spending gap to fill for 2004/05, another large average council tax increase looks likely. 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, or in central government grant distribution, causes disproportionately severe swings in council tax bills. With the council tax being widely seen as regressive, especially affecting those on low incomes just above benefit entitlement levels, this has caused much of the present concern over the council tax and much publicity about referendums, non-payment campaigns, temporary special discounts, council tax benefit take-up and the reform of local taxation. 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.

* Local government falls behind: 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.

* Business rates escape: 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 within the new local government funding since 1997.