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Speech to the New Local Government Network conference

The Future of Council Tax

I am grateful to the New Local Government Network for arranging today’s event at short notice and to offer my apologies that due to family illness I was unable to speak as originally planned to the N.L.G.N. annual conference in January.

I want to use this speech to make the case for an informed public debate about local government finance. To have in place a regime which is regarded as being fair; which has at its heart accountability but also provides the freedom to respond to local needs and aspirations; which has broad support and provides a settlement which will stand the test of time.

A tall order I know, but let me at least try. To have any chance of success we must identify the failures and weaknesses in the present system and then identify the way forward. Recognising that any changes will need to be accompanied by transitional arrangements to protect both domestic and business taxpayers from unacceptable increases.

The council tax has had a bad 18 months but it is worth reminding ourselves that in the Government’s Green Paper on local government finance published in 2000 it was noted that the council tax worked well as a local tax. It had been widely accepted by taxpayers and was generally well understood with the banding system making bills predictable and stable.

Problems arose in 2003 for reasons which have now clearly been identified by the Audit Commission in its report ‘Council tax increases 2003/04: Why were they so high?’

They found that the difficulties arose from the combined effect of changes to the expenditure needs assessment coupled with alterations to the schools funding regime. Due to the gearing effect this led to double figure increases.
It is important that in the light of present difficulties we don’t have a knee jerk reaction, jump to the wrong conclusions and introduce changes in haste that make things worse. Looking back we can see that local government finance has been bedevilled by such reactions.

So today I come neither to bury the council tax nor to praise it, but to say that whilst the council tax is unsustainable in its present form, I believe that a local property tax based on a reformed council tax should remain a key and important part of local authority finance.

We should make no apologies for being cautious in our approach to the raft of new taxes being proposed like local income tax. They all have their proponents but I do not see them as an improvement or replacement for a reformed council tax system.

The first point I want to make is on process rather than policy.

History teaches us that local government finance is a political minefield. Whether under the old domestic rating system, the poll tax or the council tax, no-one ever seems satisfied that we have in place a fair system.

So, we should try to reach an agreed settlement about the way forward. The balance of funding review chaired by Nick Raynsford is due to report in the summer. Whilst its membership is broader than the government and advice and papers have been provided from a variety of sources it is crucial that this is the beginning of the process of establishing a new system.

The review should provide the framework for public consultation and debate. Only such a process stands a chance of bringing forward a set of proposals which could command popular support.
Having had three different systems in the past fifteen years the last thing both local and central government want is for a new system to be put in place which will be short-lived and changed again within the next five to ten years.

The only time-constraint at present is the existing proposal to begin a revaluation of domestic properties in 2005 with the new valuations being effective from 2007.

If need be this exercise could be delayed a year or two in order to provide the time and space for a consensus to be found about the way forward. Far better to take time and get it right than be rushed into yet another short-term fix for local government finance.

Problems identified – solutions proposed

Today is not the time to address the whole question of what is meant by new localism and how power can be devolved to people in a meaningful way.

I have no doubt that this will be one of the key drivers of public sector improvement and reform. We need to recognise that change imposed from the centre has its limits. To be effective and lasting public service reform needs to be driven from the front-line by the public. The role of the centre is to enable this to happen.

This whole question of the role and extent of central government; a new localism driving public service reform and the devolution of power to people and their communities is going to be one of the key political dividing lines in coming months and it’s an issue I intend to address in its broad terms the next few weeks.
But one aspect of new localism has to be consideration of how local government is funded and held accountable.

What follows are my own thoughts and no-one else’s. If any kites are to be flown, they are mine and mine alone! To coin a phrase “these are the musings of a backbencher”.

But a backbencher who remains loyal to the government and one who believes the government will pay a heavy political price if it fails to tackle the concerns that people have in relation to the council tax.

Property taxes have a long history. One of the main reasons for producing the Domesday Book was to establish how much land people owned and how much tax they could pay on it.

Up until 1990 the tax on residential property took the form of a domestic rate. Each property had a rateable value based on its notional rental value.
Coupled with the business rate, which was also a local tax, over 50 per cent of local authority revenue was raised locally.

In 1990 the domestic rate was replaced by the poll tax which was based on the number of adults occupying a property rather than the value of the property itself. It was short-lived and was replaced in 1993 by the council tax.
1990 also saw the nationalisation of the business rate. This drastically shifted the balance of funding so that today in England and Wales the proportion of local authority finance raised locally from the council tax is down to just 24 per cent.

Like the old domestic rate the council tax is essentially a property tax. Valuations are based on capital value of the property not on its notional rental value. Properties are then allocated to one of eight fairly broad value bands, although council tax bills do not increase in direct proportion to property values.

So what are the problems and flaws in the present system and what are the possible solutions to overcome these difficulties?

Council tax bands

The present eight council tax bands were established at the time of the introduction of council tax. They are based on 1991 property values.

A major weakness in this banding system is that it fails to reflect local variations in property values.

So there are 54 local authorities in England with no chargeable dwellings in Band H.

There are 25 authorities with between 60 and 80 per cent of their dwellings in the lowest Band, A, there are 26 authorities with between 0.2 per cent and 1.4 per cent in Band A.

For the highest valued properties there are 29 authorities with between 0 and 0.4 per cent of properties in Bands G and H combined, whereas there are 25 authorities with between 13.5 per cent and 40 per cent in Bands G and H combined.

Such a huge variation in the distribution of homes across different bands in individual local authorities does call into question the extent to which council tax as presently constructed can truly be regarded as a national system.

Simply carrying forward the present structure updated to take into account the increase in property values since 1991 is likely to make things worse rather than better.

Using the O.D.P.M.’s quarterly index of house price movements from second quarter of 1991 to last quarter 2003 shows an average increase in prices of 139 per cent.

In a parliamentary reply to me from Nick Raynsford last week he said this would give the following bands:

Band A: up to £95,000
Band B: £95,000 to £125,000
Band C: £125,000 to £165,000
Band D: £165,000 to £210,000
Band E: £210,000 to £285,000
Band F: £285,000 to £385,000
Band G: £385,000 to £765,000
Band H: Over £765,000

These are figures for the whole of England and don’t reflect the fact that since 1991 house price inflation has been greater in London and the South than the North and the Midlands.

It is therefore clear to me that maintaining the existing bands and simply updating them for inflation would not provide a satisfactory solution.
For practical reasons I am informed that is simply not possible to move to a system in which the local authority levies a percentage charge on the capital value of each property.

The way forward would appear to be through a reformed banding system. One which is extended and regionalised to reflect the range of property values.

Moving to a ten or eleven band structure at the time of revaluation would provide the scope for reflecting the range of property values, but it does need to be coupled with a regionalisation of the bands.

This would mean that central government would set the range as present but they would differ between regions.

But in addition to the structure of the bands and their number, consideration has to be given to the values chosen for the multipliers.
Under the present system council tax bills do not increase in direct proportion to property values. A property at the top of Band E is worth three times as much as a property at the top of Band A, but pays only twice as much council tax.

From its very beginning council tax has been regressive. Nationally the poorest 10 per cent pay over four times more of their income in council tax than the richest 10 per cent.

Changes to the values attached to the multipliers can make the council tax more progressive so that the liability for council tax increases as the value of the property rises.

There is no limit to the number of possibilities but the objective should be set of making the link between value of property and council tax level more direct than it is at present.

Accountability

There has been much recent debate about whether a local authority should be held more directly accountable for the increases they propose in the level of council tax.
It is interesting to note that the Audit Commission report into what happened in 2003 found that increases tended to be higher in authorities that were not directly elected – 13 of the 20 highest increases in council tax were agreed by police authorities.

Local people value the chance to have their say on council tax increases. It is therefore right that local authorities establish the views of residents before budget decisions are taken. I welcome the fact that evidence of how an authority has engaged local council taxpayers in these difficult decisions will be an important part of the authority’s performance assessment.

But further consideration needs to be given to the question of holding a local council to account for proposed council tax increases. There are two specific proposals that I feel should be looked at.

The first is the cycle of council elections. In metropolitan districts a third of the council is up for election each year with no elections one year in four.

In London and the shires there are all out elections every four years.

The figures would appear to indicate that the consequence of annual elections in the metropolitan areas has led to a consistency in council taxes increases. Between 1995 and 2003 in each year the average increase has been within a band of 4.5 per cent and 8 per cent.

For those councils with elections every four years there would appear to be a link between election year when increases are kept down and in the following years when there are significant increases.

So in the shire areas a 6.3 per cent increase in 2001/2 election year was followed by increases of 9.3 per cent and 13.8 per cent.

In Outer London election year of 2002/3 saw a 5.4 per cent increase to be followed by an 18.2 per cent increase in 2003/4.

In Inner London election year 2002/3 saw a 3 per cent increase to be followed by an 18.1 per cent increase.

Some individual councils have ‘form’ in this area. Take Wandsworth: in election year 1998/9 a council tax cut of 23.8 per cent followed the next year by an increase of 15.9 per cent.

Election year 2002/3 saw another cut in council tax of 11.7 per cent followed the year after elections by a 45.1 per cent increase. (In fact, Wandsworth’s increase was 57 per cent. It was reduced as a result of the lower precept from the Greater London Authority.)

But Wandsworth whilst the most extreme example is not alone as the average figures demonstrate.

I know that many will groan at the thought of council elections every year with a third of the council up for election. There will be understandable concerns about voter fatigue, but for hard pressed council taxpayers it might be the most effective way of holding the local authority to account.

The second possibility is that any proposal to increase the council tax by a certain amount – say twice the headline rate of inflation, which at present would be 5.2 per cent – should only go ahead after an affirmative vote from local electors.
A local vote for local priorities – this must be the way forward for local government in the 21st century. It really does give power to the people and puts the burden on the council to show what they will deliver for the extra spending and convince people that it will be money well spent.

I know that there are strong objections to this in many quarters. It is seen as a back-door means of capping local authority spending or that it will become the ‘going-rate’ which will be levied by all councils.

I don’t see the latter argument as being tenable. I have no doubt that councils will budget as they think appropriate and not automatically go to the level just below that needed for an affirmative vote.

It is true that if the need for an affirmative vote was introduced then the government’s power to cap would no longer apply.

But local people would want protection from excessive council tax increases. Far better in my view that this be in the hands of local people, than resting with the Minister in Whitehall.

The need for an affirmative vote would change the nature of the relationship between the council and the community it serves. But many would say that this is no bad thing and that a local council should be required to go out and make the case and get popular support for an increase in council tax which is, say, twice the rate of inflation.

Balance of funding

The nationalisation of the business rate in 1990 drastically shifted the balance of funding between local and central government so that today in England and Wales the proportion of local authority finance raised locally from the council tax is down to just 24 per cent.

This leads to grotesque distortions between local expenditure decisions and their impact on local taxes. With 76 per cent of a local authority’s funding coming from central government, a one per cent increase in spending falls entirely on the 24 per cent of income raised locally – this translates into a council tax increase of over 4 per cent.

The Audit Commission recently described this as the fundamental flaw in the local government financial system and that it bears a significant part of the blame for current difficulties over council tax.

The problem flows directly from the nationalisation of the business rate in 1990.

If the business rate was to be re-localised then over half a local authority’s income would be raised locally – overcoming the major problem of gearing.

The strengths of the business rate – it is fairly stable; easy to understand; collection rates high and costs low – can all be retained if it were to be re-localised.

Such a step would need to be accompanied by guarantees and safeguards to prevent increases above that which might be applied to the council tax. My proposals for enhanced accountability in respect of proposed council tax increases would be helpful in this context.

But business will need to recognise that it must pay its fair share of local taxation. The unfair nature of council tax is clear when the poorest 10 per cent pay over four times more of their income in council tax than the richest 10 per cent. The burden of council tax on pensioners is nearly twice as great as for the average person. So, it is pensioners and those in poverty who are paying the price for the business rate being pegged to inflation.

The present system of council tax is unsustainable. It needs to be replaced by a new system which protects pensioners and those in greatest need, while ensuring that business pays its fair share.

A direct financial link would provide local authorities with a major incentive for providing a business friendly environment within their area.

Re-localisation would also need to be accompanied by a mechanism to ensure that local councils do not suffer or gain disproportionately because of their resource base.

Asset rich – income poor

One of the main criticisms of the existing system has been the impact it has on those who are said to be asset rich and income poor. This is often the pensioner who stays in the family home paying a high level of council tax, but who is on a relatively low fixed income.

It is of course the council tax benefit system that should offer a solution to the sensitive problem of a person in this situation.

But there are major weaknesses in the present system – the main one being the low level of take-up. For all who are eligible the take-up is around 75 per cent. For pensioners around two thirds claim and for pensioner single owner occupiers, just 45 per cent of those eligible claim it.

It is estimated that in 2000/1 council tax benefit to the value of between £420 million and £580 million was unclaimed by pensioners. There clearly needs to be a vigorous take-up campaign, but the process of claiming council tax benefit is often regarded as complex and some people are reluctant to claim means-tested benefits.

I hope the Department of Work and Pensions can bring forward a new approach which will automatically identify those entitled to council tax benefit.

But something more needs to be done for pensioners.

We need to devise a system which offers a choice to the pensioner under which they can pay their council tax as it falls due or they can defer payment using their home as security. The loss of income to the local authority will be met by central government to be repaid from the proceeds of the sale or on the transfer of the property.

This would make the value of the property work for the pensioner when they need it most. Such a deferred payment scheme would provide pensioner owner occupiers with a choice.

It would be simple, not means tested and would be welcomed by many pensioners.

Conclusion

Local government finance will always be an issue of debate and disagreement.

But if we are to see real improvements then we need to have the courage to restore power and greater accountability to the local level.

It is this principle of devolution that is so important and is the only way of ensuring that we have local government on behalf of local communities and not local administration on behalf of central government.