What price and risk for local financial autonomy?

Now that budgets are set and elections over, it is time for both politicians and officers to focus on two major proposed changes to local government finance: the CLG led Resource Review on how to relocalise business rates; and the abolition of Council Tax Benefit, to be replaced by local schemes.

Both will start in April 2013 with varying impacts across local government and the other authorities funded from business rates and council tax.  Diverse local economies across the country are one driver of the different responses emerging. The local government resource review contains real opportunities (see earlier LGiU blog) and aims to fulfil the Coalition agreement promise of “radical devolution of power and greater financial autonomy to local government”.  The other is also a radical devolution, requiring the creation of new local council tax rebate schemes following the CSR decision to cut spending on Council Tax Benefit by 10% from 2013 and its abolition as a national benefit in the Welfare Reform Bill.

Fundamental political debates are now underway about the relationship between local citizens and business and their different local councils, police, fire and other authorities funded from council tax and business rates.  Any focus on local taxes, which are very visible in annual bills, tends to increase public and business mistrust. Greater transparency raises questions about who pays local taxes, and who does not and why, and who benefits from local spending – even if central government is (for now) controlling the level of both council tax and business rates. Pressure groups will campaign on specific points and some national and local media coverage may be unhelpful.

Relocalising business rates

By 2014 the CSR reductions to local government reach a level that could be funded from council tax and business rates and local charges with no further central government funding. Council tax is retained locally and business rates are collected locally but redistributed nationally through the formula grant according to need.  If local government wants more funding it must build local business to grow rates income – as there is little support for uncapping council tax.

When I worked on the Lyons Inquiry, we wrestled the tensions between fairness, equalisation, accountability, national entitlements and local incentives.  Any national formula to redistribute according to relative needs and resources is inevitably complex. It imposed some equity and stability, but further obscures the relationship between individual local tax-payers and their local authorities.  Now, central government is determined to localise the revenue from business rates and incentivise growth, it has cut national prescriptions and looks ready to let go – perhaps of more than some local authorities will be happy with.

There is no longer total support for a national formula to redistribute according to needs. Some local authorities are now ready to value financial autonomy enough to risk other uncertainties – and collaborate with each other to be free of a national formula and stop being annual supplicants to central government ministers and civil servants.  Ministers seem open to divesting themselves of a key role in the complexities of local government finance – but this may not be easy, once the implications of the proposed changes become more clear to all local authorities and the public.

London Councils  have recently considered how the 33 London boroughs, police and fire authority could collectively agree a business rates redistribution scheme between themselves to fund their withdrawal from the government’s formula grant system; pooling a share of business rate growth, retaining some locally and sharing some into a national pool. Not all London boroughs agree. Some want a higher level of tax incentives and tax competition between councils, less diminished by equalisation.  Westminster and others contributed to the City Finance Commission, alongside Manchester and Birmingham.  Their report this week says cities should be allowed to keep growth in business rates and council tax that is generated by new planning consents.

There has been less voicing of the interests of those authorities who will continue to rely on national and regional pooling, and the implications for them of changing or ending a national formula grant system.  We at the LGiU are keen to support informed debate across local government.  All authorities, including those less expectant of growth will need to consider how ‘opting out’ and ‘rate escape’ could bring benefits but also affect their future financial profiles and risk.

CLG are still in listening mode, and in July, will issue a consultation document on options for relocalising business rate revenues to incentivise councils to promote growth.  This will have to address the thorny problems:

• The starting point – expected to be replicating the previous year’s outcomes.
• The basis for redistribution between those authorities who raise more in business rates than they are currently allocated from the national pot – and those who depend on the redistribution – and the local share between the various authorities to be funded in each area – the district and county councils, unitaries, police and fire authorities and some other bodies.
• There are different views as to whether redistribution should continue to be run by central government on a national basis. Is there a continuing need for a complex formula designed for ‘fairness’ to meet needs and damping to smooth out sudden changes, or does this act against incentives and build dependency. Should there be a simpler approach over each CSR period and in part through voluntary regional arrangements.
• Should we consider the case for an Australian type local government commission as honest broker to fix arrangements between local and central government.
• How are the proceeds of growth to be shared locally and nationally. For instance, a link to planning decisions would favour only planning authorities.
• What will be the relationship of each tier and authority with the local business community – how will accountability be delivered and trust built up so that in future local authorities may be further ‘freed up’ to set local business rates, or supplementary rates (currently there is only one SBR, in London for the GLA to fund Crossrail).
• Could more local control be a positive driver of new forms of ‘Total Place’ funding and delivery agreements across local services.
• How much can each authority plan to borrow based on future income? What new models such as Tax Increment Financing could develop, with what implications for existing BIDs, Enterprise Zones and indeed for the LEPs.
• Are local authorities ready to take on the financial risks which currently central government bears through running the pool, of changes from year to year, and from forecast to actuals.
• How will councils be sure that ‘new burdens’ (weekly bin collection?) are not transferred on them by central government or new legislation to be funded from a fixed funding pot.

Changes to Council Tax Benefit

This is possibly more politically and financially important to those authorities with high numbers of claimants. There are currently around 4.9 million recipients across England, at a total cost of around £4.7bn. The average individual payment is £15 week, with a wide range and some deep concentrations of claimants, mainly in those areas which have seen the greatest cuts in grant (redistributed business rates)  this year.  This highlights that the two changes will have a combined effect on local finance.

The CSR cut spend on Council Tax Benefit by 10% from April 2013 and the Welfare Reform Bill abolishes it.  The 90% funding will be localised, with a new duty on local authorities to set local rebate schemes.  A framework will be set out in another July consultation document. Unlike localising business rates, this poses local choices few councils would choose, effectively creating local council tax credit schemes – without creating local tax. It will affect individual, household and local authority incomes and making the 10% cut per recipient or per household has different impacts, as shown in a recent report by NPI.

Local schemes will sit uneasily with the national changes to Housing Benefit and the creation of the new tapering Universal Credit aimed to ‘ensure work pays’. It will constrain local priorities to tackle disadvantage and poverty for different types of households.

In advance of the consultation it seems the issues are:

• Councils will need to start gathering data to understand their local situation.
• To continue existing rebate levels, funding would have to come from other services, or other council tax payers.
• Council schemes could possibly choose to save more than 10%.
• Central government may suggest or require different approaches to applying the 10% cut to individuals and households above working age, from those who are  unemployed of working age.
• There may be higher take-up of a local rebate – around 2 million entitled pensioners have so far chosen not to apply as it is a ‘benefit’. This could lead to greater local financial risks.
• Transparency will identify who actually does pay full council tax. There may be calls for a national or local pensioner discount – as an entitlement rather than a rebate.  This will prompt wider debate about the national discounts and exemptions – and possibly the call to set some or all locally, given the impact of those for single occupancy, for students and for second homes.
• For simplicity and credibility, each bill-payer will need to understand their individual discount, exemption and rebates – across the various precepting authorities. Therefore this is likely to require political agreement on local rebate schemes across the various local bodies.
• More risk of under-collection and management of rebates will be transferred locally, whereas now DWP bears this risk.
• With a national scheme, collection has been routine, increasingly delivered in shared services across authorities and outsourced. Along with changes to housing benefit there will be hundreds of new schemes to develop and administer with greater financial risks and contractual changes to manage.

Taken all together,  big implications and a lot for every local authority to consider carefully.

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