Earlier this month, as chair of the all-party House of Commons’ housing, communities and local government committee, I announced a new inquiry into local government finance. There’s no point in being unambitious!
Ahead of the autumn 2019 spending review, we want to look at how effective the existing local government financial framework is at providing resources to meet need and demand for local services, both now and in future. We want our work to directly inform government policy towards local government funding in the spending review and beyond.
Total government spending and revenues have hovered at around 40% of gross domestic product (GDP) for the last 50 years. Fluctuations have been determined in part by the performance of the economy and in part by discretionary policy.
The UK is now a relatively low-tax country compared with the G7 and EU averages. Since the Second World War broadly-defined direct taxes, such as income tax or national insurance, have slightly increased to account for about 55% of all taxes.
But there has been a significant shift from product-specific excise duties to VAT. That may be why recent chancellors have sought to find new product-specific taxes, for instance on insurance and flights.
At the start of the 20th century, local taxes accounted for about a third of all taxes. By the late 1940s, local taxes – mainly domestic and business rates – accounted for just 7% of the total. They rose again to 10% in the mid-1960s and continued at that level for the next 30 years.
The poll tax and council tax raised less revenue than their predecessor, and the latter now represents less than 5% of all taxes in the UK, despite the government having effectively nationalised both national non-domestic rates (NNDR) and local council tax levels, complete with additional precepts for the police and adult social care. Enforced council tax increases have been used to fill part of the gap created by the 40% cut in government grant.
Other countries – especially federal or strongly-devolved countries like Germany and the US – have a third of government revenues collected through local- and state-determined taxes.
It is also worth noting the massive decline in public investment. In the early 1970s, capital investment accounted for nearly a quarter of total government spending. That had fallen to just 6% by the end of the century. Local government capital expenditure fell from about 10% of the total to less than 2%, with housing investment falling from more than 5% of the total to less than 1%.
More recently, the average 40% of cuts in central support to local government have hit the areas most reliant on grant support hardest. The decision to end the annual updating of needs assessments has moved away from need-revenue equalisation and towards fiscal incentives for economic or housing development.
This has shifted resources from poorer areas to places where large numbers of houses might have been built anyway. This will just be exacerbated by the government’s decisions about the distribution of housing resources.
There is also huge uncertainty about business rates. The government is continually tinkering with the business rates retention scheme. The so-called fiscal incentive for growth is more than countered by the larger potential revenue losses, greater funding divergence between areas and the potential for using safety nets in politically partial ways.
Meanwhile, rapidly changing patterns of commerce – for example the huge shift from high street to on-line retail shopping – is undermining the nature of NNDR. Ministerial refusals to consider the implications and alternatives will not do.
The pressures of care for children as well as adults are likely to increase spending demands faster than inflation increases in business rates and council tax. Without significant reforms to these and new forms of local taxation other important community services such as highways, refuse collection, buses, libraries, parks and planning which have already been cut substantially are likely to be cut even further.
The government’s continual deferral of proposals to address the financing of adult social care gives no confidence that it can review what needs to be done and consider new, alternative approaches to funding local government and local services over the next spending review and beyond.
That’s why my committee is going to attempt it, inviting submissions about lessons to be learned from the past and from other jurisdictions, the sustainability of the present arrangements, assessing need and future demands, and ideas and proposals for change.
Clive Betts (Lab), MP for Sheffield South East, and chair, communities and local government committee