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Are we willing to pay the price for self-sufficiency?

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Whatever you think of the local government resource review in policy terms, the consultation paper and especially the technical support documents represent an excellent piece of work.

The civil servants at the Department for Communities & Local Government have put together a comprehensive, coherent, cohesive framework dealing with every complexity one could think of, leaving plenty of choice about precisely which parameter to choose.

Sad as I am, I’ve read all the technical papers cover to cover.  In getting your head around all the complexity it’s easy to forget the really big questions.  Can we really give local government self sufficiency, rebuilding local political accountability with businesses and giving them the incentive to deliver the growth the country needs?  Will local government be prepared to pay the price for that – to give up dependency on equalisation of needs and resources through grant and to strike out on their own?

Growth or equality?

Authorities will have to stop looking at what their neighbours are getting out of the system and concentrate on growing their own resources.  It should mean the end of ‘equalisation’ – the industry that argues about the fairness of this or that tweak to the formula for needs, and that takes resources away from areas that build houses and grow business to give to those that don’t.

The civil servants know that’s the real debate, and they’ve built a system that could deliver that freedom.  It could also be used to completely replicate the existing system, except in a new and more complex way.  There are strong arguments for either system.  But there is a danger of creating a monstrous hybrid that neither delivers effective incentives nor gives weaker authorities the protection they had previously enjoyed and want to keep.

I think the debate should be about that central issue. If it is decided that we have to continue to protect the weak, then let’s abandon the whole resource review and carry on as we are. If, alternatively, we believe that economic growth and strong cohesive communities are best delivered by unencumbered local authorities in touch with their businesses, then let’s choose parameters for a new system that really delivers.

The ‘set aside’

Let me illustrate the argument with examples of some of the choices in the review.  First, ‘set aside’.  Set aside is effectively a top slice of business rates that goes to the Treasury.  It explicitly will fund the New Homes Bonus, but it’s also designed to make sure local authorities deliver the spending cuts assigned to them in the spending review.  The key worry is of course, that set aside will grow in the future as Treasury takes away the growth in business rates created by the incentive effect of the resource review.  Then, just like the New Homes Bonus, business rate growth becomes a zero sum game between local authorities.  To gain anything your business rate growth has to be better than the average of all authorities – and that gain comes at the expense of other authorities.

That is not “setting local authorities free”, to use Eric Pickles’ phrase.  It perpetuates the mutual self reliance that sustains the endless search for the holy grail of a ‘fair’ distribution system, and makes local authorities grant junkies.  We need a radical solution to prevent that from happening.  Maybe treating local authority expenditure as “AME” (Annually Managed Expenditure – ie spending that Treasury accepts is out of their day to day control) would be one solution.  Having a separate account outside the formal control totals would be another.  These solutions don’t add to the national deficit because such spending would be self funded.

Even the set aside of the first two years of the system is a lost opportunity.  If we accept that growth is better achieved by joint action at a local level, or, as the community budgets initiative is seeking to demonstrate, better social outcomes are achieved by single intervention budgets, why not use the need for set aside to make that happen.  Instead of taxing local government, give it more functions.  Personally, I’d like to see better control at a local level of the various funding streams supporting skills and employment – the Department for Work & Pensions’ Work Programme, the funding from Skills Funding Agency, European Social Funds and even perhaps Higher Education.  That way there can be connection between the skills needs of industry and the training provided as well as coherent action to get workless back into work.  I understand that this approach has been ruled out at this stage because it is thought too difficult to get necessary co-operation between the relevant departments of state.  Even the less radical approach of using set aside to replace other specific grants appears also to be ignored, presumably because departments want to hold onto their direct influence over local authorities.

‘Rebasing’

Let me turn to ‘rebasing’.  The resource review acknowledges there has to be a starting distribution.  That will fix a particular view of the needs of each local authority and ensure they have the resources required to fund them.  However, clearly resources will change over time – that’s the point of the incentive effect.  So of course will underlying needs driven by economic performance and demographic trends.  Should local authorities be expected to manage those changes themselves or should there be regular re-setting or rebasing of the starting point?

The resource review papers are actively aware that rebasing dilutes or even removes the incentive effect.  Indeed, if rebasing occurs frequently -say every three years – you have recreated the existing system.  There are therefore options in the review that seek to compromise the two issues.

I would argue that if you want ‘free’ local authorities there should not be any rebasing.  There will be a need to protect communities that threaten to ‘fall over the edge’, but I think there are ways within the review framework of achieving that without compromising the fundamental aim of the review.

If rebasing is to happen, it needs to be as weak as possible if the incentive effect is to remain.  So rebasing should ignore growth in business and council tax bases since the start (the so-called “partial” option in the review papers), there should be a minimum of 10 years between rebasing (I’d like longer!) linked perhaps to the census, and that it should only apply to a few areas where there has been dramatic change to underlying needs.

The ‘levy’

The mechanism for achieving minimal rebasing lies with the ‘levy’ proposals.  The levy is a device to remove excessive business rates growth from areas where existing levels of business rates far exceed underlying need.  While the initial “tariff” set for such authorities evens things out to begin with, the review points out the need for a continuing additional levy to ensure equality of incentives and reward across the country.

Within the review papers, the proposal is to use the levy to provide safety nets against volatility in the rates system.  It seems to me, that in the spirit of the fundamental idea behind the review, the proceeds of the levy should be seen as a local government resource for the sector as a whole to decide what to do with.  Even if that idea is considered too radical, the levy does provide the money needed to rebase those authorities whose needs have far outgrown their resources.  This would be preferable to a system wide rebase that undermines the incentive effect.  It is not an option set out in the technical papers, but it seems to me the obvious solution to explore in more detail.

The New Homes Bonus

There is one other key policy that has not been properly examined in the context of the resource review – the New Homes Bonus.  The bonus has been taken as a policy axiom and accordingly fitted in.  It should, I think, be re-examined, because the main reason for it has gone.

In a system of full resource equalisation, building more houses leads to a reduction in grant (and for authorities with low council tax levels, the grant loss is actually greater than the additional income!).  The New Homes Bonus was a way of ensuring that there was some incentive effect for building homes.  However, the resources review could put in place a system where there is no further resource equalisation.  Not only do local authorities get to keep the proceeds from growth in rateable value, but also from growth in council tax.  There is no need for the New Homes Bonus.

Keeping it undermines the idea that local authorities are set free by the resource review.  As I’ve pointed out, the bonus (or rather about £1bn out of the £1.2bn final cost) is financed by a top slice of business rates, which over time will fall more heavily on authorities that create growth.  And because it is currently funded by redistribution of formula grant, it has some odd effects.  If there was an even increase in houses built over the country, the New Homes Bonus would take grant from the north and increase grant in London and the south-east because of relative house prices (actually relative house prices in 1991).  It also over time takes grant from county councils and gives it to district councils in shire areas.

Leaving aside these weird redistributional effects (which may of course be deliberate policy), it still seems to me the New Homes Bonus is an interventionist policy that is no longer needed (because of the ending of resource equalisation) and undesirable because it makes an individual authority’s resources dependent on the actions of other local authorities.

Conclusion

I’ve hardly touched the surface; but I hope I’ve made my main point.  The resource review does give us a chance to set local authorities free from dependency on other authorities and on the annual formula grant negotiations dance.  That does require some radical choices to be made.  There will be many authorities perhaps that don’t have the ambition or the capacity to take that opportunity.  So as a final point perhaps we should also consider a hybrid system.  Some local authorities opt out of the system once the base line is set.  The others agree on regular rebasing and redistribution from amongst the resources they share between them.  For those of us who feel constrained that perhaps is the ideal solution.

Stephen Hughes, chief executive, Birmingham City Council

Equalisation - The process by which the government ensures councils in areas of differing needs are adequately funded to provide a basic level of service. Up until now this has been done by councils passing all the business rates that they collect to Whitehall from where they are redistributed around the sector according to need.

Rebasing - The government’s plans to allow councils to keep business rates collected in their area means that over time, councils’ resources will grow, or shrink, at differing rates. The consultation seeks views about regularly ‘rebasing’ the system to fix the distribution of resources against councils’ needs.

Tariffs and top-ups - Currently some councils collect more in the way of business rates than they spend. Some councils raise considerably less in business rates than they spend. To ensure no authority loses out in the first year of the new system, those authorities that collect more than they spend will pay a tariff whilst those that collect less than they spend will receive a top-up.The system would be self-funding so the total amount of tariff would equal the total amount of top-up.

Levy - As well as the tariffs and top-ups, the system will include a levy that will recoup a share of any economic growth considered disproportionate. This levy will be used to fund a safety net to protect areas that experience extreme, negative volatility, for example the closure of a major employer.

New Homes Bonus - The government rewards councils that build new homes in their area by allowing them to keep the extra council tax raised from the properties for a six-year period. This money is taken from other councils.

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