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FEATURES - FINANCE

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This year's council tax rises are something of a paradox. The finance settlement for 2003-04 appears at first sight...
This year's council tax rises are something of a paradox. The finance settlement for 2003-04 appears at first sight the best since council tax was introduced. But the increase in council tax will average some 12.9% - the largest annual rise since 1993. Why?

First, this year's settlement was based on an assumed increase in council tax of 6%. So, even if every council had kept their spending in line with the increase in provision - as measured by formula spending share - council tax would have risen by 6%.

But councils have increased their budgets by around 2% above the increase in FSS due to a wide range of pressures. The finance settlement assumes inflation of 2.5%, but councils are experiencing much higher cost pressures - from both recent pay settlements and recruitment and retention problems. In addition, the 1% increase in national insurance contribution accounts for nearly 10% of the rise in formula grant.

Pressures on social care budgets are continuing, with nursing and residential care fees increasing well above inflation. The costs of collection and disposal of waste continue to rise. Many councils face rocketing insurance premiums and are having to deal with looming deficits in their pension funds.

Finally, councils do not appear to be budgeting to use reserves as much as in previous years. This should come as no surprise. The comprehensive performance assessment takes account of auditors' judgment of financial standing - including an assessment of the adequacy of reserves - while the Local Government Bill gives the secretary of state the power to determine a minimum level. The CPA appears to have substantially changed the basis of budget making, with much greater emphasis placed on improvements to services rather than on measures to keep council tax down.

This 2% increase in spending translates into a much larger increase in council tax. As council tax pays for only a quarter or so of local spending, any increase in spending puts the council tax up by a much larger percentage. As a result of gearing, the 2% addition on budgets this year has increased council taxes by around 7%. So, when combined with the 6% increase built into this year's finance settlement, the outcome is an average increase of very nearly 13%.

We hope the review of the balance of funding, due to start later this month, will address this key problem - and establish an understandable link between local spending and taxation.

Steve Lord

Programme manager, Local Government Association

www.lgcnet.com/policyresearch

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