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FINANCE - FOOD FOR THOUGHT

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No longer seen as simply a talking shop, the pressure is on for the balance of funding review to deliver, says Kerr...
No longer seen as simply a talking shop, the pressure is on for the balance of funding review to deliver, says Kerry Lorimer

The balance of funding review is the most keenly anticipated appraisal of local government funding in a generation.

The flames of the review have been fanned by public ire over council tax increases, and political mud-slinging has only added fuel to the fire.

What started off promising to be a lacklustre re-run of arguments well rehearsed by the 1976 Layfield report has become key to the future of central/local relations.

As a result, local government minister Nick Raynsford, who launched the review last year, is under pressure to produce an adequate response to an issue which has no perfect solution. Not only that, but he must offer a political fix for a government only too aware that high council tax increases will cost votes in the next general election.

Mr Raynsford has by all accounts presided over the group with characteristic charm and good humour, engendering an atmosphere of constructive debate rather than political partisanship. The spirit of consensus will no doubt be evident in the review's findings, expected in July.

Those findings will be strongly influenced by CIPFA research into the feasibility of a local income tax. Although the institute's initial paper raised doubts about the suitability of local income tax as a replacement for council tax, further work suggested that top-tier authorities could choose from a set menu of local income tax rates to supplement council tax income. The new levy would be collected by the Inland Revenue.

CIPFA's proposals did a great deal to make local income tax palatable, even to its staunchest opponents. As well as suggesting that the tax need not be overly complex to administer, the notion of council and local income tax existing side by side counters unease over a tax system based on income that takes no account of property values as an indicator of wealth.

Review group member Gerry Stoker, board member at the New Local Government Network, says the combination model put forward by CIPFA found resonance across the group.

'Local income as a supplement to council tax, rather than as a separate free-standing tax, has always been the likelier option,' he says.

'Council tax reform doesn't have a huge lead-in time, it could get wide consensus across the political parties, and it's something we should be getting on with.'

Much more contentious is the relocalisation of non-domestic rates to redress the balance of funding. Business is still implacably opposed, while the case for local control is being made by councils in stronger terms than ever before.

There is no doubt that against a backdrop of spiralling council tax rises, the capping of business rates increases to the rate of inflation is looking increasingly untenable. Discussions between local government leaders and the business community suggest there is scope for local rate-setting within agreed limits, in return for a louder business voice in the running of council budgets. Depending on how far the government is willing to go to extract a greater contribution from businesses to the funding of local services, the review could at best herald a new and more engaged relationship between councils and local businesses.

Local government finance expert Rita Hale says relocalising business rates would be the quickest solution to the balance of funding dilemma.

'I realise that the business community would oppose it but the non-domestic rate could be linked to the council tax - thus guaranteeing that non-domestic rate payers would not face bigger tax increases than domestic tax payers,' she says.

'Property taxes of this kind have been local taxes since the 17th century, if not longer. Against this backdrop, the nationalisation of the non-domestic rate in England in 1990 can be seen as an aberration.'

As the review draws to a close, commentators are divided on its potential to deliver radical change.

Chris Clarke, review group member and leader of the Liberal Democrat group on the Local Government Association, is optimistic. He believes the next general election and council tax revaluation will concentrate ministerial minds on producing a robust response to the review.

'The main options have all been laid out and had a bit of an airing, and the next bit depends on the will to bring about a sustainable solution,' he says.

'Enough people in government will know that change has to happen, and it can't be tinkering. The worst thing they can do is slam the lid on it.'

Simon Heywood, director of finance and deputy chief executive at Wandsworth LBC, is less confident.

'I am still a thorough-going cynic,' he says.

'The government has managed to defer hopes for real improvements in the balance of funding until at least 2006, so that the real decisions can be taken later next year, as part of a potentially painful package including changes in schools funding.'

All this was probably envisaged by the government from the outset of the review, says Mr Heywood.

'The bonus for the government has been the opportunity to set the scene for higher taxes on business, through above-inflation increases in the non-domestic rate,' he says.

'The government can be pleased with quite a successful game so far. But the review still seems on course to deliver little except vain hopes for local authorities.'

If nothing else, the review has underlined the vast complexity of any kind of reform to the way local government is funded.

As Professor Stoker puts it: 'If I ever thought local government finance was straightforward, the balance

of funding has certainly absolved me of that understanding.'

Some consolation, perhaps, for Mr Raynsford when he presents the review's findings next month.

  • View LGCnet's mini-site dedicated to the Chartered Institute of Public Finance and Accountancy's annual conference in Brighton here.
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