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The debate on tax reform is beginning at last

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Commentary on the tentatively growing campaign for fiscal reform

It has been hard not to be disturbed in recent years at the paucity of debate about how to ensure public services – especially local ones – receive proper funding.

Much of the discussion in Parliament has tended to split predictably along party political lines.

The Conservatives have throughout this decade prized fiscal responsibility above all else. Austerity has been the result. Labour has gone from supporting a less dramatic fall in public spending to being fully anti-austerity.

With the possible exception of various select committee chairs, there has been little space in the middle for those such as Liberal Democrat health spokesman Norman Lamb who have urged cross-party work to find health and care funding solutions.

The shock Brexit vote and the arrival of Theresa May in Downing Street should have heralded an opportunity for a new approach. In her brief summer 2016 campaign for the Conservative party leadership Ms May made strong noises about a regional industrial strategy and about creating a fairer society, which were interpreted by some as heralding the easing of austerity.

However, Ms May has been hamstrung by the preoccupation with Brexit, a perceived absence of imagination and, since last summer, by her lack of parliamentary majority. Austerity has rumbled on and services have for the most part declined.

As society has become more politically polarised, there has been surprisingly little discussion about an appropriate level of tax and spend. For local government this has been particularly unfortunate. It is just about the worst hit part of the public sector by austerity and its loss of central funding leaves it dangerously dependent on council tax – a property tax based on 1991 housing valuations – and business rates, a tax based on the rateable value of business properties which looks increasingly anachronistic in the era of home-shopping and digital start-ups.

Yes, the Local Government Association has highlighted the sector’s £5.3bn funding gap by 2019-20. But, until recently at least, councils’ plight has not been widely appreciated beyond the sector. The localisation of business rates has been the stock ministerial assurance to queries about future council financial viability. But there have been surprisingly few calls for a new Layfield or Lyons commission to set out the finance system that can facilitate a genuinely sustainable local government in the decades to come.

The financial demise of Northamptonshire CC can catalyse the debate for a new financial settlement for councils within a wider discussion about the sustainability of all public services.

Ms May’s former joint chief of staff Nick Timothy is among those who have sought to ignite this debate. In a Sun article before Christmas he wrote: “The government should be prepared to redistribute more through the tax system: from the wealthy to working families with modest incomes.

“They should be prepared to increase taxes on accumulated wealth so they can cut taxes on income. They could raise more money through inheritance tax.

“They could abolish stamp duty and instead charge capital gains tax on house sales, helping young people on modest incomes.”

Similarly, former Treasury permanent secretary Lord Macpherson (Crossbench) has lately been active in making the case for significant tax changes, calling in a Lords speech last month for a new NHS tax.

“This new NHS tax would be separately itemised on people’s pay slips and could be spent only on the NHS and social care,” he said. “In my view, taxpayers would be more prepared to pay higher taxes if they knew where the additional money that they raised was being spent.

“A 2% tax, paid by young and old alike on incomes above the lower earnings limit of national insurance, would raise well in excess of £10bn a year. I hope the government will give it serious consideration.”

The general sense that the debate may be moving a little closer – albeit slowly – was bolstered by an Economist article last week, entitled “Wanted: radical proposals to fill Britain’s giant fiscal hole”, which stated: “Politicians are slowly facing up to the fact that higher taxes are needed.”

The thrust of the piece is that the government can tax three things: income, consumption and wealth. It describes wealth taxes as the “most growth-friendly” option, and states wealth looks “undertaxed” right now. “Buckingham Palace attracts a council-tax bill of £1,400 a year, around the same as some flats in Bradford.”

A council tax revaluation that reflected current property values “would be a start” while, in the long-term a land-value tax levy of 0.5% could fill almost a third of our fiscal hole. It would be “hard to avoid, since land cannot be hidden or easily substituted”.

The Economist piece concluded: “Today, no prime minister would dare to implement these radical ideas, least of all the timid, distracted incumbent. But the fiscal logic is brutal. If Britons want good public services, they will need to pay more. Real tax reform is coming sooner or later.”

The problem is that local government can’t wait. Services are stretched. As Rob Whiteman, chief executive of the Chartered Institute of Public Finance & Accountancy, said last week, Northamptonshire is unlikely to be the last council to issue a section 114 notice.

Something has to give - local government must hope that it is prime ministerial reluctance to countenance brave solutions, rather than yet more council services.

The debate needs to move on quickly but we can at least take some comfort in the debate having started at last.

Nick Golding, editor

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