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Nick Raynsford speech at LGA conference on balance of funding, 8 December 2003 ...
Nick Raynsford speech at LGA conference on balance of funding, 8 December 2003

'In our 2001 White Paper, Strong local leadership - quality public services, we said that we wanted to see a vibrant local democracy in which councils provide strong leadership to their communities and deliver high quality and improving local services. We will work with local government to give effect to that vision. We are committed to removing the unnecessary controls that stifle innovation. But we also expect to see local government giving real effort to improving service delivery.

Implicit in this vision is a 'contract' between central and local government. We, central government, would work to enhance the standing of local government and offer freedoms and flexibilities to make it easier for local authorities to manage things locally. In exchange we sought commitments to continuous improvement in standards of service delivery and strong community leadership being shown by all councils.

And there has been considerable progress since then. We're fulfilling our side of the bargain. I can point to three areas in particular.

The Local Government Act 2003 came in less than a month ago. It includes substantial new powers for councils to trade, to charge for discretionary services, to retain income from some fines and penalties, to vary the council tax discounts on second and empty homes, and for authorities ??? rather than government - to decide how much they need to borrow. All very significant financial freedoms. And it also allows new schemes - Business Improvement Districts and Growth Incentives - to encourage councils to work with local businesses to improve services and the business environment and attract inward investment.

Second, I'd like to point to the commitment to improve local government services through the Comprehensive Performance Assessment. CPA has given us a new basis for engaging with local authorities. We are reducing central requirements on all counc ils in proportion to their performance with more freedoms and flexibilities for the best performers and an improvement process for the less well performing., With the roll out of CPA to districts, they too can now benefit from greater decentralisation.

Third, Local Public Service Agreements have been successfully implemented across the whole of England. Around 120 of these voluntary Agreements between government and individual councils have already been concluded, and the remaining 25 or so should be signed soon.

Last Thursday I launched with the LGA a second generation of Local PSAs, which will build on the strengths of the first generation. There is an even greater emphasis on local priorities, and on partnership - both between councils and local partners, and between central and local government. We are retaining and strengthening the focus on local outcomes that will make a real difference to people's lives, with significant financial rewards for enhanced performance. And I am very keen that we continue to improve the way we work together on tackling obstacles to service delivery, using new ideas such as 'explorer partnerships', in addition to the good work being carried out in the Innovations Forum.

And implicit in this contract is our clear commitment to continue to improve the funding of local authorities. Since we took office in 1997 we have increased funding to local government by 29% in real terms. The recent settlement is the seventh successive one to give an above inflation increase to councils.

However, we also know that there are particular problems facing councils next year. That is why we not only added the £120 million of transitional funding for schools which Charles Clarke announced last month, but found an additional £300m of extra funding for non-schools pressures. We also freed up some £750 m of grant from ring fencing so that councils are better able to take their own spending decisions about how best to achieve the outcomes from their se rvices. Next year ring-fencing will account for 11.1% of all funds compared with 13.3% this year - a drop of 2.2%. The overall increase of 6.5% is, by any standards, a good settlement - by the standards of 10 years ago it is phenomenally good.

But we also expect authorities to deliver services in a cost-effective way. It is clear that the public is very unhappy about the unreasonably large council tax increases in recent years, like the rise of 12.9% this year and we too are very concerned. This in our view is an unsustainable trend.

I have already made quite clear the government's view that continued year-on-year increases in council tax on the scale we've seen this year will not be acceptable to voters or the Government. Electors will make their views clear through the ballot box, and the Government will if necessary use its capping powers.

We do not threaten capping lightly. We would prefer not to use our powers as we believe councils should answer directly to their electorates for their decisions. But we cannot stand aside if councils continue to impose unreasonable increases. So have no doubt that in the coming year, we will be looking at council tax rises very closely. When we do so, we will also want to take account not only of one year's increases, but of the trend in increases over more than one year. We make no exceptions. All authorities - including fire and police authorities, and those categorised 'excellent' and 'good' in current and future comprehensive performance assessments - will be considered if we do have to make use of our capping powers.

At this point, I would like to mention the recent report by the Audit Commission, investigating the reasons for this year's high council tax increases. It is a useful and timely contribution to understanding why local authorities increased council tax by 12.9 % on average this year. As the report makes clear a number of factors were significant, some the responsibility of central government and some the responsibi lity of local government. We are acting on those matters that are our responsibility - unfunded pressures, ring fencing, and the overall structure of local government finance about which I will be saying more in a moment as that is the subject of the balance of funding review.

At the same time we expect councils to give careful attention to their responsibilities. The report makes very clear that that councils do have a responsibility to keep council tax down. Let me quote from it: 'There is a difference between increases being justifiable and increases being unavoidable. Authorities have choices about which priority growth areas they fund, what budget reductions they agree, and the charges they raise for services. They also can feel under more or less pressure to deliver efficiencies.'

The setting of council tax is rightly the responsibility of local authorities, not the government. They have a responsibility to manage their budgets prudently. andwithout imposing excessive council tax rises.

We do expect councils both to improve standards and to increase their efficiency. We make no apology for that. While there has rightly been a focus on improving services, there has often been less attention to value for money issues.

There is clearly room for improvement in how some councils use their resources - procurement is one obvious example. As we take forward the national procurement strategy for local government with the LGA we want to make sure that we see a much greater focus on cost effectiveness, on driving down costs and prudent budgeting.

Having said all that, I am focusing the Audit Commission's concern about the current structure of the local government finance system. The balance of funding review - is the right way of addressing that concern and that it what I'd like to turn to now.

In our 2001 White Paper to which I referred earlier, we recognised that local authorities are concerned about the balance of funding. That is the proportion of local spendin g which is financed from central and from local sources. So, we set up a high level working group to look at the issues, review the evidence and consider reform options. This group - which I chair - includes representatives from local and central government, the business world, academics and other experts in local government finance. The Group first met in April, and has conducted a review of the relevant evidence and consulted on some key issues and is now moving on to consider options for reform. Its aim is to present its findings next summer.

As I am sure you know, the balance of funding varies considerably across the country depending on the level of an individual council's needs and its tax base. So, for example, Newham in east London raises only 10% locally, while St Albans in the South East raises 50% locally. But whatever the figure, many councils and others, argue that their dependence on central government for so much of their funding means they cannot be properly accountable to their taxpayers. There are also strong criticisms of the 'gearing' effect- which means that, because of the balance of funding, if a council wants to raise its budget by 1%, it has on average to raise its council tax by an average of 4%. Obviously this varies from council to council depending on the balance of funding in that area.

I want to make one point very clear here. If we were to change the balance of funding and increase the proportion of funding raised locally - and I do say if - we would not be talking about increasing the tax burden overall. The Review is not about the overall amount of money, but who should raise the money - local or central government - and through what kind of taxes.

That is the focus of the review. It is important. It is the most significant examination of the financing of local government for 25 years. This comes through in the work of the Review so far - which, I should add, is publicly available on our web site and the LGA's.

We looked first in the review at what principles should underlie the system of local government finance in England. How important is local accountability and what do we need to do to encourage it? What are the trade-offs between greater local discretion on the one hand and achieving acceptable standards throughout the country and fairness on the other? What do we mean when we talk about 'fairness' in taxation? These are difficult but important questions.

We have also commissioned some research. Among the conclusions of the independent researchers were that:

- there seems to be no evidence of a direct connection between the balance of funding and local election turnout;

- it is clear that many members of the public are not clear where accountability for local government services lies and where the money comes from. There is confusion about the responsibilities of central and local government - and of the different tiers of local government and indeed, what matters most to them is not where the balance of funding lies but whether local services are efficiently delivered;

There are different patterns of funding in different countries??? we may be able to learn from how their local councils are financed. But we must always be cautious about making comparisons as individual circumstances vary so much.

The final reports of this research are now available on the ODPM website.

I should also mention our public consultation. We received over 200 responses. Overall, the responses showed a wide range of concerns about aspects of the current local government finance system - in particular the gearing effect and the impact of council tax rises on taxpayers with fixed incomes. We had a significant number of responses from pensioners.

Many suggested far-reaching changes to the system to deal with these problems. I haven't got time to repeat them all here, but they showed just how complex an issue this is, and just how different people's views can be of what needs to be done.

What is absolutely clear so far is that there are no simple answers, no easy fixes. Whatever happens, there will be some who will disagree. Whatever happens, there will be big implications across local - and indeed central - government. We need to think these issues through fully, if we are to come up with a system that is fair and widely accepted.

We need to do this in a calm and careful way. Knee jerk reactions are not wise.

To address issues in the consultation responses, the steering group decided to ask expert organisations to give evidence on the pros and cons of four main issues put to us by consultees. The four are: how one might reform the existing council tax, the case for introducing some form of local income tax, the case for and against re-localisation of non-domestic rates, and a 'mixed option' of many smaller charges and taxes. I can now tell you that:

  • The New Policy Institute will present a paper on reform of the council tax;

  • CIPFA will present a paper on Local Income Tax; and

  • The LGA and CBI will give evidence on the re-localisation of the business rate.

    All of these subjects will be considered by the steering group in the New Year. We shall also consider the 'mixed' option.

    I want to make it very clear that the fact that the Group is looking at how each of these might work does not mean the government endorses them or is planning to adopt them - whatever you may read in the newspapers. It makes sense to find out more about the case for change, and to analyse the proposals carefully and thoroughly. The Group needs the chance to find out how different taxes would really work in practice and what their advantages - and disadvantages- might be.

    Let me just address each of the four issues one by one.

    Many consultation responses said that there were serious problems with council tax. But most of them suggested that council tax could be reformed rather than abolished.

    What kind of reforms might we be talking about her e? Well, we must put this in the context of changes such as the revaluation of domestic property, to which we are already committed and which is currently planned for 2007. This will make sure that a council tax bill is based on the up to date valuation rather than its value in 1991. Revaluation is not by the way an exercise designed to raise more tax overall. Its overall impact will be neutral. But it is necessary to avoid the valuation base losing touch with reality. People would not think it right for income tax to be based on 1991 income. Similarly, we can't continue to assess council tax on 1991 property values. At the same time as the revaluation we will consider the case for change to the existing bands.

    A point that came through strongly in the consultation was that people thought that council tax should reflect more closely both people's ability to pay and the variations in property values. There are ways of doing this - for example, through a new banding system - and we will be asking for evidence on this. The regional impacts of this need to be considered carefully. However, I must make clear today that we are not committed to any particular changes in the banding system. We are looking at the options on this.

    The second main issue put to us by consultees was local income tax. There is support in some quarters for raising some local funding from an income tax - which is, of course, related closely to the ability to pay. But much of our tax revenue in the UK already comes from national income tax - so we would need first of all to be very sure of the case for having a local income tax too.

    Some have suggested that there is a case for taking more account of people's income than under the current council tax scheme and that it might be possible, for example, to combine a reformed council tax with an element of local income tax.

    The prime minister has made it clear the government does not favour replacing council tax with local income tax. However, we are certa inly prepared to listen to reasoned arguments, and I look forward to hearing the evidence on the pros and cons of this and the other options from the experts I mentioned earlier.

    Now a vital question is if we were to consider the case for an element of local income tax how might it operate? Would a system where councils set the rate be better, or should a fixed amount of national income tax be assigned for each council?

    Another key question is how much would a local income tax cost local authorities, businesses and the Inland Revenue to administer? The suggestion that has been made by some advocates of local income tax that its administrative costs are minimal is frankly not credible.

    The third issue that was highlighted by the consultation was the re-localisation of the non-domestic rates. For the last ten years, although local authorities have collected business rates, they have not set the level of rates or kept the proceeds. Central government now sets a national business rate and redistributes the money to areas on a per capita basis. Re-localisation - a return to the pre-1990 system - is not something the government has favoured in the past, but there is strong demand for it from many in local government.

    Most consultation responses from councils argued that re-localisation would resolve the balance of funding problem and encourage better partnerships with local businesses. But business organisations do not see it this way - they fear that councils will simply raise business rates to untenable levels. Each area will have a different business rate leading, some say, to a postcode lottery for businesses.

    Of course, there are possible middle ways - for example, having strict limitations on possible business rate rises, or something like our proposed Local Authority Business Growth Incentives scheme, which is being introduced to reward councils that attract inwardinvestment without penalising business.

    I think few councils realise how much they benefit from the current system, because it does redistribute grant from areas with very large business rate yields, such as central London, to other parts of the country. Most areas would require a higher business rate to raise the same revenue that they receive through the current system. Alternatively there would be a need for a national equalisation scheme which undermines the principle of localisation. But again, the review needs to hear the arguments in detail.

    Finally, we come to the case for a 'mixed', or basket option of several smaller taxes. Historically, UK local government has raised most of its money through central government grant, council tax and business rates. It is not necessarily limited to these. Our consultation and research shows that both councils and the public welcomed the principle of people paying for what they use. They thought 'user charges' in certain contexts were fair.

    Other responses to the consultation argued that some national taxes eg vehicle excise duty could be 'localised'. Why not, they asked, give councils a basket of other possible revenue streams that they can - with their voters' agreement - use to raise money? There are difficult issues raised by all of these options, but we will be asking consultees for further evidence.

    Councils are already exploring new freedoms we have given them. The freedom to trade is giving considerable opportunities to councils. And business improvement districts offer the opportunity to local authorities to work in partnership with business to improve the attractiveness of local business areas using the proceeds of a supplementary levy on business. So what the review is looking at is new in one sense but in another is building on what is already there.

    I hope that from what I have said today, it is clear that we are not just aware of the concerns that so many people have about council tax levels, but we are actively working to tackle and remedy the problems. We are not just looking at short-term options. We are having a longer term look at the key issues. Indeed, we want to ensure that we have a system of funding of local authorities which will sustain us for years to come and which is fair and acceptable to all, not least local taxpayers.

    But in the meantime, I hope that local authorities will heed the message - a further round of unsustainable council tax rises in the coming year will not be acceptable, either to government or to council tax payers. Such a round of increases could do damage to public confidence in local government. It could also cause a conflict between central and local government which undermines what we do - working together for the people we were elected to serve.'

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