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Bellicose ministerial threats about capping council tax next year need to be taken in context. ...
Bellicose ministerial threats about capping council tax next year need to be taken in context.

This government has never yet used its reserve capping powers, despite years of sabre-rattling. Indeed, in March the Opposition attacked deputy prime minister John Prescott for threatening capping this year, but then not following through. Actual capping, rather than spin about the possibility, would represent a fundamental shift in government policy.

It would smash the covenant with local government on moving towards greater council powers and financial freedoms. Local democracy would be weaker and ministers would no doubt have less to say about what services should be pruned after capping. If introduced for 'excellent' councils, capping would fatally undermine the credibility of the comprehensive performance assessment and break an explicit promise.

Perhaps the furore is more about influencing councils' budget-making decisions than a desire to recreate the capping rows and savage service cuts of the 1980s and 1990s. However, this hard Whitehall line cannot resolve the council tax crisis, which is not of local government's making.

Like others, I was fascinated to see the outcome of the Audit Commission's investigation into the reasons for this year's high council tax increases. The Local Government Information Unit had already commissioned research from independent financial consultants Rita Hale Associates, which will be published in the new year. This analyses the funding of local government over the past 20 years and the reasons why the present financial regime is unsustainable. A number of contributory factors to the present crisis emerge.

The first goes largely unreported - basic underfunding, given demographic pressures and expectations. Planned spending on the NHS has risen by 140% since 1990, but for local government this figure is 130%, despite similar inflationary pressures. The Local Government Association reported an £800m funding gap in 2004-05, about half of which was co vered by the government's recent settlement.

Another largely ignored pressure is the declining proportion of local expenditure being met by business. Since the non-domestic rate was nationalised in 1990, rises for business have been pegged to the rate of inflation, way below the government's planned council tax rises.

A more commonly quoted contributory factor to council tax hikes is the unhealthy balance between central and local funding. Relatively marginal changes in local expenditure, or in Whitehall grant distribution, cause wildly disproportionate council tax increases. This factor combines with the massive rise in specific grants and central direction over local spending, to place council tax increases consistently above inflation alongside severe cuts to those services, such as highways, that enjoy a lower political priority in Whitehall. Rita Hale's research provides some remarkable statistics on the growth in directed funding for national priorities, the consequent destabilisation of council budgets and the impact on council tax bills.

Tough-sounding ministry statements on the need for restraint, infused with the innuendo that councils are generally profligate, cannot alter the root causes of the problems. Neither would the use of the capping weapon itself.

Just as night follows day, councillors will soon face a miserable choice between high council tax rises or service cuts. They will probably choose a combination of both, boxed in by an unsustainable finance system and a regressive tax.

The balance of funding review and the chancellor's 2004 spending review must come up with some radical answers - and fast.

Dennis Reed

Chief executive, Local Government Information Unit

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