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SCOTS REJECT NEW FINANCE UPHEAVAL

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Scottish local government review...
Scottish local government review

>> Scottish Local Government Review investigates future of council funding

>> CIPFA favours council tax status quo

>> Call for localisation of business rates

By Mark Smulian

'Always keep a hold of nurse, for fear of finding something worse,' the poet Hilaire Belloc advised. Scotland's councils have taken this adage to heart and want to keep hold of the council tax for fear of finding something more complex and more difficult to collect.

Memories remain vivid of the uproar caused in Scotland by the early introduction of the poll tax, and politicians will tread carefully around any changes to council finance.

So many officers are hoping the country's Local Government Finance Review, which has been considering the future of the councils' cash for the past two years and is due to report to the Scottish Executive this autumn, will largely recommend the status quo.

However, a risk remains that due to party politics, greater change may be afoot. Both the Scottish National Party and the Liberal Democrats, respectively the country's second and third largest parties, have advocated a move to local income tax.

Parliamentary elections next year might see the Labour and Lib Dem coalition which has ruled since devolution in 1999 replaced, so the review's opinions on the effects and practicalities of any change will carry weight.

Councils pressed for the review in the hope it might somehow secure them control of more money, such as business rates.

The review's remit was to 'identify the pros and cons of implementing any changes to the local taxation system in Scotland, including the practicalities and the implications for the rest of the local government finance system and any wider economic impact'.

That is narrower than the remit enjoyed by Sir Michael Lyons' review of local government finance in England, which has grown to Topsy-like to encompass councils' powers and roles.

Scotland's review, led by former Bank of Scotland chief executive Sir Peter Burt, has also been less public than Lyons, holding its evidence sessions in private.

Alan Logan, chair of the treasurers' section at the Chartered Institute of Public Finance & Accountancy Scotland, and head of finance at West Lothian Council, says: 'The review team has been considering its findings for a quite protracted period.

'It is very tight and there have not been any indications of what it will opt for.'

He explains that CIPFA is 'very keen on the retention of council tax, with certain modifications', because it believes it is reasonably equitable and that the disadvantages of rival systems would outweigh any gains.

The organisation's submission to the review said its support for council tax 'relates principally to the collectability, predictability and cost of collection'.

Certainly, the poll tax legacy makes ease of collection in any new system an issue. Resentment over the poll tax led to a 'can't pay, won't pay' culture that became sufficiently embedded for Audit Scotland to flag up poor collection rates even 15 years later (LGC, 13 July).

Its figures showed that councils collected 93.3% of the£1.78bn due for 2005-2006. That might sound high, but it lagged behind the 96.7% achieved in England.

But despite auditors' concerns about collection rates, CIPFA feels they are acceptable, saying 'any tax which results in collection levels of this magnitude provides, in itself, a strong argument for retention and would maintain a link between local compulsory levy and local accountability'.

It instead calls for more council tax bands to make the tax more progressive, with a lower proportion of the burden falling on the lowest bands. It also wants to see business rates returned to council control to counter the 'gearing' problem.

This arises because the whole extra cost falls on taxpayers if a council spends more than the Scottish Executive expects it to.

According to CIPFA, a 1% increase in spending leads to a 4% rise in council tax and 'the gearing effect has an invidious impact'.

If councils could set business rates, with safeguards against excessive increases, some increased spending would fall on that source, rather than solely on domestic payers.

CIPFA does not totally oppose local income tax, and has researched the idea in a spirit of intellectual curiosity. It accepts it would be better related to ability to pay.

But it warns of costly demands on businesses, which would have to use multiple tax deduction rates since their employees might live in many different council areas, and against the importation of income tax avoidance techniques into local government finance.

CIPFA's Alan Logan says: 'Any transition from council tax to local income tax would take four years to implement effectively.

'Generally it would be far more burdensome than the existing arrangements.'

He also sees little demand for change, although a lone representative of the Scottish Senior Citizens Unity Party sits in the parliament, and there are protests from elderly people who feel penalised by council tax rises.

Don Peebles, CIPFA Scotland's policy and technical manager, points out that the country also has a review of public sector integration and an efficiency drive in progress.

'We argued that this review needs to be taken with the balance of funding and future of the public sector,' he says. 'Local government is relatively small, it is£2bn in council tax and national non-domestic rates out of£30bn that the Scottish Executive spends.

'The review remit is rather narrow and it should have been able to go into other expenditure issues. It should not report in a silo.'

Mr Peebles also thinks there is no great public hostility to council tax, but says the legacy of the poll tax remains a live issue because it 'raised the profile of local government finance for all the wrong reasons'.

The Convention of Scottish Local Authorities' review submission also stated bluntly 'the council tax system should remain', though it conceded a minority of councils support local income tax.

It called for an immediate property revaluation, left untouched since 1991, for additional payment bands and a simpler benefits system. It also supported CIPFA's view on the need to return business rates to local control.

Cosla reviewed not only council tax and local income tax but also the defunct poll tax and domestic rate options, and land value taxation. It concluded that council tax ticked all the boxes for 'ability to pay', 'easily understood', 'fairness', 'preventing avoidance', 'administratively efficient', and 'predictability'.

No other system met more than three of these criteria, it found. Its public affairs manager David Kennedy says: 'We asked for a review of local government finance and we were given one, so we cannot complain.'

Opinions differ on whether much can happen between when the review reports in the autumn and next May's parliamentary and council elections. But if the review does back any radical change perhaps Scotland will lead the way, as it did with the poll tax - though this time with happier results.

www.localgovernmentfinancereview.org

Property tax still the future for Scotland, says Don Peebles

Almost two years after its formation, the local government finance review committee in Scotland is expected to finally present its conclusions in late autumn. Deliberations on how to fund local government are, of course, nothing new. The Layfield Committee looked at it over 30 years ago. However, with the 'new' devolved arrangements in place, the opportunity presented itself to address the issue once again. So, just what kind of local taxation system should be in place to levy and collect£2bn from Scottish citizens? The review committee has been considering property based taxation; non-domestic rates; and perhaps more controversially, a local income tax.

The Chartered Institute of Public Finance & Accountancy Scotland has come down in favour of a progressive property tax. Further consideration should also be given to relocalised business rates and the introduction of a local income tax in the UK. This is based on a number of essential factors including costs of collection, collectability and predictability.

A reformed council tax, subject to corrective action on the present gearing effect, we believe represents the most appropriate basis for the future of local government funding.

Since the review commenced, other initiatives have gained momentum in Scotland, most specifically shared services. With local tax collection a key target area for shared services the final report from the committee will almost certainly have to be placed in that context.

The timing of the final report may indeed prove opportune. Not only will it highlight local government finance generally, it will act as a catalyst to place local government finance firmly on the agenda in advance of an election year in Scotland.

Don Peebles Policy and technical manager,

CIPFA Scotland

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