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THE CENTRAL PROBLEM

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Fundamental reform of the local government finance system is vital to a healthy democracy, says Richard Williams, e...
Fundamental reform of the local government finance system is vital to a healthy democracy, says Richard Williams, executive member for finance at the Local Government Information Unit. Simply tinkering does nothing to address the problem of lack of local control.

Since 1990, when the poll tax was introduced and business rates centralised, there has been little change to how councils raise finance. This is despite recognition in the local government white paper of the issue's central importance.

There is a real danger the present murmurs about the centralisation of education and social services budgets will put local government on the defensive at a time when we must be forcefully putting forward the case for more local control, not less.

That is why the Local Government Information Unit, after consulting more than 150 councils, is launching an agenda for local government finance as part of its programme for local democracy in the 21st century.

Whatever the many arguments against change, the centralised nature of the local government finance system stifles innovation, distorts accountability and is inconsistent with healthy local democracy.

We want to see change across the system. The major reform has to be in the relationship between central and local government. There is a democratic case for loosening the controls on finance, but there is an economic case as well.

The government continues to control the finance councils raise themselves, through reserve capping powers and the withdrawal limitation scheme for council tax benefit subsidy, when there is no macro-economic case for doing so. The government seems to accept its case for control is largely political.

Local people should decide on the future of local services and their ability and willingness to pay for them. The system of capital controls is even more restrictive. The LGIU and its 150 affiliated councils want to see the removal of the reserve capping powers and the council tax benefit subsidy limitation scheme.

Is the government beginning to accept central controls need to be lifted? There is no sign of movement on the revenue side, but there seems to be greater consensus over capital finance.

It is reviewing capital finance and considering ideas that would lead to greater freedom over borrowing. The capital finance system is centralised and complex. It undermines sound investment strategies - new investment is restricted, even when it is needed to protect assets or when it could provide income to fund further investment.

The government has commissioned research into the possibility of replacing the controls with a system enabling councils to borrow subject to prudential accounting limits. It has published a joint paper with the Local Government Association looking at options for change. Options, however, are only one step.

We have campaigned for a change to the method of accounting for public enterprises. We want to see the government switch from the public sectornet cash requirement, to the general government financial deficit used in the rest of Europe.

The GGFD allows a more flexible treatment of self-financed public sector investment and enables public bodies to invest in assets on the basis of their value and revenue stream.

The central issue is local accountability. How can councils be seen to be accountable to residents when local taxation counts for less than 25% of council income? The government claims there is no evidence to link accountability with a higher share of locally raised funding. We reject this argument.

The most direct way of increasing the proportion raised locally would be to return the business rate to local control, but we want the government to consider additional sources of local taxation.

The government is reviewing how central government grant is redistributed. The current system is deeply flawed. There is little consensus, however, on how it should be changed.

The DETR seems to be looking at a system that would distribute a proportion of grant based on councils' forward plans, probably combined with a simplified version of standard spending assessments.

The LGIU has concerns about this. It would increase central control and could produce instability. The government should focus on reforming SSAs so they are more transparent and reflect the needs of an area.

We want to see more imaginative thinking. We need a system to encourage innovation, joint working and flexibility. We support initiatives from the LGA which attempt to balance meeting national objectives with a greater degree of autonomy to respond to specific local circumstances.

The local government finance system needs to underpin the modernisation agenda. The present system undermines it. There will be no genuine local democracy without fundamental reform.

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