WHAT’S HAPPENING TO COUNCIL TAX? DON’T SWITCH OFF – IT’S IMPORTANT!

The UK’s system of funding for local government* is in a mess – and getting rapidly messier. Let me explain why. Take the current budget forecasts for Wandsworth Council. They have become byzantine. One line in the forecast for the financial year 2018-19 2018 shows that the Council has been allocated a £12.9 million grant known as the New Homes Bonus Funding (NHBF). Extraordinarily, ten years ago no one would have known what this acronym meant. Yet now it is closely matched by an estimated income of £11.9 million from the equally bizarrely named Improved Better Care Fund (IBCF). Each of those separate sources of income is almost as large as the traditional Revenue Support Grant; and from next year onwards, they are forecast to be larger.

The New Homes Bonus Funding was intended to incentivise local authorities to build homes. In Wandsworth it has been so successful that the Council has the second highest level of NHBF grant in the UK, after Tower Hamlet’s massive £20.7M. By contrast, Wandsworth’s linked* Borough of Richmond receives £2.2M from this fund; and Wandsworth’s neighbours Merton and Lambeth £2.4M and £9.7M respectively, approximately a tenth and less than half of Wandsworth’s.

Is there any real rhyme or reason about this state of affairs, other than it being a reflection of the amount of available building land? And does anyone think that the current explosion of development in either Wandsworth or Tower Hamlets is sustainable in the longer term?

If the new system has incentivised anything, it has incentivised local authorities to give planning permissions for larger, higher and more dense developments. Developments that are notorious not as homes but as ghost towers, safety deposit boxes for funds often of dubious origins and designed to gain speculative profits for their usually foreign owners. Developments, moreover, that are unpopular with most of the local residents who live nearby; and which are not doing anything to resolve London’s urgent need for low-cost accommodation.

Meanwhile, the Tory Government continues to reduce the Revenue Support Grant (RSG) each year, as indeed it said it would. Its ultimate aim is to end central government financial support for local government. However, the policy has already run into predictable problems. For example, financially-strapped Councils are struggling to carry out their statutory duties with disastrous consequences for the provision of social care. To compensate, the government has had to introduce and now increase grants from a new Improved Better Care Fund (IBCF).

This is, of course, a misnomer since the fund provides neither an improved nor a better service than the care system as it had already operated under the Revenue Support Grant. It is, however, specific, tied funding from central government, targeting one specific service. That outcome is precisely what local government had repeatedly said that it did not want, because it implies much more, and more specific, centralised control. Ear-marked funding means that there is no scope for sensible local adjustments to changing patterns of need – and no scope for local decision making. That’s a sorry state of affairs that – in theory – the Tory government says that it too does not want.

As part of setting local Councils ‘free’, the Tories now offer Councils control of the local Business Rates, the property tax paid on all commercial and industrial businesses within a Council’s boundaries. Yet the funds raised from such a source are wildly unequal across Britain. It therefore leaves Council income disastrously at the mercy of the rise and fall of business activity, which is almost totally defined by geography and geology, i.e. how near to London, or to North Sea oilfields, or to major commercial hubs each particular authority happens to be.

So the Tory government has introduced a Business Rates ‘top up’ scheme. In Wandsworth’s case, in 2018/19 the top-up of £35.650M is very slightly more than Business Rates themselves at £35.594M. So, what does this manoeuvre mean? It is actually a rate equalisation grant, designed to balance what would have been the massive inequalities of a few Councils in the midst of property booms having money to spend, whilst most Councils elsewhere are desperately short of funds – in practice Councils are no more “free” of central allocation than they ever were.

At the same time as all these muddling interventions from central government, the real local tax, the Council Tax, becomes less and less significant. Both major parties are absolutely aware that, at less than 10% of the budget, its impact on Council finances today is minimal. Both parties also know that the legal scope for raising Council Tax is very close to zero. In Wandsworth, that state of play won’t stop the majority Tory party from running scare stories about Labour’s alleged profligacy and the risk of Council Tax rises. However, such accusations will be shadow boxing, while Councils everywhere lose money, lose any semblance of local autonomy, and carry the can for failing services, which are actually failing for lack of either proper or reliable funding.

The irony is, of course, that the historic system of Domestic Rates, levied on housing property values, which was the traditional way of raising money for local government, was beautifully designed to tackle a modern-day curse – under-occupation. That is, to raise reasonable (not outrageous) sums of money from people in very large properties who otherwise pay hardly anything in local rates. When under-occupation is detected in the state sector, it is brutally both controlled and penalised by forcing council tenants to pay the notorious Bedroom Tax. Introduced by the Tories in 2013, it was described as removing the ‘Spare Room Subsidy’ (i.e. ending the so-called subsidy from the state to tenants who had under-used rooms).

Yet, in the private sector, under-occupation is neither controlled nor penalised. The result is not just that half of the British population live in spacious luxury and vote for penalising the poor but also that Britons live in the country with the lowest taxes on private housing in the world, outside of mini-statelets like Monaco. Exactly, of course, the reason why in 1989-90 Thatcher abolished Domestic Rates in favour of the failed Community Charge (Poll Tax).

Remember that? Since then successive governments have struggled to find a reliable and fair basis for funding local government. This current Tory administration is lurching from expedient to expedient. The system is becoming ever more byzantine – and under-funded.

So, whilst the British people want and expect first-world standards and services, they have been simultaneously encouraged to expect third-world levels of taxation. The result is that Britain gets aircraft carriers without any aircraft; a health service once admired across the world but now financially on its knees; an education system collapsing under the weight of failing and corrupt out-sourced academies; a probation service run by unaccountable, monopolistic out-sourced companies who cannot even deliver basic security; a costly railway system heartily loathed by its customers; and a political system which holds out promises of services which it cannot deliver.

It’s a genuine tragedy that, amidst these massive challenges, local democracy is being threatened as never before. Local government finances, and therefore essentially local government itself, have been nationalised to within an inch of their life. But the resultant byzantine system simply doesn’t work. It doesn’t work for local Councils or for the central government – or for the voters.

Council finances need proper reform. The system needs to return to something like domestic rates – which need regular revaluing, to take account of changing property values – and a modest degree of rate equalisation between wealthy and poor regions. It’s not rocket science. It’s the lifeblood of local democracy.

∗  This the Text of a speech that was prepared for delivery at Wandsworth Borough Council Meeting on 7 February 2018 but not delivered.

∗  The administrative systems of Wandsworth and Richmond Borough Councils have been merged since 1 April 2017.