My response to the Local Government Finance Policy consultation

I’ve written most of this post on the train down to Birmingham for the Liberal Democrat Autumn Conference. The timing of my travel meant that I missed this morning’s consultative sessions, in particular the one on the local government finance. So this is my written response to the local government finance consultation paper instead. Posted online via the free wi-fi in the ICC.

• You can read the full consultation paper here

Over all this is a pretty soundly based attempt at practical steps towards the kind of funding arrangments for local government that Liberal Democrats have long argued for. The broad thrust of the paper should be strongly sported.

The paper proposes that local taxes should be based on a ‘four pillar’ approach of income tax, property tax, fees & charges and specific local taxes. I will take each pillar in turn.

Local income tax

The paper contains proposals for what is essentially an interim step towards the fully flexible local income tax that Liberal Democrats have long argued for. This involves directly allocating a share of income tax receipts to local government on a formula basis. Given that the political realities make moving to a full blown LIT in one go unrealistic I see this as a very sensible and welcome move.

However, it also introduces the idea that this formula would have a component based on the workplace as well as the residence. The idea is that areas that are centres of employment, and have to provide services and infrastructure to support those employment activities, where a high proportion of the workers live in another local authority do not lose out. It equalises revenue between areas with a residential or non-residential profile.

I think this idea is an attractive one but I would be concerned about public reaction. I am not sure how people would feel about paying income tax to an area where they do not live. I wouldn’t want public opposition to a “workplace tax” to scupper the more general goal of a more localised tax system.

Property Tax

I welcome the strengthening of the party’s commitment to land value taxation that this paper represents. I wouldn’t pretend to any great expertise in this area so I will refrain from commenting on the detail. However, I do have two general comments to make.

Firstly, I think it is really important when developing proposals for taxes on land and property to understand and carefully consider the impact of such proposals on the planning system. The interaction between such taxes and land use is complex and have the potential to be either hugely beneficial or damaging. Inevitably together they result in a policy choice about how we what our communities to develop, so we had better understand what we are doing before we start.

Secondly, there is the politics around a “mansion tax”. I have no objections to a mansion tax in principle. However, far more important is getting consensus around the idea of a move to some form of land value taxation. If a row about the introduction of a mansion tax is going to get in the way of that then, whatever the merits of the scheme itself, it is best avoided.

Fees & Charges

The idea that local authorities should be free to set fees and charges for the services it provides as it sees fit should be uncontroversial for anyone who is a true advocate of localism. I would argue for the maximum possible discretion to be given to councils.

Other Local Taxes

Again, I would support councils having the ability to develop new and innovative ways to raise revenues making use of the particular characteristics of their area. Shaping the funding of local services so that it fits with the nature of that locality has the potential to both improve the effectiveness of those services and place them on a more sustainable footing.

However, in developing this aspect of our policy I would like to see more concrete examples of how this would work in practice. The examples in the paper are too vague to use to judge the implications of this move.

The equalisation system

As the paper says; “Given the significant differences in local area revenue-raising opportunity, especially with regard to need, there is the need to have a clear and stable equalisation system to shift resources from the wealthiest to the neediest areas.” This is crucial to getting any form of local government finance to both work properly and have public support. Again, without claiming any great amount of expertise in this area, the system proposed in the paper seems to make sense to me.

The key characteristics any such system should have however are simplicity and transparency. The funding formulas that currently exist are so complex that even the most experienced local government finance officers struggle to get there heads around them. This makes it almost impossible for local politicians to engage in any meaningful debate around funding issues. Any new system should be no more complex than that required for a reasonably engaged member of the general public to understand it.

Central government funding

This is an area of the paper where I would like to see us go further. We need to see a shift to a situation where the majority of revenue received by local government is in effect “raised” locally. We also need to see a situation where local government has near total discretion on how to spend that revenue. The great barrier to creating this situation is central government. It has to be forced to let go.

While recognising that central government does need to retain some ability to provide specific funding streams to local government, we have to be very careful how we construct that relationship. The desire of different government departments to fund specific projects and areas of work is understandable. Yet the way in which this is done often is corrosive of local discretion and accountability. I would like to suggest the policy proposal that we implement a ban on any government department funding local government outside of a funding framework jointly agreed between the Local Government Association, DCLG, and the Treasury. In this way we can hopefully be able to police those funding arrangements to ensure that account is properly taken of localism.

Democracy: the missing element

Finally, I wanted to mention an aspect that is not talked about in the paper but that I believe to be a vital element of a working system of local government finance. That is how it directly impacts on the health of local democracy. Many, if not most voters, believe that what their local council spends is raised from what they pay in Council Tax. It might have something to do with the name. Yet despite the frequency of politicians campaigning on Council Tax levels at local election time, the truth is that this is a very small proportion of how local government is funded.

You don’t have to be a student of the American Revolution to recognise the important link between taxation and representation. Yet for local government across the UK that link is effectively broken. While I doubt that many Liberal Democrats would disagree with this point, I believe it is important that any proposals for reform of local government finance is clear about it’s connection with the health of local democracy. So we should make sure in any policy we propose how it would a) make local government finance understandable to the voter and b) capable of being influenced by the voter via the democratic process.

This content was originally posted on my old Strange Thoughts blog.