This post may seem ironic to people working in local government in England where both their functions and the funding they receive from central government to provide them have been and are being so drastically cut. The actual circumstances I set out apply directly to Scotland (I pick up the political aspects of those circumstances in my other blog). But the arithmetic and the issues are relevant anywhere a higher level of government helps fund a lower level.
People don’t like paying taxes. They especially don’t like paying them when it’s very obvious (unlike, say, VAT) and when a bill for them arrives, literally, through the door. And they don’t like paying more taxes in times of inflation or when they feel hard pressed.
Local government, throughout the UK, has for a long time received most of its funding directly from central government. How much they get and why is a complex story. But crudely speaking, about 70% of council funding has come from central government. Some of the rest comes from income (parking fines, housing rents and so on) but much of this is, to use the jargon, ring-fenced for specific purposes. So, also crudely speaking, we can say that councils have received about 30% of their income from local taxes – once upon a time domestic rates, briefly and notoriously the poll tax, and now council tax.
Because of its visibility, people are very conscious of increases in council tax levels. They don’t like it. They moan to their elected representatives at all levels and the government comes under pressure to ‘do something’ about it.’ The ‘something’ they’re sometimes tempted to do is institute a council tax freeze, paid for by them in exchange for certain commitments by councils (I examine the Scottish example in my other blog).
There are two unintended consequences of a council tax freeze of this sort.
First, over time central government funds a greater and greater percentage of council spending. The following table illustrates this.
- a council service costs £100 in year 1 and annual inflation is 3%
- and it is funded 70% by the government, 30% by council tax
- and the government agrees to pay for the maintenance of that service at existing levels providing the council agrees not to increase council tax
this is what happens.
|Year 1||Year 2||Year 3||Year 4||Year 5||Year 6||Year 7|
|Council tax pays||30.0||30.0||30.0||30.0||30.0||30.0||30.0|
|% paid by government||70.0||70.8||71.7||72.6||73.4||74.1||74.9|
So in seven years, in this simplified example, central government funding increases from 70% of a council’s spending to virtually 75% (three-quarters) and the longer the freeze continues, the higher that percentage will creep.
I spell out some of the detailed consequences of this in Scotland in my other blog that I’ve already mentioned. But the general point, as the old saying has it, is that he who pays the piper calls the tune. And the more he pays, the more he calls the tune.
The second unintended consequence is that wealthy people benefit more from a council tax freeze than poor people.
This can be illustrated by the situation where I live, in Aberdeen. There are seven council tax bands based (historically) on the value of your house or flat. Each band is set as a percentage of the middle Band, D, a sort of rough average.
The table below shows what the council tax is in 2014/15 for the lowest, ‘average’ and highest property bands in Aberdeen. If the council tax freeze were to continue for seven years, council tax would stay at those levels – £820.26, £1230.39 and £2460.78 respectively. The table shows what council tax would be if inflation continued throughout at 3% per year and there were no freeze.
From this information it is easy to calculate what people in each band would save with a freeze (the difference between 2014/15 and 2015/16 + 2014/15 and 2016/17 etc)
So the taxpayers in the highest council tax band save £1149.09 more than those in the lowest band.
You may object to this on the basis that the council tax is based on housing prices not incomes. What about the little old lady with a small income who lives in a large house inherited from her parents? What about the self-made millionaire who never moved out of his council house? Of course extreme cases like this exist. But on balance we can be sure with some confidence that in most cases the value of the property that people live in reflects their wealth and income. So a council tax freeze tends to benefit the better off more than the poor.
My contention is that both this and the increasing reliance of council funding on central government are unintended consequences of a council tax freeze. To keep the technical and more overtly political aspects of this separate I look at some of the wider implications in my The Nation says No Thanks! blog.