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.

If

  1. a council service costs £100 in year 1 and annual inflation is 3%
  2. and it is funded 70% by the government, 30% by council tax
  3. 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
TOTAL COST 100.0 103.0 106.1 109.3 112.6 116.0 119.5
Government pays 70.0 73.0 76.1 79.3 82.6 86.0 89.5
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.

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
Band A 820.26 844.87 870.22 896.33 923.22 950.92 979.45
Band D 1230.39 1267.30 1305.32 1344.48 1384.81 1426.35 1469.14
Band H 2460.78 2534.60 2610.64 2688.96 2769.63 2852.72 2938.30

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)

Band A 543.45
Band D 815.06
Band H 1692.54

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.

Advertisements

In my last brief post on the HelpGov blog nearly three months ago I forswore the mention here of Scotland’s independence referendum. Well, as will be obvious to all but the most news-averse reader ‘indyref’ as it became universally dubbed on Twitter has been and gone. I got the result I wanted (see the blog formerly known as No Thanks! but now renamed The Nation says No Thanks!) and my mind is relatively clear to return to the meat of public service issues.

Now there’s a slight cheat here because the subject of this first-post-for-three-months arises directly from said referendum I said I’d forswear.

Regardless of the result one of the features that everyone must have noticed was the high participation in the Yes and No campaigns and the high turnout: 85% of the electorate voted. There was also a burst of voter registration in the period running up to the deadline as these figures for Scotland show

  • Registered electorate 2012 – 4,060,000
  • Registered electorate 2014 – 4,280,000

Some of those on the new register were the 16 and 17 year olds who could vote for the first time. But many were older people who registered to vote for the first time, or at least the first time for many years.

And that’s the trigger for this post.

A number of councils have said they will use the new up to date and expanded registers to find residents who owe them money, in particular council tax and the long-gone poll tax. The charge seems to have been led by the last council I worked for, Aberdeenshire.

Instant outrage has followed.

A typical example was a local spokesperson for a group called Women for Independence, who is quoted in today’s Press and Journal as saying

The reason many people, particularly from poorer and disadvantaged backgrounds, stayed off the register was because of a suspicion that they would be targeted by councils for debts arising from the now-scrapped poll tax. Not only is this targeting the poorest but smacks of retribution for those people daring to find a voice in our democratic process.

The outrage is of course complete tosh although less polite words are available.

The facts are

  • it is entirely legitimate for a council to seek to recover debts owed to it, whether for the poll tax, council tax or any other reasons
  • those other reasons for debt range from business owners who disappear leaving business rates unpaid to housing tenants who do a flit owing rent
  • debts owed to a council are in effect debts owed to all of us as citizens
  • councils have always used as many sources of information as they efficiently can to recover debts
  • people who decline to pay their debts to a council do so for many reasons. A past political act in relation to the poll tax may be one but a not insubstantial proportion are people who won’t pay rather than can’t
  • poor people don’t have to pay all their debts off in one go but can come to an arrangement to pay in manageable instalments
  • no evidence has been presented to say that new entrants on the electoral register in 2014 are either so poor they cannot pay their debts or are more likely to owe their council money than any other electors
  • old debt is not somehow forgivable because it is old. The only criterion that should be used to write it off is an excessive cost of collection.

I am pleased councils are using every feasible means to collect unpaid debts. More power to their elbow.


Chancellor George Osborne has just announced that the coalition government’s council tax freeze in England will be extended to 2012/13 and will include the devolved administrations providing they abide by the same rules that he has set English councils (Scotland has already ‘enjoyed’ a council tax freeze for several years funded by its SNP government).

Put simply, the chancellor’s rules are that if a council limits its annual spending increase to 2.5% and does not increase its council tax the government will provide additional funding to bridge the gap.

Of course 2.5% is below the rate of inflation so in real terms councils are being asked to spend less money each year.  But that’s another story.

A typical headline that greets these initiatives is Chancellor throws lifeline to hard-pressed council tax payers.  I’ve invented that one but you’ll be familiar with the style.

These ‘freezes’ are typically said, in today’s easy cliché, to be a win-win-win situation:

  • The government wins because it helps keep inflation down and gets the credit for helping people (invariably characterised as ordinary decent hard-working people) in hard times
  • The council wins because it shares the credit for keeping the tax down
  • The council tax payer obviously wins because their tax doesn’t go up.

The truth is slightly more complex.

Take a look at the statistics.

Assume for ease of calculation a council with a yearly spend of £1,000,000, 75% of whose spend is currently funded by central government.  The £1,000,000 is unrealistically low (think 10 or 100) but the 75% is not untypical.

If that council accepts the government’s offer of 2.5% extra money and doesn’t increase its council tax, this is what happens over five years:

 

Year 1

Year 2

Year 3

Year 4

Year 5

Council spend

£1,000,000

£1,025,000

£1,051,000

£1,077,000

£1,104,000

Additional spend funded by central government

     £25,000

      £51,000

     £77,000

   £104,000

Total central government funding

  £750,000

 £775,000

   £801,000

   £827,000

  £854,000

% funded by central government

75%

75.6%

76.2%

76.8%

77.4%

In other words, the percentage of the council’s spending funded directly by central government creeps inexorably upward.

In the short term you might say ‘So what?’ and councillors certainly find it convenient not to have to raise the council tax.

But all concerned would do well to remember the old saying He who pays the piper calls the tune.

Scottish councils have already found this, with their council tax freeze linked to a concordat with the Scottish government that includes a single outcome agreement in which they and their local partners have to agree with the government how they will help deliver their national priorities.

A quick glance across the water to the Republic of Ireland gives a taste of what could eventually happen.  As Wikipedia (not always right but near enough on this occasion) puts it

Following the abolition of domestic property rates in the late 1970s, local councils have found it extremely difficult to raise money…[National government] is a significant source of funding at present…The dependence on Exchequer has led to charges that the Republic has an overly centralised system of local government…numerous studies…have recommended the reintroduction of some form of local taxation/charging regime, but these are generally seen as politically unacceptable.

To mix my metaphors, as the link between taxation and democratic representation is weakened councils will inevitably become more emasculated and increasingly the hand maiden of central government.

Not a good idea.