Jim McCormick: How to balance local government budgets?

Jim McCormick says we need a full debate and people with vision to solve the problem of local government funding. Picture: PA

New prime minister John Major moved quickly to charge Michael Heseltine with finding an alternative. Within weeks, the council tax was born, safely but in haste. It dealt with the crisis of the time yet, more than 20 years on, local government funding is the headache that hasn’t gone away.

Conservative governments used to fight battles with councils over rate-capping. The last Labour government ensured that English councils classed as high performers had looser control than others. Today in Scotland, a more subtle form of restraint is used. Elected on a pledge to continue freezing the council tax, the SNP government’s message to councils is clear: raise it if you wish, but face much heavier grant cuts than the 6.7 per cent real-terms cut over the three years to March 2015. Across the Organisation for Economic Co-operation and Development, most governments accept that spending has to fall and taxes rise to deal with budget deficits. But for local government here, only the first part of the equation applies.

Fresh evidence published this week by the Joseph Rowntree Foundation shows how five Scottish councils are dealing with the social risks of spending cuts. The findings, from a public finance team at Glasgow Caledonian University (GCU), show councils reducing discretionary services, which often have a long-term preventative effect. Given their role in delivering public services in communities most affected by austerity, local authorities should be well placed to mitigate the risks for disadvantaged groups. Yet they face considerable organisational risks of their own in managing austerity – and precious few options.

First, though, credit where it’s due. The Scottish Government and the Convention of Scottish Local Authorities (Cosla) were swift to act when the UK coalition announced its plan to devolve council tax rebates and cut the budget by 10 per cent. While different schemes will apply in 326 English councils, creating complexity and higher bills for low-income households, Scotland will have a simpler scheme of council tax reduction. The hole in the budget will be shored up from existing resources. But we’re still left with some tricky underlying issues, which a perma-freeze on council tax doesn’t resolve.

One lies in the relationship between councils and the Scottish Government. The “concordat” setting out how they work together has pegged grant payments firmly to council tax being frozen. At a time of grant cuts – and the impact of welfare reform now unfolding – councils which want to avoid major service cuts have few choices. As the GCU research makes clear, councils meet only about a fifth of their typical revenue expenditure from local sources (council tax, fees and charges). This is low compared with northern European neighbours, but has been a consistent feature here for decades.

So, to increase spending on main services by 1 per cent, income from councils’ own sources would have to rise by 5 per cent. This makes it very hard for councils to manage austerity other than by cutting expenditure on services and staff in line with the speed and scale of grant cuts.

To get round this, the Scottish Government would need to relax the extent of grant clawback to allow councils to keep more of their own income. It could make this conditional so that extra income would be earmarked for particular types of spending – for example, to advance the Christie Commission agenda of prevention which will in any case need to be reflected in mainstream budget decisions, beyond the bold but tiny Change Funds set up to improve early years support, reduce  reoffending and shift the balance of older people’s care. Or it could just allow local democracy to work its way through, with councils accounting for their choices to the local electorate in 2017. Resolving this tension is even more important than deciding which local taxes to use.

Either way, it’s hard to defend the view that austerity has been equally bad for us all. Actually, Scots are not all hard-pressed. Incomes have certainly dropped fast in the middle and will now be squeezed harder still at the bottom by a freeze on working-age benefits and tax credits. Meanwhile, the better-off among us still have much higher incomes, savings and assets than the average. So it’s not unfair to allow councils to ask them to contribute more, especially after five years of a tax freeze worth more in hard cash to the better-off.

In the short term, a twin-track approach could be taken if legislation were amended. Middle and lower-banded homes could continue with a freeze, while higher-rated properties could see the council tax rise in line with prices.

If Prime Minister David Cameron loses the 2015 UK election, the next government might support a mansion tax in England. What would Scotland do? Probably not much to start with. By then we will be in the last year of the current SNP government’s term. It will be busy negotiating independence or making a fresh case for more devolved powers. And we will be a year away from the next Holyrood election.

Beyond that? As Scotland on Sunday’s Kenny Farquharson observed last year, there will be champagne corks flying in Morningside if Scotland does nothing. The simple option is to add extra bands to include more expensive homes. Finance secretary John Swinney’s plans to replace stamp duty with a land and buildings transaction tax would cover sales, but not the regular cost of paying for local services.

Even then we’re still left with further challenges. More than half of low-income households are paying the full rate of council tax. These people usually lose help with their bills on relatively low wages. We don’t know if the new Universal Credit will help. But we do know that the very slow rate of improving support over the past decade has dragged more and more of the working poor into the net of paying full council tax.

In addition, proposals to raise property taxes on more expensive homes meet the objection that those households are not all well-off. True, but analysis of the benefits that flow from local government spending show the middle-classes making greater use of cultural, leisure and environmental services. They tend to use more and, through property taxes, pay more. Property taxes are visible and hard to evade. But there’s still an element of rough justice about relying on them alone.

Enter local income tax (Lit). In the last parliament, the SNP and Liberal Democrats couldn’t agree on introducing Lit. Approaching the Holyrood 2011 election, exit local income tax – at least for the SNP. It’s unclear if it was regarded as the wrong policy or the wrong timing with income tax revenues taking a nosedive. It’s not clear why a combined tax base – property plus income – was ruled out.

Ahead of the 2014 referendum, there is time to escape the strait-jacket of the current position on local government finance. We shouldn’t expect detailed plans for reform after independence or further devolution, though both Greens and Liberal Democrats at least deserve credit for consistency in their respective support of land taxes and Lit. These are, instead, the stuff of party manifestos. But we should expect a serious debate on competing visions for how we can pay for services locally. And, in the meantime, we must press for better ways to enable local services to deal with the full force of austerity.

• Jim McCormick is Scotland adviser to the Joseph Rowntree Foundation. Managing the social risks of public spending cuts in Scotland by Darinka Asenova, Stephen J Bailey and Claire McCann is available at www.jrf.org.uk