'Hundreds of millions' needed to fully fund Humza Yousaf's council tax freeze

Local government insiders say ‘hundreds of millions’ needed to fund the council tax freeze.

Humza Yousaf’s council tax freeze could cost hundreds of millions and potentially as much as almost half a billion to fully fund as local authorities held crisis talks with the Scottish Government over the plans.

The First Minister announced the freeze in his leader’s speech at SNP conference on Tuesday, but councils have reacted with fury to the surprise announcement.

The SNP leader will meet with council leaders today to discuss the policy and how to move forward.

First Minister Humza Yousaf after his speech during the SNP annual conference at the Event Complex Aberdeen (TECA) in Aberdeen.

Planned reforms to council tax bands was expected to raise as much as £175m in total for local authorities, with around £100m coming in the first year of the changes.

Councils are likely to request at least this amount from the Scottish Government, who said a fully funded freeze equal to cover a potential 3 per cent rise in council tax would cost around £100m.

Most local authorities were likely to increase council tax next year well beyond that level, with some understood to be contemplating increases of as much as 10 per cent, with matching an average rise of 5 per cent to cost around £125m-£150m.

Council insiders said the figure required to solve the dispute between local authorities and the Scottish Government would be in the “hundreds of millions”, with some suggesting as much as £1bn would be demanded.

However, the Government is understood to have limited sympathy for councils who were banking on the reforms to council tax becoming law, with no commitment previously made to legislate for the changes before the next set of council budgets.

These would have seen some increases of around 22 per cent for those in the highest band and proved politically damaging during the Rutherglen by-election.

Sources state the freeze is a reminder to voters the SNP remains on their side, particularly during the difficult times of a cost-of-living crisis. There is also the belief the opposition, particularly Scottish Labour, lack a plan to tackle such a move and the previous freeze "tied Scottish Labour in knots”.

Many councils in Scotland, including East Lothian, Edinburgh, Fife and Stirling, are controlled by Scottish Labour minority administrations.

The freeze forces those councils to either sign up or to argue for council tax increases, something which would likely be ruthlessly exploited ahead of next year’s general election.

However, for the freeze to take effect the Scottish Government needs to reach an agreement with councils on how much additional funding would be provided to make up the difference in income and to protect local services.

Experts said fully funding the freeze would create a “fiscal gap” of around £250m at the least, with cuts either needing to be found within the Scottish Government budget or council budgets.

David Phillips, of the Institute for Fiscal Studies, said the Government only funding a projected average planned council tax increase of 2 per cent or 3 per cent would be “really challenging” for councils.

He said: “Even with a 5 per cent council tax rise, we thought that councils could need to make cuts to quite a range of services next year, given rising pressures for social care services. Even if the Scottish Government fully funded a 5 per cent equivalent, next year would still be very tough for Scottish councils. Of course if they only fund 2 per cent or 3 per cent, that makes it really challenging.”

The Fraser of Allander Institute said the shortfall for the freeze to be fully funded was closer to £420m.

In a blog post, they said: “The true size of the shortfall will depend on what councils were actually budgeting for. If we assumed an 8 per cent increase was being planned – which is lower than some councils implemented last year, and would still not bring much in terms of real increases in funding for local authorities – the total shortfall would be £417m (£229m from the freeze plus £188m from not increasing the multipliers).”

Scotland’s umbrella body for councils, Cosla, reacted with fury to the freeze on Wednesday, saying they deplored the manner and substance of the announcement.

The organisation said there was “no agreement” with the Government to freeze council tax, leaving open the possibility some local authorities could defy the policy.

Demanding a meeting with Humza Yousaf, the body also held crisis talks with deputy first minister Shona Robison.

In a statement prior to that meeting, Cosla’s president Shona Morrison and vice-president Steven Heddle said: “It has been shown that previous council tax freezes have been regressive, having no impact for the poorest in society and eroding the council tax base, compounding councils' ongoing underfunding.

“We will explore the implications arising and what the Scottish Government might propose when we meet with the Deputy First Minister later today. But we are clear that local taxation and particularly council tax should be left for democratically elected councils to determine.”

The Scotsman understands the meeting with the finance secretary recognised the announcement of the freeze was a “complete break” from the recently signed Verity House Agreement between local councils and government. Sources said representations were made in a bid to keep the agreement, which set out how local and central government should work constructively together, alive.

A lengthy negotiation over the final cost of the freeze is also anticipated.

The decision to freeze council tax also drew the ire of the SNP’s coalition partners, the Scottish Greens, who were only informed on the morning of the speech of the change in policy. The party’s finance spokesperson, Ross Greer, said he understood the anger from local authorities.

He said: “I know that Green councillors and SNP councillors are not at all satisfied, not at all happy with this announcement. Green MSPs don’t think that this is the best policy decision to be taking forward, which is why we are going to make sure, through the influence we have as part of the government, that this is fully funded, that councils are supported, and we continue delivering on other green measures like removing peak time rail fares, like the support we’ve given through the Scottish Child Payment.”

Council tax is a small percentage of how local authorities are financed, with the bulk of the more than £15bn in funding coming from Scottish Government grants, with council tax estimated to provide around £2.6bn.

On top of this, authorities are able to charge for services and issue fines, which government figures state add a further £9bn to their overall income stream.

The IFS state council funding fell 9.5 per cent in real terms between 2009/10 to 2018/19, but has since increased and is now just 3 per cent lower than in 2009/10. However, this is in part due to increased responsibilities, with funding being 6 per cent lower than in 2009/10 when new childcare funding is stripped out.

This demonstrates the scale of cuts faced by councils, and why services are under significant strain.

However, speaking to the BBC on Wednesday morning, Mr Yousaf defended the policy. “We will make sure councils are funded by the Government for that council tax freeze,” he said.

“Let’s be frank with each other, we’re living in a cost-of-living crisis. I, in my constituency surgeries, see people who are on above average salaries come to my constituency offices and ask for financial help. People who are nurses, who are police officers, who are teachers.

“Therefore it is right that in this cost-of-living crisis, we try to help them with bills that are rising and rising and rising – one bill we are able them to help with is the council tax.”

Scottish Labour’s Mark Griffin said families struggling with the cost-of-living would “welcome this U-turn”, but said the Verity House Agreement was “dead”.

He said: “There are now serious concerns that this freeze will leave already underfunded councils even more out of pocket.

"The SNP must ensure that any shortfall this causes will be made up from the central government budget, so that it does not come at the expense of vital local services on which communities depend."

Liz Smith, the Scottish Conservative finance spokesperson, said “serious questions” were posed about how the freeze would be funded. She said: “Local authorities have already made their anger clear as to how this could shatter the recent agreement between councils and the SNP-Green government.

“The SNP repeatedly ignored Scottish Conservative calls to deliver a fair funding deal for our councils and now we see the chaos which has resulted. Now they must be upfront as to how it will be delivered, and if local services will bear the brunt of more cuts.”

Cllr Peter Barrett, the Scottish Liberal Democrat local government spokesperson, said the council tax freeze was a “short-term stunt for political gain”.