Finding fiscal freedom – to deliver | Cllr Sam Chapman-Allen, chairman, District Councils’ Network
By Cllr. Sam Chapman-Allen, chairman, District Councils’ Network
District councils need freedom and certainty if their critical services – that promote good health and well-being and deliver housing and economic growth – are to continue on a sustainable footing.
Freedom is ultimately about greater fiscal autonomy: a wider range of sources of finance, including taxes and charges, which local councils set and retain, or which are automatically allocated to them without interference from central government.
This shouldn’t be filed away in the “too difficult box”. I’m proposing a practical set of proposals for fiscal freedom, which could easily be delivered across the lifetime of the next Parliament. There are some changes that shouldn’t wait that long.
On the face of it, districts already have a high degree of fiscal autonomy. Council tax represents over 50 percent of net revenue expenditure, much higher than other types of tax. But it is the only tax controlled by councils and is heavily fettered by the referendum principles set each year by Parliament.
Democratically elected councillors should be accountable to the electorate for their decisions on council tax, in the same way as MPs in respect to national taxes. National tax decisions are not subject to referenda. Likewise councils should not be subject to blunt national tools that are tantamount to universal capping. It is highly unlikely that any referendum would result in a vote to approve a higher increase than is set out in referendum principles.
For several years, districts have been constrained to council tax increases which, at Band D, would be lucky to pay for a pint of beer across a year. We need to see referendum principles raised very significantly as a first step to removing referenda altogether.
We also need freedom for planning and licensing fees. They should be set locally so that councils can at least cover the costs of delivering these services. A well-resourced planning system is the best guarantee that councils will be able to plan for and secure housing and economic growth in ways that protect the environment, ensure well-designed developments and deliver levelling up far more effectively than bureaucratic bidding processes run from Whitehall. Government action to increase current fee levels should be a steppingstone to legislation to free councils to set the fees themselves.
Penalty charges for environmental and other offences should be increased, not only to provide a deterrent but also to ensure that a greater proportion of the cost of enforcement is covered.
Greater freedom to raise income should go hand in hand with greater freedom to decide how to spend income. To take just one example, district councils with off-street car parks face restrictions on the use of car parking income. It is time to trust councils to decide how any surplus will be used to support local services. It is not profit that goes to shareholders. Legislation should lift current restrictions, and governments should not be tempted to fetter existing powers to charge. Many districts make a surplus from providing collection of trade and garden waste and reinvest any surplus in other services.
How can we go further? In future, we need to see a wider basket of taxes and charges at the disposal of districts and other councils. In comparison with local government in most other parts of the world, councils in the UK have very limited fiscal autonomy. OECD data shows that the proportion of UK taxes raised at sub-national level is only 5.1 percent. This compares to 13.5 percent in France and 32.3 percent in Germany. It also shows that there has been very little change in the proportion of UK tax raised locally over the past 20 years3. In many countries, local government has the power to raise an array of local taxes and much greater discretion over how to spend the money than councils have in England4.
District councils should have the ability to charge a supplement on second homes and should retain all the extra income to respond to their impact on local housing markets. There should be universal schemes for the licensing of private rented sector properties and short-term holiday lets, with the fees set and retained by district councils so that the costs of monitoring and enforcement are covered in full.
Legislation to introduce a tourist tax is long overdue. Such taxes are very common elsewhere in the world. The tax should be set and retained by districts in shire county areas – to fund additional costs associated with tourism such as litter and waste, but also to fund facilities and initiatives that benefit tourists and local businesses and residents alike.
Business taxes have always funded local services. Yet we’re left with the worst of all worlds: an unpopular tax set by central government but collected by councils. We need to explore options for greater local control, not simply retention of growth, as well as options for a different base to the tax – whether it remains based on property or shifts to other measures such as turnover.
With freedom comes difference. As a nation, we are too concerned about variation and the “postcode lottery” – taxi licences, parking fees and council tax are just a few things that cost different amounts in different areas now. Greater fiscal autonomy will inevitably mean more variation, with local politicians accountable to local residents for the decisions that they take on how to strike the balance, rather than councils being constrained by out-moded and inefficient central control systems.
Freedom provides greater certainty to districts as they will control more of their own financial destiny. But the government also needs to provide certainty through longer-term grant settlements, covering a minimum of three years ahead at any given time. We don’t need legislation such as the NHS Funding Act 2020, which gave the NHS minimum total funding figures for four years. The government simply needs to run a proper forward-looking budget process every year – just as councils do – so that there is always a three-year run of figures for all services.
Government grant still has its place for districts primarily to equalise resources, recognising that not all areas have the same ability to raise income from taxes and charges, or that some areas face exceptional costs that lie outside their control. We recognise that some areas have low property values, constrained ability to grow housing because of tight boundaries or National Park/AONB restrictions, or a large proportion of remote rural communities to serve. Conversely, other areas serve compact urban areas or have high property values, plenty of land for development or large numbers of second homes.
Secondly, grant can incentivise outcomes. An incentive such as the new homes bonus should remain a feature of local government funding, with at least 80 percent going to district councils, to incentivise planning authorities to deliver housing growth, particularly in the absence of housing targets. It is not enough that they gain extra council tax income.
Finally, grant is required to meet the full cost of new requirements imposed by legislation or the government’s administrative requirements, where that is not covered by any new charges or taxes being introduced as part of reform.
We also need to see the plethora of specific grants simplified. Ideally, they would be rolled into general grant. But, if not, there should be fewer funding streams in areas such as housing and homelessness and all grants should be distributed by formulae. It is time to end the cost and bureaucracy of competitive funding pots for councils and for the civil service. For example, all areas have levelling up needs, to a greater or lesser extent, and a formula could be devised to ensure those with the greatest needs receive the largest allocations of levelling up funding.
Without radical change to deliver freedom and certainty for district councils, they will face a growing struggle to invest in their people and places. The National Institute for Health Research has demonstrated how local authority budget cuts have a negative impact on local economies, cost lives, and contribute to falling life expectancy. Districts need to be able to play their part in ensuring that there is good quality, affordable housing to meet communities’ needs; in improving health and well-being; in driving local economic growth; in reducing crime; and in undertaking preventative and early intervention activity, which shields the rest of the public sector, especially the NHS, from excessive demands. In short, districts need fiscal freedom and certainty in order successfully to level up their places.
We need clarity that this and future governments support these activities as the purpose and functions of district councils. Without fiscal freedom and certainty, then we will instead need an honest debate about what districts can realistically be expected to achieve if the current sub-optimal, constrained, and bureaucratic system of financing is maintained.
We recognise that funding formulae are out of date. While the fair funding review and business rates reset present risks to districts, the right thing to do is have up to date formulae and to maintain them. But we also need other things brought up to date. There should be council tax revaluation and – based on the Chancellor’s point that people with the broadest shoulders would bear the heaviest burden – the introduction of more, higher bands for the most valuable houses. Legislation should devolve all reliefs to councils to decide including discounts and the council tax relief scheme for pensioners. If it is local government’s tax, it is for local government to set and run – not Whitehall and Parliament.
The programme of changes I have outlined here would provide a funding system that is up-to-date and future proof. The changes could easily be implemented in the life of the next Parliament and action on some of them should start before then. Moreover, our programme need not cost the government a penny in extra grant. Give district councils freedom and certainty: they will deliver.