So farewell then, Eric Pickles, one of the surprise casualties of the post-election cabinet reshuffle. His time in charge of the Department for Communities and Local Government (DCLG) was characterised by a combative approach towards local authorities, and nowhere is this more evident than in the squeeze that he put on their finances. So there was a certain irony in the fact that only a day before he was relieved of his duties he scored a significant victory in his battle with councils when the people of Bedfordshire voted against increasing council tax to pay for extra police officers.
To understand the significance of this, we need to back up a little and get our heads around how local government finance works in England. It’s a horrendously complicated system, so we’ll save the full story for another time, but here’s the short version.
Councils get some of their funding from council tax. They set the level of this tax, collect it from residents and spend it locally. This accounts for about 40% of their funding. Councils also collect business rates from commercial properties in their area, but they don’t set the level of this tax and they don’t get to keep the money, which goes instead to the Treasury [i]. The rest of their funding comes from central government in an ever-shifting range of grants, mostly paid by DCLG.
Over the last parliament, these grants were cut back severely. The IFS estimates that between 2009-10 and 2014-15, central government grants to local authorities were reduced by 36.3%. That means that the 60% of council funding that comes from central government fell by more than a third [ii]. In times past, councils could have raised council tax to offset these cuts. Of course, there were limits to this, since they would have to answer to their voters at the next local elections. That’s how local democracy works. Or rather, that’s how it used to work.
You see, Eric Pickles was determined that councils wouldn’t be able to raise council tax to compensate for his department’s cuts. Right or wrongly [iii], he viewed councils as wasteful, overly bureaucratic and in need of a bit of fiscal discipline. To make sure that this discipline was not undermined by council tax rises, he decided to neuter councils’ revenue-raising powers with a combination of carrot and stick.
The carrot was the council tax freeze grant. Councils that agreed to freeze council tax in nominal terms (i.e. a real terms cut) would receive a grant from DCLG to compensate them for some of the cost of doing this [iv]. The stick came in the form of council tax referendums. Any council that wanted to raise council tax by 2% or more (in nominal terms, so usually that would only just keep pace with inflation) is now legally required to hold a referendum. Pickles was presumably calculating that such a referendum – where a council asks its population whether they want taxes to rise – would be difficult to win. Voters understandably favour lower taxes and better public services, which is why politicians often pretend that they can deliver that heady combination by “eliminating waste”, “reducing bureaucracy” or even “cracking down on tax avoidance”. Few politicians dare to go to the polls on a platform of raising taxes, even if they know they will have to do so once they are in office.
Councils seem to agree with this calculation, since despite huge cuts to their budgets and pressures to deliver better social care and collect bins more often, not one council has triggered a referendum by trying to raise council tax by 2% or more [v] – until now.
All of which brings us, finally, back to this week’s referendum result from Bedfordshire. The referendum was triggered because Bedfordshire’s Police and Crime Commissioner Olly Martins wanted to raise £4.5 million to put an extra 100 police officers on the streets. This would have meant increasing the police’s council tax precept (not council tax as a whole, just the police bit of it) by 15.85%. When asked whether they wanted council tax to rise, the people of Bedfordshire said no. Naturally, they preferred for the extra police officers to be funded by eliminating waste, reducing bureaucracy and cracking down on (council) tax avoidance.
There may be other reasons why this rise was voted down. Kelvin Hopkins, MP for Luton North, blamed it on the wording of the ballot paper, which is set by DCLG. The ballot paper asked people about a 15.85% rise, but Mr. Hopkins thinks that “if it had said ‘would you be prepared to pay 18p a week extra for 100 extra police officers’ people might have said yes”. Whether or not that’s true, any other council that braves a referendum will face the same wording restrictions and the result in Bedfordshire will make them even less confident of victory. In effect, councils can no longer make decisions on levels of taxation and expenditure, reducing them to managers administering the budgets allocated to them by Whitehall.
This curtailing of council power seems perverse when viewed alongside this week’s third notable piece of local government news. In a speech on Thursday, the Chancellor outlined plans for greater devolution to cities that are willing to elect a mayor, starting with Manchester. This “radical devolution” will give local government the “levers to grow their economy”, including transport, planning, housing, policing and public health, but no new revenue-raising powers.
So even under these plans, while councils will be given additional managerial responsibilities, they will remain at the mercy of central government for their funding. As Mr. Pickles’ time in office demonstrates, central government can and will use this as a stick to beat them with. Devolution should be about a transfer of power (actual power that is, not just “powers”) from central government to the local level, but Whitehall is offering to give up precious little power here. Local government will remain relatively unimportant, and since voters recognise this, local democracy will remain weak and participation levels low.
The experience of other countries shows that it doesn’t have to be like this. US states have significant revenue-raising powers, although since the country is much larger than ours this may not be a fair comparison. European examples may be more relevant. In Germany, the sixteen Länder have significant powers; and Swedish municipalities – the lowest level of government – set and collect taxes on income.
Council tax is a poorly-designed and regressive tax that badly needs reforming (for example, it could be replaced with a progressive levy on property values). But control of a reformed council tax should be handed back to councils, without forcing them to undergo unwinnable referendums just to keep pace with inflation. Local governments should be elected for a period then allowed to do their jobs until they face the voters again at the next election – just like central government is. Along with devolution measures of the sort proposed by the Chancellor, this would help to create stronger local democracy that people actually care about and which makes a real difference to their lives.
DCLG recently introduced a “business rates retention” scheme, which allows councils that increase their business rates take (by having more businesses in their area) to keep a bit of the money. But since the Treasury still controls the overall level of non-council tax money going to councils, this amounts to a zero sum game between different authorities. If you grow your business rates, but everyone else grows them by more, you actually lose money. Perhaps more on this another time, but for now it’s enough to note that this hardly counts as a revenue raising power.
In fact, this proportion varies across the country. Councils that have a small council tax base (relative to their assessed funding need) get more than 60% of their revenue in central government grants. These councils (which tend to be in more deprived areas) feel the effects of grant reductions much more sharply. The IFS estimates that between 2009-10 and 2014-15, council spending per person fell by an average of 23.4% in real terms; but spending in Westminster fell by 46.3%, while spending in North East Lincolnshire fell by just 6.2%. This system is frankly nuts and in dire need of reform. Perhaps more on this another time.
As always with local government issues, the answer is probably that some councils are wasteful and others are efficient. It is worth noting however, that central government has no way of identifying the wasteful councils, let alone targeting spending cuts on them.
It seems to me that councils would be mad to take up this offer, since the grant is not recurring but the losses from freezing council tax are (unless they are willing to brave a council tax referendum to play catch-up). But in fact, a majority of councils took this offer up, at least in the early years.
A number of councils raised council tax by 1.99%, the maximum that would not trigger a referendum and just about keeping pace with inflation. Pickles branded these councils “democracy dodgers”. This tells us a couple of things about Pickles’ view of democracy. First, he is implying that traditional local democracy, where councils are elected and are accountable for their actions (and which mirrors national democracy), is not real democracy. Second, he is saying that voters should be consulted when council tax is raised, but not when it is cut. In fact, he is saying that voters should be consulted if council tax is raised in line with inflation – i.e. if it stays the same in real terms – but not if it is cut.