Finance after Lyons

November 15, 2006

Dick Sorabji, Deputy Director, NLGN
LGC

Act one of Labour’s devolution drama was the White Paper. Act two will be Lyons final report; especially the recommendations for reform of local government’s financial regime.

Lyons has concealed his intentions behind a multitude of inquiries and suggestions. It raises the question of whether he is moving towards a reform strategy not built from one or two giant steps, but on dozens of small changes that shatter today’s system.

That would be clever politics, but to succeed it will still need to be sound finance. Sometimes many detailed solutions are better than one grand strategy.

One example is Lyons’ comment that ensuring councils are fully funded for new duties needs more independent assessment. NLGN proposed in Pacing Lyons: a route map to localism that the regime should be adjudicated by a Select Committee in Parliament advised by the Audit Commission. Reform would affect both finance and also put Whitehall under external scrutiny. In this way small changes can drive wider shifts in the balance of power between central and local government.

Reform should mean freedom from central controls, but should not mean greater freedom to spend more. Instead the pressure to spend less may actually increase, but it will come from the community and not from Whitehall.

Financial reform must create incentives that drive learning and help to deliver place-shaping. Finance must do more than just provide cash. Lyons appears to share this view. He is ‘particularly interested’ in changing behaviour by changing incentives. This matters in the debate on de-nationalising the business rates: NNDR.

Nationalisation broke the link between council success and economic growth. The inflation cap on NNDR has cut the business share of council funding by a quarter. Yet simple devolution will not work.

The Direct Schools Grant took £26 billion out of the RSG leaving a rump too small to deliver equalisation. Today NNDR is almost all that is left to deliver equalisation. NLGN recommended that de-nationalisation should follow from local government agreeing its own equalisation system.

Many strands of the Lyons Inquiry have centred on how councils can receive financial rewards by growing the local economy. The inquiry has suggested that LABGI is too complex. It has pledged to reach a view on the proposed Planning Gain Supplement. Commenting on the Barker review, it has raised the question of a land value tax for derelict brownfield sites and of cutting NNDR reliefs on empty business property.

Could it be that Lyons plans to reconnect business success to council revenues, not through a single giant leap, but by dozens of smaller incentives? This approach would free councils from Whitehall influence, but increase accountability to local stakeholders. It would also create powerful incentives to develop new skills in economic development: place-shaping. The risk is that change will not be great enough to trigger a change in culture

To meet this risk NLGN propose a massively expanded and simplified version of LABGI. While today’s NNDR take will need equalisation, all future growth in the revenue from business rates should accrue to the council within whose area it occurs. To lock in this incentive councils should be assured that they will keep the fruits of economic growth, protected from grant or other equalisation adjustments for 10 years.

Lyons’ plans for re-connecting business and local government are well concealed. But his plans for council tax are buried still deeper. Yet there are hints.

In his Interim report last December Lyons mused on the fact that council tax is both a property tax and a service charge: the politics of each are very different. Previous reports also hint that part of the problem with council tax may be that a tax which works well at £688 per home, the average band D in 1997, breaks down at £1268 per home, the figure or 2006. Thirdly there is the problem of low take-up of council tax benefit.

Recent press stories suggest an interesting possibility. Might Lyons try to shatter the current regime replacing it with a service charge and a smaller property tax? This would be consistent with charges for waste disposal. They in turn dovetail with the politics of green taxes. It would match his observation that council tax only raises 16% of total funds, while charges already raise 11%. It would ease reform of property tax structure. It would smooth the path for a simpler form of council tax benefit.

Outmanoeuvring the political obstacles to reform on business rates and council tax would be a huge achievement, but it will not be enough. The DSG demonstrates that the financial regime still locks in a dependency culture through the gearing ratio and the complexity of the grant formulae.

When councils need more cash they should look to their locality instead of arguing with Whitehall statisticians. That means more council funds must come from local stakeholders. Yet past reports suggest Lyons is unconvinced by the arguments large new taxes.

At NLGN we have argued the dilemma can be resolved by assigning the local revenues from national taxes to individual councils. The 10p rate of income tax is one of the Taxes as Grants (TAGs) that we propose. The rate is set by the Chancellor. Most people on PAYE pay the whole of the 10p band and so the tax becomes a measure of how many people in a community have a job.

Lyons only has one shot at reform. Success will depend on the man as well as the plan. So predicting the detail is impossible. But it seems that Lyons may believe he can better succeed by avoiding one big political battle, preferring dozens of detailed policy reforms.

If so, we must hope it is enough to unleash the fundamental change in culture that is needed to give birth to autonomy from Whitehall.


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