Restoring the Balance
29 March, 2007

Dick Sorabji, Deputy Director, NLGN
The MJ

Two years and eight months later the Lyons report has arrived. It is comprehensive in its coverage and rigorous in its determination not to gloss over complicated problems. This strength creates new challenges. Competing interests ensure that finance is the centre of political attention. Yet Sir Michael’s analysis is that not only funding, but also powers and structures are parts of a deeper obstacle to reform. To fulfil the place shaping role that Lyons sees for 21st century local government he wants to change behaviours in all tiers of government.

To achieve this Lyons proposes reforms intended to create clearer accountability, greater flexibility, better incentives, a reduced sense of unfairness and enhanced efficiency. As a result he makes recommendations in many areas apart from finance including performance regimes, joined up government, citizen engagement, sub-regional development and political systems.
Lyons’ message to local government may partly explain why his finance proposals do not offer the scale of change that most councils want. He argues that local government must become more self-confident; ending the ‘tendency to wait and see where central government will go’. Councils need to take greater ownership of performance and create a stronger national reputation.

Lyons accepts that progress is being made on all these fronts, but it has influenced his judgement on the balance of political forces. Lyons’ reform plans use many small steps instead of one giant leap.

That political judgement is reinforced by his technical analysis. Lyons argues rightly that council tax is not broken but can be reformed. On business rates he argues that the need for equalisation means that simple denationalisation is not enough. Local income tax would take six years or more to deliver. His alternative route to reform is ‘developmental’ suggesting steps where each stage helps build the foundations for the next.

In the short term Lyons calls for reduced ring-fencing of grants, the introduction of charges for waste to handle new EU fines, the removal of business rate reliefs on empty property and a review of other reliefs. Lyons wants incentives to reward councils for success. LABGI should be reformed and sharpened. The proposed Housing & Planning Delivery Grant should be implemented.

The Chancellor accepted all these proposals in the Budget. He also gave a vague yet positive response to suggestions that council tax benefit be converted into a rebate. Lyons’ plans would raise take-up and take 370,000 out of full payment for £195m. This is so much cheaper than the government’s one-off £200 pensioner payment that it will become a good test of national political commitment to reduce the pressure on council tax.

Lyons argues for a new supplementary business rate for economic development which at 4p would raise £1600m. Using income to support infrastructure loans means that for example Manchester’s £81.2m could fund £622.5m of investment. This is an important step forward and the Chancellor has accepted the idea in the Budget.

Lyons’ other short term measures are to end capping and provide an independent assessment of the costs of new duties placed on local government. The Budget rejected the former and has been silent on the latter.

It seems that Lyons short term package is an effective judgement of what is politically achievable. The problem is that this complex reform menu risks losing the political momentum for change.

Government is negative about Lyons’ medium term proposals. This may reflect the state of national politics; awaiting a new Prime Minister and so more fearful tabloid headlines. On council tax Lyons endorses proposals by many, including NLGN, for more bands at both top and bottom, combined with revaluation. Yet CLG have said there will be no change in this Parliament. Technically the chance for reform in this Parliament was lost when revaluation was delayed. It is important that Lyons’ conclusions are used to help government avoid making the same mistake twice.

The core problem of council tax is that it is the only source of finance that councils can affect. More local funding streams are needed. In 2006 NLGN argued for new funding through the assignment of taxes as grant. Lyons has adopted this proposal.

Assigning a slice of basic rate income tax gives councils more autonomy from Whitehall. It creates incentives to focus on citizens instead of civil servants. Lyons’ modelling shows that assigning £13.1 billion of basic rate income tax would give councils the incentive of £600 for each job they create in their community.

Lyons has also enhanced our proposal for rewarding economic development by allowing councils to retain growth in the total take from business rates for a period of time. NLGN argued that councils should keep extra revenue for 10 years, without having their needs based grants cut. Lyons shows that five year retention would give councils £3.2 billion.

Reform using taxes as grants to create incentives for success delivers a significant shift in the balance of autonomy without the head-on conflicts of major tax reform. Lyons has shown these plans can work.

Lyons long term proposals assume that local government can use these medium term reforms to build its reputation and its competence. That in turn may create the conditions in which the political argument for finally denationalising business rates or transforming locally assigned income tax into local income tax will be possible.

There lies the risk in Lyons’ strategy and the challenge for those of us who already understand local government’s vital role in 21st century government. Lyons is right to argue that changed behaviour – a new culture of governance – is the key to change. But cultural change needs a vision to guide it.

The judgement that reform cannot be achieved in a single grand sweep may be correct. Yet the complexity of the alternative risks obscuring the ambitious vision needed to motivate councils so that they seize the opportunities which Lyons has created.

On this long road to reform the message for local government is to keep our eyes on that prize.