Council tax: Not just a problem for older people

Council tax is under mounting attack as a method of raising finance for local government services, particularly in the context of older people being unable, even unwilling, to meet increases well above the rate of inflation. So what is likely to happen assuming the government is made increasingly uncomfortable by older people being prepared to go to prison rather than pay? Harvey Cole, ECA’s new economic and development correspondent, examines the situation and prospects for change.

The problem

Ministers have announced that alternatives to council tax are to be examined. But this won’t stop the system operating for at least one more year - and it looks as if the rate of tax levied across the country will rise by an average of five per cent or more. Even this could reflect government intervention to ‘cap’ the rises proposed by a large number of local authorities. As a result, some of them may be compelled to reduce the level of services they provide. How does such a ridiculous result come about?

The challenges to council tax

There are two main thrusts to the challenges being made to council tax:

It regularly goes up by more than the general rate of inflation;
Its incidence is unfair.

Council tax will always rise more than the headline inflation

In some ways, the first argument is a bit of a red herring. Almost any system for raising local government finance is bound to result in above-average, year-on-year increases.

This is because the services provided are labour intensive. The Retail Price Index (RPI) is made up of thousands of items of goods and hundreds of services of various kinds. Over the last five or six years, the prices of many goods have actually fallen (for example, clothes and electrical goods), while others have gone up by less than the overall inflation rate. On the other hand, most services from hairdressing to insurance and restaurant meals have outpaced inflation.

If inflation generally is running at two per cent, and pay and pensions for local government workers go up 3.5 per cent (pay and conditions for them is almost totally determined by central government), then a typical local authority with about two-thirds of its expenditure accounted for by pay, will find that its payroll increase itself adds more than two per cent to total costs. Increases in other costs widen the gap.

It is difficult to believe that central government remains in ignorance of these simple facts when claiming to have offered generous grant settlements (that is, more than RPI) and then blaming local authorities for raising council tax by more than RPI. Both Conservative and Labour governments have behaved in almost exactly the same way.

Because the government contributes about 75 per cent of the funding for local spending, the shortfall that this leaves when increases fall short of the actual inflation experienced by councils has a disastrous gearing effect: for every one per cent of such shortfall, the council tax has to be raised by four per cent. The final injury added to insult is when the government intervenes to ‘cap’ the tax – leading to actual cuts in service provision. The effect is intensified when ministers insist that a certain proportion of extra grant must be ‘passported’ through to particular services like education or social services – making cutbacks in other sectors even more likely.

The fault in the relationship between central and local authorities runs deeper than the way in which council tax works. Unless the latter are given greater freedom and responsibility to set their own expenditure and revenue, changing the financial mechanism will simply lead to the same problems resurfacing in a different form.

Council tax is unfair in its application

The second complaint is that council tax is unfair as between the individuals who pay it. Since the ‘bands’ for house property were set when the tax started, they have remained the same. A top (Band H) dwelling still pays just three times as much as the lowest (A). In the intervening period there has been a vast increase in properties in the H band (over £320,000).

Council tax also bears heavily on those with low or fixed incomes. Indeed, with general inflation low, and council tax among the items that is bound to grow faster than average (it is of course the essential nature of averages that some are above and some below it), the annual rise in the tax can swallow up a very high proportion of the increase in a pensioner’s income.

A local income tax has been widely suggested as a substitute. After allowing for exemptions and reduced rates for those with small incomes or other special circumstances, a levy of around three per cent would raise about the same revenue as council tax.

This would actually benefit around two-thirds of all households. Of course, no system can ever be completely fair, and there are bound to be losers. (In this case, the losers would be mainly those with incomes above £30,000 living in Band A and B homes, and those earning more than about £45,000 in Bands G and H.)

It has been objected that local income tax would bear heavily in families with more than one earner. This is true. But it can be argued, first, that it is reasonable for them to make a higher contribution, and, secondly, that this really is no more than a mirror image of the present rebates given to single occupiers.

The tale of big brother

A true fairy tale

Once upon a time there were two brothers. Big Brother lived in Whitehall and had a large income. Little Brother lived in Town Hall and had a much smaller income.

One day the two brothers agreed to provide services for people living in ‘Anywhere’: schools and libraries, care for old people, roads and museums, collecting and disposing of rubbish and all sorts of other things.

Because Big Brother had more money, he was to pay more. They reckoned it would all cost £100 and divided it like this:

Big Brother £75.0

Little Brother £25.0

Total: £100.0

During the first year everything went well. But some things began adding to the costs:

Prices in general went up a bit, which added £2.0;
Then there were more children in the schools, more old people to look after, more rubbish, more cars making more holes in the roads. All this amounted to another £2.5;
Worse, Big Brother decided that Little Brother should pay his employees another 3.5 per cent. It also added one per cent to Little Brother’s National Insurance contributions as an employer and ordered him to raise what he paid into his staff’s pension funds (because share markets had collapsed). And he imposed an extra lump of tax on sending rubbish to be landfilled. This meant more extra costs of £3.5;
So the bills to be met in the second year came to £108.5;
Big Brother said he would be very generous and raise his contribution by more than inflation, offering £80.0;
But he also ordered Little Brother to spend £3 of the extra £5 on schools and old people, which didn’t leave much room for improving other services;
Little Brother was left to find £28.0 just to maintain the existing level of services;
That meant that he had to find £3 more than in the first year – 12 per cent more;
That was bad enough. But then Big Brother came up with Catch 2004 (that is like Catch 22 only much much worse). He said he would only allow Little Brother to raise £ 26.5;
So peoples’ services had to be reduced by 1.50 per cent.

That is why the people of Anywhere are facing:

· A rise in inflation of 2 per cent;

· A rise in council tax 6 per cent;

· Service cuts of 1.5 per cent

Conclusion

Even though local income tax could well be fairer, it is only a way of altering the way in which revenue is currently raised. What is really needed is a fundamental rethink of the relationship between Whitehall and Town Hall. In the meantime, pensioner groups are unfortunately most likely to be disappointed with their progress.

Harvey Cole is ECA’s economic and development consultant. He can be contacted by telephone on: 01962 865 930 or by post at: 9 Clifton Road , Winchester, SO22 5BP.