Interim report


Overhaul of Local Government Finance 'Essential' for England

Urgent reform of the way in which local public services are paid for in England will be essential to avoid a decline in the economy and people's quality of life over the next five years, an independent commission today warns.
Current proposals for devolving greater powers to Scotland highlight the need for a proper settlement for England, the Independent Commission on Local Government Finance has argued.

In the Commission’s interim report, published today, it says that a new system of local government finance is essential to underpin the devolution of funding and decision making England needs. It sees an opportunity for local government to be largely funded by money raised locally, which would help give local areas the freedoms to build new homes, create jobs, support businesses and maintain local services.
The report ‘Public Money, Local Choice’ sets out early proposals for making local areas more independent, and creating a clearer link between where money is raised and where it is spent.
It argues that in an era of reduced funding and increasing demand, public services provided by councils, which include adult social care, child protection and road maintenance, will become unsustainable unless councils are given more freedom to make decisions for their local areas
The Commission cites evidence which shows English towns, cities and local areas lag significantly behind international cities when it comes to control of their finances. For instance, London looks to central government for 74 per cent of its funding. This compares to 8 per cent for Tokyo, 24 per cent for Berlin and 31 per cent for New York.
It will now consult on proposals for how greater financial independence for local government in England could work to better tackle national challenges like building more homes, creating more jobs and supporting people into work. These include:
• Self-sufficiency. By 2018/19 there is scope for local government to become self-sufficient if it keeps all of the business rates it collects. Currently more than 50 per of business rates collected by councils is redistributed by government. By 2018/19, further cuts to government funding mean council tax and business rates revenue are on course to overtake local government’s projected total funding. Reducing dependence on central government could create a more stable and predictable source of funding for local authorities. This could help them to promote economic growth. For this to work there would need to be an element of equalisation between local authorities – where those with the most income ‘top up’ those with the least. The Commission suggests one approach could be for this to work at two levels – first between different parts of the country, and then at a more localised level between areas within a unit such as a combined authority.
• Council tax. Evidence given to the commission suggests that council tax is one of the major obstacles to efficient and effective local government. It heard that the current national system of council tax – based on 1991 prices and nationally-set bands – is distorting the housing market and is forcing local authorities to levy taxes which, relative to the value of properties, are disproportionately high in some areas and disproportionately low in others. The Commission argues that like the poll tax and domestic rates before it, the council tax system is heading for collapse. It is consulting on whether giving councils the power to revalue properties and set council tax bands locally could help make public services sustainable and tackle the inherent unfairness in council tax.
• Housing. The commission believes that the marginalisation of councils in the supply of housing means the chronic shortage of new homes – particularly for those on low incomes – will never be overcome. It supports recommendations for government to review its approach to the classification of housing debt. Currently, the legitimate desire to control borrowing is being pursued without regard to wider social and economic imperatives. It is estimated that councils could build an extra 15,000 – 17,000 homes per year if the housing borrowing cap was removed.
• Welfare and work. Councils understand local skills needs through their work with local businesses, but have limited powers to shape the supply of local labour. National skills programmes will never be as successful as local ones because they cannot hope to meet those specific needs. Giving local government and businesses more control over skills development would benefit the UK economy. The Commission believes that policy around housing, welfare support and training could be developed in local areas a single coherent framework. This would support the vulnerable, help people find work by developing the skills that local businesses need, and shift public spending from subsidising rents to investing in social housing. These are ideas which the commission will explore further.
Commission Chair Darra Singh said:

“The current local government finance system is broken. The way it allocates money is irrational and unintelligible. It is virtually impossible for government ministers to understand, let alone the public.

“We need a better way of funding public services which is fit for an era of lower funding and rising, more complex demand. Reform of the local government finance system goes to the heart of our ability to grow local economies, improve the well-being of our communities and spend every public pound well. Liberating our towns, counties and cities to develop skills, build houses, improve transport, reduce welfare dependency and support the vulnerable is essential to our national future. Local leaders are concerned that excessive central control is holding back success.

“The Commission believes the need for reform is urgent, and sees an opportunity to establish a funding system for local government which is largely self-sufficient. This should include powers to set council tax bands and revalue properties locally.

“The current outdated and unfair system of council tax has been identified as one of the major obstacles to the reform of local government finance. This is an inherently unfair tax and the lack of revaluation for the last 23 years has exacerbated that unfairness.

“Clearly a system which leads to a smaller than average terraced house in the north being charged more than a multimillion pound mansion in central London is past its sell-by date.

“Like the poll tax and domestic rates before it, the council tax system is heading for collapse. The one way government can avoid the pain of again having to invent a new local tax system is to devolve control of council tax to local areas.”

The Independent Commission on Local Government Finance was set up in June 2014 and has been tasked with making recommendations for the reform of local government finance and finding better ways to fund local services and promote economic growth in England.

Its recommendations will be presented to all of the main political parties with the aim of shaping the debate on the future of local government finance and influencing the next government.
The Commission was established by the Local Government Association (LGA), the national voice of local government, and the Chartered Institute for Public Finance (CIPFA), the professional body for public finance professionals. Its views and recommendations are independent of those two organisations.

Darra Singh is chairing the Commission in a personal capacity.

The Commission will publish its final recommendations in early 2015.


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