Would you please outline the proposals for the reform of the rating system contained in the recent Green Paper: Paying for Local Government?
The Government’s Green Paper Paying for Local Government (Cmnd 9714) published on January 28 1986, sets out the favoured options for what is called “the most radical reform of local government finance in Britain this century”. The changes, if implemented, are not likely to affect England and Wales before 1990, but the proposals could be introduced earlier in Scotland.
Since the present Government came to office in 1979, ministers have sought to create the climate and incentives to persuade local government (which accounts for more than a quarter of all public spending) to adopt restraint. They have tried to achieve this objective, not by direct control from the centre, but by measures designed to enhance the accountability of local government to its electors and taxpayers. Between 1979 and 1984 a succession of measures were introduced, culminating in direct powers to limit the rates of local authorities.
These powers, however, led to weakened accountability to the local electorate, to a series of clashes with Labour-led authorities, and to protests from the Conservative-controlled shire counties as their grants were reduced. Ministers therefore decided that a more fundamental reform would be needed to deal with the effects of the rating system and to develop a grant system that was more easily understood.
Key proposals
Local non-domestic taxes
Non-domestic ratepayers (chiefly industry and commerce, including shops) contributed nearly £8bn to local government during 1984-85, more than a quarter of the total rate-fund revenue expenditure.
On the grounds of economic efficiency alone, the Green Paper argues that there is a case for setting non-domestic rates on a basis which does not distort the competitiveness of businesses simply because they are located in one authority rather than another. This case is strengthened because non-domestic rates have other defects, eg the non-accountability of local authorities to their electors for financial decisions.
The present government favours tackling the “unsatisfactory” nature of non-domestic rates as a local tax by directly restraining their variability. This means transferring to central government the power to determine the non-domestic rate poundage (although the proceeds would continue to be used for local government spending).
Under the proposed system, the income from the national non-domestic rate would be “pooled” and redistributed to local authorities as an equal amount per adult. Councils might also be given discretion to raise an additional non-domestic rate of up to 5% of the national rate poundage. The national rate would initially be set so as to ensure that the proportion of local government spending funded by non-domestic rates was maintained, increasing in subsequent years in line with inflation.
Since non-domestic rates are to continue as a substantial source of tax revenue, the Green Paper emphasises the importance of levying them on as firm and consistent a basis as possible. The last revaluation was in 1973 and has become badly out of line with up-to-date rental values. The Inland Revenue Valuation Office has therefore been asked to start work on a revaluation of non-domestic properties for introduction on April 1 1990.
Local domestic taxes
According to the Green Paper, the present local (domestic) taxation arrangements leave too great a gap between those who use, those who vote for, and those who pay for, local services. The Government therefore proposes the phased replacement of domestic rates with a “community charge.” Each local authority would set the level of the community charge to be paid at a flat rate by each and every adult in its area. Such a charge, it is argued, would be of direct concern to the whole electorate (as rates have never been), and the clearest possible link between higher spending and higher local taxes would be established.
In order to give households time to adjust, the charge would be introduced gradually; initially fixed at a low level (with an immediate corresponding reduction in domestic rates). In 60% of local authorities rates would disappear within five years, and should be completely eliminated within 10 years. After the transition period, the Green Paper estimates, just over half of households would be better off under a community charge. The main beneficiaries would be households with a single adult, while the main losers would be households with more than two adults, but over 70% of gains and losses would amount to less than £2 a week, and for all those on low incomes rebates would be available.
The proposed community charge would be enforced with the help of a separate register, with heads of families liable to criminal prosecution for failure to comply. The register would include foreigners with no right to vote but enjoying the benefits of local services.
Grants to local authorities
Although the Government remains committed to the bolstering of local government income with central grants, it believes shortcomings in the present methods of paying grants make reform essential.
The Green Paper’s proposed reform is intended to produce a simplified system, readily understood by ratepayers, as well as experts, and offering more certainty on the entitlements of councils. The belief is that the planned changes in domestic and non-domestic rating would make it possible to implement a grants system with two main elements, “needs grants” and “standard grants”.
The amount to be made available for both types of grant would be determined annually as a matter of policy by central government, as happens with existing arrangements.
A “needs grant” would be allocated to compensate local authorities for differences in the cost of providing a standard level of service to meet local requirements, while a “standard grant” would make an additional contribution, from central funds, towards the cost of those services and would be paid to all authorities as a common amount per adult.
There will remain a role for certain existing specific grants, such as that for police expenditure. There may also be a case for some new grants, for example in the education field. But, equally, extensive use of such grants could run counter to the approach set out in the Green Paper, and (since a thorough appraisal of the role of specific grants has not been carried out for several years) the Government is undertaking a separate review of the role of specific grants in the new system.
Capital expenditure
About a third of all public sector gross capital expenditure is incurred by local authorities. The Government is therefore concerned with both borrowing for capital purposes and the capital expenditure itself, and the Green Paper puts forward two possible reforms for consideration. First, the introduction of a control over local authorities’ total net external borrowing (for both revenue and capital purposes) through a system of external borrowing limits (EBLs); and, second, control of gross capital expenditure (incorporating an allowance to ensure that local authorities are unaffected by receipts from the sale of assets).
Against this background, the Government considers that there are three objectives which any control system must satisfy. It should provide effective Government influence over aggregate levels of local authority capital expenditure and borrowing; it should promote the Government’s aim of reducing the size of the public sector by encouraging asset sales; and it should provide a sound basis for local authorities to plan their capital programmes. The Government feels it should allocate resources in accordance with national policies and focus them on areas of need, but local authorities should maintain the freedom, within their overall spending ceiling, to have regard to local priorities. The system should also be stable enough for local authorities to be able to plan ahead with confidence.
Distributional changes and other financial measures
Distributional changes arising from the introduction of the new grant and non-domestic rate arrangements, for example between highly rated areas in southern England and areas with low rateable values in the North, would be offset by a system of self-financing adjustments, thereby preventing any dramatic shifts of resources between local authority areas on the introduction of the new arrangements; and the proposed transitional mechanism for transferring the burden of domestic taxation from rates to a community charge would ensure that there were no drastic effects on the income of households or individuals.
There are two further areas discussed in the Green Paper where the Government feels reforms could help “clarify electors’ perceptions of the link between their council’s expenditure on services and what they are asked to pay towards them”. The first — the fees and charges levied by local authorities for the consumption of certain services — is directly related to the principles underlying the proposed new community charge. The second — the framework governing the presentation and implementation of local authorities’ annual budgets — is concerned with the extent to which local authorities may distort the link between their expenditure decisions and tax rates by the way in which they organise their internal finances.
As a result, the Government has initiated a review of centrally determined fees and charges for local authority services, is considering ways of improving charging practices and has outlined a possible framework of duties to be placed on local authority treasurers to certify the propriety of their authorities’ budgets.
The Green Paper argues that these proposals at the heart of the Government’s reforms would widen the tax base, so that virtually all adults would have a financial stake in the affairs of their local authority. They would also ensure that the full costs or benefits of any changes in an authority’s expenditure would fall on its domestic taxpayers alone, and councils would no longer be able to finance extra expenditure by taxing commerce and industry as it wished.
After consultations lasting until July, the Government intends to publish a White Paper containing its final version early next year. This will then become a commitment in the Conservative Party’s next election manifesto.
