by Charles Sayer
Concern over the cost of local government, the principal motive for the radical rating reforms introduced in most of the UK this year, is nothing new. It is probably as old as the rates themselves.
More recently, it was in 1975 that Anthony Crosland, then Secretary of State for the Environment in the last Labour administration, responded to pressure from the International Monetary Fund for reductions in public spending by announcing that “the party’s over”. (The party was, of course, in full swing again by 1979.)
As a source of public finance, rates (which had only become a single local tax towards the end of the 19th century) produced more revenue than income tax until after the first world war. Local government expenditure rose progressively during the 20th century as its role expanded, even while central government was steadily taking over responsibility for what had originally been local functions — health care, trunk roads, power supply and so on.
The 1950s witnessed another surge, with the post-war expansion of public services growing at a faster rate than the increase in the gross national product should strictly have allowed. Here, of course, is where the seed of today’s massive problem was sown.
The real cost of this growth was consistently obscured by rising levels of central government grant aid. By 1975, the year of Mr Crosland’s pronouncement, two-thirds of all local authority expenditure in England and Wales was being financed by the Government from central taxation and, by the end of the decade, councils accounted for 28% of total public spending.
Reversing this trend was an early priority for the incoming Conservative administration. The chosen method was to make local authorities more susceptible to pressure from their ratepayers — for example, by reducing central grants and introducing expenditure targets.
By the mid-1980s, however, the Government allowed itself to be convinced that these measures were not working and adopted a more radical approach. The central problem which it isolated was the mismatch between three interest groups — the population of a local authority, its electorate and the relatively small number of businesses and other organisations which paid the largest share of its costs.
For, prior to the reforms introduced in 1989 (in Scotland) and 1990 (in England and Wales), the proportion of local authorities’ rate income deriving from the non-domestic sector ranged from 54% in England to 64% in Scotland.
From this discrepancy emerged the key innovations in the new system — the disparate treatment of domestic and non-domestic ratepayers and the creation, in the UBR, of a national tax. The result was the biggest structural change in local government finance for 100 years.
Unfortunately, it has suffered from the consequences of not having been adequately thought through.
Accountability
It is instructive here to remind ourselves of the Government’s intentions, as expressed in its 1986 Green Paper on Paying for Local Government. By fixing non-domestic rate levels and centralising the distribution of yield, the aim was to force councils to seek additional revenue from the domestic sector.
Accountability was thus to be enhanced at the level of the individual. By increasing the number of voters paying for local authority services from ratepayers to nearly double the number of chargepayers, councils were to have a built-in incentive to restrain spending (although the practical problems of collecting from the unemployed, senior citizens, students and other low-income groups were never really considered).
As the 1990 local election results showed, the strategy was partially successful — notably in Greater London, where Conservatives strengthened their hold on councils which had levied low rates of charge and dislodged Labour from others where the charge was high. Over the country, too, higher than usual percentages of turnout suggested greater awareness of the role — and cost — of local government in people’s lives.
With non-domestic rates, achieving greater accountability was always going to be an elusive goal.
As the Green Paper pointed out, “businesses do not ultimately bear the bill”.
The final burden of the tax will rest elsewhere: with the consumers of the goods produced, the owners of the property occupied, the shareholders of the company, the workforce (either through lower wages or lower job creation), or the tax payers who will pick up the bill for public-sector bodies. These people will not perceive any link with … the local authority.
They are very likely to live outside the area altogether. So non-domestic rates fail the normal criteria for any local tax; that it should be perceptible to those who pay it as a tax imposed by the authority concerned and the taxpayers should be able to influence the behaviour of those who levy the tax.
What is now forgotten, however, is that the Government did make some attempt to increase local authorities’ accountability towards the business community before embarking on wholesale reform. In the 1984 Rates Act it introduced a new requirement for councils to consult representatives of non-domestic ratepayers prior to setting their rates or precepts.
This was a modest response to the blatant failure of certain local authorities to enter into any serious negotiations with businesses over the kind of services needed and the levels of rates which firms could afford.
However, it was still forced to accept the continuing complaints of hundreds of firms that their local authorities were “merely going through the motions”. Ironically for the eventual outcome, it noted the risk that depriving councils altogether of their right to decide the level of non-domestic rates would remove most of the incentive for dialogue.
In the end, the Government decided that the risk was worth taking. But, by centralising the collection and distribution of non-domestic rate income through a national tax, it has left businesses and their local authorities almost totally divorced in terms of any meaningful role for consultation over the quality of services and methods of financing them.
Some interesting modifications were considered but rejected. One involved leaving councils the discretion to levy and retain — but only after appropriate consultation — a small precept (say 5%) on their non-domestic rate base, the rest being collected and distributed nationally as it is now.
Whether such a mix would have proved workable or beneficial, it no longer seems a political option.
The Labour Party, for example, has now declared its policy of restoring local control over non-domestic rating to councils — a move which is unlikely to be entirely popular with the business community.
Variability
But the suggestion reminds us that, fewer than five years ago, the Government was prepared to contemplate a less rigid approach than the one it has introduced.
The main problem tackled by the UBR is the unpredictability of one of the larger taxes for which all non-householders have to budget. (From the beginning of the 1980s, the rate burden on British businesses consistently exceeded that of corporation tax — excluding receipts from North Sea oil operations.)
Removing unpredictability was the rationale for centralisation. Non-occupational costs such as labour, energy, materials and equipment are largely uniform across the country and can thus be forecasted — while rents are normally stable for five years at a time.
Rates, on the other hand, were becoming the great exception. Variations arising from rateable values could be defended as reflecting the relative attractions of different qualities and locations of property, as measured by rental performance.
But the objection stemmed from differences in rate poundages, which mirrored the spending priorities of individual local authorities rather than levels of resources needed or benefits enjoyed. It was highlighted by a number of highly publicised councils which, during the 1970s and 1980s, took increasing advantage of their arbitrary powers to raise rates annually — seemingly without the slightest concern for the commercial consequences.
Only in 1984 did the Rates Act finally empower the Government to set limits to councils’ expenditure. These powers were effective, but the Government was criticised for appearing to impose cuts.
Rate burdens varied widely even between neighbouring authorities. The ensuing discrepancies were marked enough to affect locational decisions and could be criticised as damaging economic efficiency since businesses were faced, in one of their more significant overheads, with varying cost structures unrelated to their own competitive strengths and weaknesses.
The UBR, as a national tax, seeks to deal with this anomaly by spreading the burden evenly throughout the country. But the benefits have yet to become widely apparent, with enormous disparities between “winners”, such as northern industrialists, and “losers”, such as southern retailers, resulting from the introduction of a thoroughgoing reform simultaneously with the first revaluation since 1973.
Catching-up processes are typically painful and this one was going to be no exception after 17 years. Rents have risen dramatically in line with the prosperity of areas such as the South East and few businesses were prepared for the sting in the tail of the inevitable revision of the rate base.
Inflexibility
It is an unfortunate complication that the antecedent date of April 1988 set for the 1990 revaluation coincided with a peak for commercial rents in many areas. Thus, the new rateable values tend to be artificially high and will remain so until the next revaluation because, under this inflexible system, they can no longer be adjusted between revaluations for changes in rental trends.
Even the phasing procedure brought in to moderate the effect of these changes over the next five years has several unsatisfactory aspects. This is mainly because of the short-sighted insistence of the Treasury that it should be a self-balancing effect.
“Losers” are vulnerable because the phasing, which restricts increases to a maximum of 20% a year, was at a late stage made personal to the occupier. Any move attracts the full UBR for the substituted accommodation — with the likely result of a degree of stagnation in the property market.
“Gainers”, on the other hand, will have to wait far too long — up to, and in some cases after, the next revaluation due in 1995 — for their full benefit. Here, the Government has thrown away a golden opportunity to make a positive use of fiscal policy. “Gainers” are typically manufacturers and distributors in the Midlands and the North. Allowing these full relief straight away would have cut their costs and boosted their productive (and exporting) capacity without risking the kind of inflationary pressures on the South East which have contributed to increases in interest rates affecting the whole country.
Inflexibility is also evident in the way in which councils now have virtually no discretion over the rating of empty property and have lost the power to agree equated dates. New regulations requiring the date of any alteration to the valuation list to be entered in the list itself mean that it is no longer possible to cope with the phased occupation or vacation of commercial property by negotiating an “equated date” reflecting notional values of occupied and unoccupied areas.
The obvious consequence is that rating authorities will be encouraged to use completion notices much more aggressively as a means of fixing the liability for unoccupied rates. In effect, an avenue of common-sense dialogue between councils and their business communities may have been closed.
More seriously, the scope for challenge is greatly reduced. The occupier now has only one opportunity to appeal after each revaluation — with an extremely tight deadline of September 30 1990 for any business, which has clearly not gained on this occasion, to lodge a common-sence protective appeal.
Once the period for lodging an appeal is passed, the ratepayers or owner can now only make a proposal to reduce an assessment on the grounds that there has been a material change to the property. (The Inland Revenue, on the other hand, is free to propose an assessment at any time, a situation which scarcely seems equitable.)
A way forward?
The Government has already been forced, amid high publicity, to review the operation of the community charge, and it should be prepared to do the same with the UBR. For a start, there are several practical steps which would bring a measurable degree of comfort to the business community.
First, we need the re-enforcement of regular revaluations with a guarantee that the next one will be no more than five years away. It would be intolerable for the business community to face the uncertainty of another extended interval (1973 to 1990 adds up to 17 years) of the kind which is responsible for many of our current problems. (Naturally, this implies providing the Revenue with the resources to do the job properly.)
There may well be a case, particularly after the shock of 1990, for instituting a rolling revaluation, with assessments based on extended sampling and subject to appeal on wider grounds than apply at present. The quinquennial revaluation would then provide any necessary corrections within a reasonable period. (Such a system would, however, create problems and anomalies of its own which the Government would need to understand and anticipate. The position after five years is going to be particularly pertinent.)
Second, the Government should act promptly to remove the unfairness which occurs on the boundary between the UBR and community charge. The most obvious case is where proprietors of businesses living “over the shop” are effectively paying two taxes instead of the one they faced previously.
Third, it should seriously consider rejigging the phasing arrangements — particularly with a view to speeding up the rate at which “gainers” receive their benefits. This may mean an argument with the Treasury, but the sums involved need not necessarily be large and, as indicated above, there could be compensating advantages in industrial competitiveness.
Suggested alternative ways for non-domestic property occupiers to pay their share of the cost of local government services have, in the past, included sales tax, payroll tax and tourism tax. All have their advocates, who argue from the application of similar taxes in other countries.
However, while the possibility of alternative taxes cannot be excluded, caution is needed. None of these options is practicable within the particular geographical and political framework of the UK.
As will be appreciated from this discussion, much of the thinking behind the UBR is, in my opinion, essentially sound, but flawed mainly in terms of its detailed implementations — which is susceptible to improvements. The business community would be well advised to press for these and retain the principle of the tax, following the excellent advice to “… keep a hold of Nurse, for fear of finding something worse”.
