Let Local Councils Vary Income Tax

Article excerpt

Local government has a crisis of credibility. Under 18 years of Tory rule, councils were stripped of powers and funding. In a whole range of fields housing, social services, education, urban regeneration-the role of local government has been diminished, and could yet be eliminated altogether. Ministers complain that the performance standard of local authorities is not high enough. But taking away their functions can only make the idea of becoming a local councillor even less attractive to the talented aspiring politician. Where are the 21st-century Joseph Chamberlains now?

Local authorities in the UK now raise only around a quarter of their own income, against 55 per cent a decade ago. (This is a lower proportion than in all our major partners except the Netherlands.) The rest comes from central government, leaving local authorities not just financially but politically dependent. So far from being autonomous units of democratic government at local level, it is almost impossible now for councils to determine either what they do or how much they can spend doing it. Is it any wonder that the average turnout in local elections is less than 30 per cent?

If local authorities were able to raise taxes in order to fund improved services, participation rates in elections would surely rise. They can already raise council tax, but politically this is a hopeless option. Because the tax raises such a small proportion of total local authority funding, it must be increased by much more in percentage terms than the rise in spending that it is financing. A 5 per cent rise in council spending, for example, requires a 20 per cent increase in council tax, and the disproportion is even greater for poorer councils.

The Local Government Association's solution is to restore business rates to local control. But since businesses do not have votes, this would not bring councils closer to their electorates; rather the contrary. And all the arguments that led to the nationalisation of business rates a decade ago still hold good. As local authorities in poorer areas increased their rates to secure income, while those in richer areas were able to reduce theirs, the effect on economic development would be exactly the reverse of what is needed.

A second option sometimes canvassed -- it was recommended by the Layfield Committee on Local Government Finance in 1976 -- is to introduce a local income tax. The principle is highly attractive: a progressive, buoyant and easily understood local tax that would give local authorities financial and democratic autonomy. (Local income tax operates successfully in most of Scandinavia.) But the administrative cost of introducing a whole new tax has led to its consistent rejection. …