Magazine article Public Finance

Tax Reforms Reach Freezing Point

Magazine article Public Finance

Tax Reforms Reach Freezing Point

Article excerpt

The Conservatives have decided to make an issue of council tax. Having seen Labour flounder for more than 11 years with the toxic issue of local taxation, the Tories went on to the attack at their recent annual conference in Birmingham. In doing so, they appear to have raised the stakes as the parties move towards manifesto-writing in advance of the general election.

George Osborne's proposal is simple enough. He has said that if his party took power, he would offer councils a deal - for two years whereby if they kept their council tax increases to 2.5% or below, then the government would pay a grant that would reduce the increase to zero.

He has presumably calculated that most authorities would prefer a spending squeeze and no council tax rise to a tiny additional spending increase and a rise of, say, 4% or 5%.

This is a crafty calculation. It offers his party the real chance of opening up 'clear blue water' between itself, Labour and the Liberal Democrats. Ever since Margaret Thatcher capped local taxes and then nationalised non-domestic rates, the Conservatives have found it virtually impossible to take advantage of their party's willingness to set lower tax levels than the other parties. By stripping 'high-spending' Labour authorities of their right to tax, an era of conformity and 'flat' tax increases was introduced.

In fact, Labour councils have long ago given up their high-taxing ways. Most are pro-business and worried about the impact of council tax on lower-income voters. But the jewels in the crown of Tory local government remain Wandsworth and Westminster, with their super-low local taxes. Indeed, it is clear that year after year of such council tax levels has made both councils virtually impossible to win by the other parties. Other authorities would like to follow suit.

The Osborne proposal paves the way for a gap to open up between Conservative authorities and others. It is likely that the party's front bench has worked this out. The worst that can happen politically - from the Tories' point of view - is that a number of Labour and LibDem councils will reject the offer to keep their local tax increases to zero and opt for increases that will antagonise voters. In reality, most councils of any or no political control now make strenuous efforts to hold down council tax. Few would opt for an electorally poisonous rise when most others are setting a nice round zero.

For public services, efforts to keep council tax to 2.5% will mean many authorities will have to reduce real expenditure on services. Even if inflation dropped back from its current 5% level, the Osborne challenge would put pressure on service levels. …

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