Magazine article Public Finance

Finding the Balance

Magazine article Public Finance

Finding the Balance

Article excerpt

The Convention of Scottish Local Authorities might have spoken for most of Scottish local government when it told Sir Peter Burt s Local Government Finance Review Committee that a modified council tax was its preferred option. But there is a small and determined group in Scotland, mainly Liberal Democrat led councils, that are promoting local income tax as a better alternative. The arguments for this are well rehearsed, but now Aberdeenshire Council has taken those arguments a stage further.

In its evidence to Burt, Aberdeenshire proposed a way of introducing local income tax not only to produce a fairer system of local taxation, but also to solve the 'balance of funding" problem.

In Scotland, as is broadly the case in the rest of the UK, the proportion of grant to local taxation is about 80:20. This brings with it the attendant evils of gearing, hypothecation and accountability.

Gearing affected Aberdeenshire heavily in the late 1990s. Because grant met around 80% of expenditure, a 1% shortfall in the rate of increase in grant translated into an extra 4% on council tax. Little wonder then, that the public's opinion of the council tax system is moving closer to its opinion of the old community charge.

With the Scottish Executive meeting so much of the bill for local services, there is an irresistible temptation to meddle more and more in how 'their' money is spent This creeping increase in hypothecation has served only to reduce and constrain the ability of locally elected councillors to govern their local area.

Inevitably, this imbalance blurs accountability, with the general public holding councils wholly accountable for the delivery of services, while the contribution the public makes locally is only one-fifth of the cost.

The 'Aberdeenshire solution involves the Scottish Parliament using its powers to cut the national rate of income tax in Scotland by 3p in the pound. This would be combined with a higher level of revenue from local income tax to move the ratio down initially to 70:30, with the prospect of moving eventually to a 50:50 split Essentially, this would be done by transferring a significant share of the funding of local government from the national taxpayer, via national income tax, to the local taxpayer, via local income tax. The critical factor would be that, while the proportion of tax raised from each source would change, the impact at taxpayer level would be, in overall terms, neutral.

Supporters of LIT envisage that the tax would be collected along with income tax. The taxpayer's perception would be of tax at the combined rate, which would vary from council to council. The taxpayer would not be too concerned at the exact composition of that rate between the national and local elements. That affords an opportunity to address the balance of funding problem once and for all.

If Aberdeenshire Council, where the gearing ratio is now 77:23, is used as an example, its net spending of £402m in 2004/05 was funded as is shown in Table A. The total funding controlled by the Scottish Executive comes from national taxation - 56% - supplemented by business rates, essentially a national propertybased tax (21%). Thus the total support from national taxation was 77%.

If we envisage LIT replacing council tax on a likefor-like basis, LIT would be set at a level sufficient to generate 23% of Aberdeenshire Council's income, the same as council tax in the above example. …

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