Council Tax: Deal or no deal?

March 2, 2012 11:00 am

The clock is ticking. Councils have until March 18th to decide whether they want to take up the Government’s offer to freeze their basic council tax level in 2012-13. The latest DCLG update on 24th February said that 306 councils have decided to take up this offer. Last year every council took up the offer. So what about the few left; should you take the deal or not?

If councils sign up to the voluntary scheme and set the basic amount of council tax for 2012-13 at a level which is no more than the basic amount for 2011-12, the authority will receive a grant equivalent to a 2.5% increase on their basic amount of council tax. But, this will not be built into the baseline.

Now before I go any further, I know that this topic can be lost on many because of the impenetrable local government finance jargon; so I want to try and explain, in simple terms what is meant by the ‘base’ – because it is important.

Every year, when councils set their level of tax, this is calculated on the ‘base’ (the starting point) of the previous year. So a council that freezes council tax this year, therefore keeping their base the same, will be able to charge less money than councils who increase their council tax by 3.5%, therefore increasing their starting point on which to calculate the next years’ level of tax. Over a period of years this has a cumulative effect, which means that the councils which freeze tax (and the base) will be able to raise less money than those who increase tax (and reject the government’s deal), as their base has not increased.

There are reasons to believe that taking the deal now is the best thing to do. The public love to hate council tax – not least because many see it is a hugely unfair tax that doesn’t take into consideration ability to pay. Accepting the deal will give councils a grant, without having an impact on residents; for now at least.

Also, and put simply, raising council tax is a difficult argument to win in the current climate. Many councils are having to cut services and may be delivering less. Asking residents to pay more each month for services which may be reducing could prove disastrous at the next local election.

Although the scheme is described as ‘voluntary’, there is huge political pressure to accept this deal. Not just from residents, but also from key figures in local government. Bob Neill, Minister for Local Government, sent a letter to councillors setting out the ‘moral case for the freeze’: ‘freezing council tax is a public service in itself’. It is difficult to argue against that one – especially on the doorstep.

Speaking on Radio 4 today (01-03-12), Grant Shapps also hinted that those councils that do reject the deal may not be in a better off position – that their decision could be a ‘mistake’. He said there is no guarantee that those authorities raising their council tax will in fact increase their base for next year – the government will be able to determine which base level to use. Could those that raise council tax with the intention of increasing the base be punished for doing so?

But, there are also reasons to think that this offer doesn’t represent the best deal for councils.

This scheme, unlike that for 2011-12, is for a ‘one-off’ payment, which won’t be built into the baseline. This is significant. The government hasn’t yet decided what they are going to do about council tax for 2013-14. Next year this same deal may not be on offer. If they decide that they aren’t going to propose the same scheme in 2013-14, and as we know, accepting the deal for 2012-13 means that council baselines won’t increase, local authorities may have to consider pushing up council tax by a much higher percentage in 2013-14 in order to plug the funding gap.

But, while the Localism Act abolished capping, it instead included provisions to allow local residents to approve or veto excessive council tax rises through a referendum. The proposal currently sets this as 3.5% for most principal authorities. So councils will have a very difficult balancing act if there is no council tax deal on offer in 2013-14: making up the shortfall in cash in absence of the grant, whilst ensuring that council tax increases are not above 3.5% so a referendum isn’t triggered (which would have associated costs and political implications).

It is also important to note that this funding gap is potentially exacerbated by rising service costs, such as those anticipated in adult social care, and also the changes relating to council tax benefits. Local authorities are facing a reduction of 10% on current spend for council tax benefits when the government hands down both the responsibility and resources to pay for council tax benefits, to local authorities from 2013-14. Councils will have to consider how this cut will be absorbed and whether this will mean passing costs onto claimants.

You’ve also got to look at the profile of councils that have already said that they would reject the deal. You may expect this to only include Labour authorities – but doesn’t. ConHome have been running a Roll of Shame, and currently list 15 Tory authorities that are rejecting the deal.

The real issue at stake is that the current system we have for local taxation is not sustainable. Real reform of council tax is needed, so we do not end up with this same scenario year on year; where councils incrementally raise council tax in order to increase the funding base. I invited some leading voices in local government to look at local government funding back in 2010 in the lead up to the finance review – but as we know, the current government has merely tinkered around the edges. Labour needs to propose real reform of council tax and local government funding at the next general election. Now is the time to engage with Labour local authorities to put forward a credible alternative.

Laura Wilkes is a Policy Manager at Local Government Information Unit. She writes here in a personal capacity.

  • externalities

    I completely agree that reform is needed. To quote the Mirrlees review, it’s ridiculous that council tax “lacks buoyancy, which means that ‘increases’ have to be announced each year just to keep up with inflation, let alone growth in GDP”.

    But that’s not the only problem. There’s also the fact that we’re still working from 1991 values (even for new properties!) due to political cowardice. Plus, £50m properties pay the same property tax as those worth £320,001; and anything more than a cardboard box pays the same as a £40k property. And then there are the problems of real estate bubbles, speculation and unproductive investment which we can’t afford to overlook at the moment.

    The minimum reform should be revaluation and extra bands at the top (and possibly bottom).

    Real reform would come in the form of either a land value tax – http://www.labourland.org/ – or the ‘Housing Services Tax’ proposed in the Mirrlees Review –  http://www.ifs.org.uk/mirrleesreview/design/ch16.pdf . Both could be far, far more progressive than council tax, alongside other benefits, though I think the HST at least could be sold as a reformation/improvement of council tax, rather than a replacement or new tax.

  • Quiet_Sceptic

    Based on council tax increases whilst Labour was in government, the councils should be in a strong financial position. Between 1997 and 2010 council tax increased at rates significantly above RPI so that real-terms funding from council tax payers had been growing steadily for a long period.

    Where did that extra funding go – was it additional funding for local services or was it making up for reductions, or below RPI increases, in central government funding during that time?

    Increase in council tax:
    http://news.bbc.co.uk/1/hi/uk/8533369.stm

    • Dave Postles

      Icelandic Banks?

  • T Dan Smith’s Ghost

    The effective re-introduction of “crude capping” really does show that the Government’s agenda is one of “localism without local government”. If people don’t like their council’s policies then they are already able to express their feelings in local elections, there is no justification for centrally imposed referendums.

    • Winston_from_the_Ministry

       By voting for the candidates that will reduce thir council tax?

      Ho ho ho.

  • JoeDM

    Those councils that insist on increasing taxes on hard working people must be named and shamed very loudly.
     

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