The council tax conundrum

By Sarah Hayward / @sarah_hayward

So the big trail from Osborne’s speech was the Conservative’s pledge to provide funds to ‘freeze’ council tax for another year. I’ve yet to plough in to it enough to know whether this is new money or not. But it’s certainly not actually new policy – it was promised at Tory conference as far back as 2008 and was included in the coalition agreement. It’s possible confirmation of the actual cash to do it for next year is new (I’ll update if I can find out).

The ‘freeze’ is good politics. There’s no doubt about it.

Council tax is part of a fairly outdated system of funding for local government. The amount it contributes to a council’s total budget for services varies wildly. Broadly the more deprived an area is, the higher the grant from central government, the lower the proportion of the budget comes from council tax. But this is a system the government is seeking to undo – they see targeting resources based on deprivation as unfair you see.

In Camden, with areas of relatively high deprivation council tax – prior to the cuts – contributed just under 25% or about £100m of our total budget for services. So even where our grant dwarfs the council tax take the proportion of our total spend is significant.

Council tax, as you will all know, is levied annually from April to April, set in an annual budget setting process. It’s different from income tax or vat because you get a physical bill and have to arrange to pay it separately – it’s therefore much more visible. Unlike the States, VAT is included in the ticket price so you never really see it, same with PAYE taxpayers who check their wages have gone in to their bank account and only vaguely engage with (or understand depending on how complex your employer presents the information) the lines of numbers on their pay slip. This means that psychologically our relationship with council tax is different. The policy to ‘freeze’ it understands this relationship between the taxpayer and the bill.

But what the announcement doesn’t say, is that the funding to ‘freeze’ is a real terms cut. Like last year, councils will be given the equivalent of, as far as I can ascertain an arbitrary 2.5% rise on their council tax in return for ‘freezing’ it. With CPI running at 4.5% and RPI in excess of 5% the level of funding amounts to a real terms cut. Meaning councils that set a one year budget in February/March this year will now have to do some additional thinking about what they do locally.

To give you an idea of the impact of this cut that 2.5% funding represents in Camden it amounts to £2m-£2.5m depending on which inflationary measure you use. This could roughly back fill the cut we’ve made to our voluntary sector grant funding, or the cut we’ve made to libraries, or that which we’ve made to youth services, it could fund a whole menu of smaller but important projects that have suffered like good neighbour schemes and discretionary freedom passes etc. We’d have to choose which to prioritise but you get the picture about what it could fund.

In Camden, we’ve left the possibility of council tax rises on the table, but not planned for it. The financial situation, nationally and internationally is so precarious that to do anything else would I think be foolhardy, this is particularly the case because although we have a ‘commitment’ about the third year of funding from government it’s not confirmed. They could yet impose further cuts in 2013/14 with no redress for councils. Any rise would have to be done carefully and in my view, very carefully hypothecated to a particular service or issue.

What the government has done today is make it a lot harder politically to put this back on the table as we start to prepare our budget for next year. Even before today is was going to be politically treacherous territory for any council. The voter relationship with the tax and the financial squeeze families are facing means decisions to take more money from families advisedly.

But because this has been covered by the media as funding for a ‘freeze’ the Tories are quickly winning the presentation battle. In the minds of voters councils will have extra cash available so as not to increase the tax locally. And no local authority is now going to be able to play the presentational catch up to ensure that voters understand that because of inflation this is a further cut to funding for local services.

It’s also worth noting that people on low incomes benefit less than people on higher incomes, that’s because council tax benefit – available to some people and families in lower paid work – absorbs both reductions and increases in the tax. So the people who benefit most are those that pay their full council tax.

One of the reasons that we’ve left the tax on the table in Camden as an option is because it’s the only meaningful way that councils have to raise extra revenue. Other streams are self limiting – like charges for leisure activities, there’s only so much you can charge before people stop paying, or strictly ring fenced – like parking where what you can spend revenue on is strictly controlled.

At a time when the government has chosen to target local councils particularly hard for cuts in public spending the limitations of having only one meaningful way of raising revenue locally is demonstrated in stark relief.

But as I said at the beginning, it’s good politics, however damaging the policy might be in the long term to local services and local communities.

This post was originally published at Sarah Hayward’s blog.