Making council tax fairer is a good place to start on levelling up

By John Dudding | 26 January 2021

Council tax is back in the news. The Spending Review announced £4.5bn of council funding, most of which was to come from a 5% rise in council tax. Labour called for this to be stopped to protect struggling families during the pandemic. With a debate in Parliament this week, the issue is here to stay on the agenda.

In the past week alone, much has been written about the dangers of raising taxes during an economic downturn, and about the contrast of expecting local leaders to raise tax whilst central government doesn’t. We have also been reminded about the regressive nature of council tax – the IFS calculate the poorest fifth of the population pay 5% of income versus 2% for the richest fifth – and, of course, that the tax bands are based on 1991 property prices, favouring the London homeowners where prices have increased most.

But there is another issue at play here, and one that does not sit well with the Government’s levelling-up agenda. Allowing – and expecting – councils to increase council tax by 5% will mean very different things for households in different parts of the country. Whilst the percentage increase is uniform across places, the starting level of council tax varies significantly across the country. Residents in areas already with the highest tax rates will face the biggest increases in cash terms. Our research at CPP shows that, if councils increase tax by the maximum allowed, Band D householders in Gateshead will see a council tax hike of £108 compared to £71 in Windsor and Maidenhead. Even neighbouring authorities could see stark differences: in Kingston-upon-Thames the increase would be £112, twice that of Wandsworth’s £55.

Some councils have said they will not increase tax by the full 5%, but this is a difficult decision given the current state of local finances. Last year 85% of councils did increase council tax by at least 3.9% of the 4.0% allowed. This is unsurprising given that the maximum allowed increase appears what central government think is necessary to safeguard services: it was assumed in the chancellor’s announcement of £4.5bn of extra council funding and, more importantly, in calculation of council’s grant funding.

In some cases, it would be reasonable to argue that variation in local taxes is a positive sign of local democracy – elected leaders making trade-offs between tax and spending. But in reality, current council leaders have limited flexibility. Instead, the place to place variation in council tax is the legacy of historical choices that have been locked in by recent central government policy. From the mid-2000s, central government has placed tight limits on percentage increase in council tax with no regard to the big difference in tax levels that existed between places. While councils are allowed greater tax rises with a referendum, this has never been taken forward.

Central government further locks in this historical legacy by linking grant funding decisions to the level of council tax – the higher your tax rate the lower your grant. This is true of the main council grant, the settlement funding assessment, following the method for cutting grant funding from 2016, but it can be seen most clearly in this years’ social care grant. The majority of this grant is calculated to reverse the differential impact of the allowed 3% social care precept. A 3% precept means a tax increase of £55 for a Band D household in Gateshead but only £14 in Westminster. The difference, once account is taken for tax base and relative need, is made up by the central government grant. In effect, the national exchequer is subsiding the low council tax rates of some councils.

Issues with council tax are of course not new and stem from a complex legacy. In the past week there have been renewed calls for wholescale reform. But if this requires more political capital than the government currently has, there are smaller changes they can make. Most simply, they should specify any maximum council tax increases in £ terms not % terms, as is already done for the policing element of council tax. This would stop the unfair differences in council tax rises between places even if it does not return to councils full control over tax levels.

A bolder, but entirely possible, option would be to calculate grant funding against a lower assumption of percentage council tax increase. If the chancellor allows a 5% increase in council tax, he could announce funding and calculate grants as if there was a 3% increase. This would return to individual councils flexibility to raise funds above what is deemed necessary for the average council, without impacting grant funding.

Looking forward, the Fair Funding Review, already long overdue, has the opportunity to return grant funding to a fair footing by calculating it with respect to the tax base of an authority not the historic tax take. This could mean providing central government grant as if council tax rates were harmonised across places.

Any changes to council tax, including these, will hurt some places relative to others. But the current system is already, in effect, a postcode lottery built on historical legacy rather than economic sense or local control. If the Government wants to level-up, fostering inclusive growth and recovery across the country, making council tax fairer - or at least stopping making it more unfair - would be a good place to start.

John Dudding is research analyst at the Centre for Progressive Policy

Conservative MPs refuse to vote down hike in council tax

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