PROFESSOR ARTHUR MIDWINTER analyses the impact of  the SNP’s council tax freeze, critiquing the centralising effects of its implementation.

 

Introduction

The council tax freeze was introduced in 2008 – 9, as part of a new concordat between the Scottish Government and COSLA. The financial mechanism used was ring fencing £70m pa in the Local Government settlement which would only be paid to councils who implemented the freeze.

The Concordat’s rhetoric of partnership and joint accountability falls short in practice. There is a lack of clear lines of financial accountability, and of robust accounting data, which creates ambiguity and confusion over political responsibility for delivery of the policy commitments. 

Moreover, despite expressing concerns over the funding levels and the SNP’s manifesto costing’s COSLA advised councils not to use the settlement to “wrong foot or embarrass ministers” nor blame the Administration for “funding difficulties”.  Problems were to be resolved in private by a joint working group of officials,  hardly the transparency expected from devolution. 

This paper provides a critical assessment of the financial assumptions underpinning the council tax freeze,  and the scope for genuine efficiency savings without damaging frontline services. The funding gap created by the freeze has generated continuing instability in council finances, and an unprecedented squeeze on services.

The Financial Framework

Local authorities set revenue and capital budgets. Revenue covers the daily running costs of services such as salaries, supplies, energy, maintenance and interest payments on borrowing.  For capital expenditure, capital spending creates an asset which provides a flow of benefits to the community over a number of years, such as schools, libraries, roads, and police stations.  In revenue spending, councils cannot budget for a deficit and must set a balanced budget. The Scottish Government supports revenue spending on services with special arrangements for council housing finance. 

The Scottish Parliament inherited a framework in which around 80% of council revenue was funded by central grants.  Today, around 7.5% of such grants are specific. These grants are often described as “ring-fencing”.

Around £2 billion is funded through non-domestic rates – a property tax on businesses and public institutions. It was formerly a local tax, and is now set centrally and collected by councils, paid into a central pool, and redistributed to councils on a population basis. 

The remainder is funded by a Block Grant of around £7.7 billions through a needs-based formula based largely on the client numbers for a service, known as primary indicators. These are often self-evident, and selected by judgement, and include school children, the elderly, or total population, with an assessment for each major service or sub-service.  Secondary indicators are factors seemed to add to the cost of provision, and based on regression analysis against past expenditure, to reflect factors such as poverty and sparsity which are tested annually and reviewed regularly. This formula has been in use since 1980, and is subject to revision, although the current emphasis is on minimising change in the interests of stability.  Most councils have gripes about aspects of the formula which disadvantage them.  Needs assessment is not rocket science. Allocations are adjusted by a stability factor to ensure authorities receive a minimum increase or maximum decrease.

 Developments Since 2007

In 2007, the SNP pledged to freeze council tax then replace it with a nationally set local income tax, dropping their long-standing commitment to local democracy and fiscal autonomy. They also promised major spending increases on education and social work. The funding envelope, even including the theoretical efficiency savings, was insufficient to fund this package. There was a shortfall of £400 million on service spending, and a shortfall of around £800 million on the cost of LIT, which was later abandoned.

After the 2011 election, the SNP has committed to a further five year freeze, with forecasts of cuts in jobs and services in local government in the Scottish media. Efficiency savings of  over £800 million are required under the package.

The Economic Impact

The council tax freeze is regarded as popular in the Scottish media. It is difficult to see how freezing council funding in this way can deliver the “employment opportunities, protection for vulnerable people and reduced levels of poverty” in local communities as claimed in the new Scottish Budget. Further, the freeze promises “protection for hard-pressed households across Scotland, many of whom have been affected by the economic downturn and UK welfare reform”. 

The reality on the ground is different. Council employment has been falling since 2007, and the freeze is regressive, benefiting rich households at the expense of the poor. In practice, the freeze is a real cut in council funding of £280 million off the Scottish Budget so far. If that had been applied to services, and council tax raised in line, then extra council tax benefit would have accrued to claimants. As 20% of Scottish households attract full benefit, council tax freeze is taking resources out of the economy.

The resultant budget cuts adversely affected local government staff more than NHS staff. Over the four years from 2007, spending on health services grew by 2.5% in real terms, whilst spending on local government services fell by 3%, after discounting the freeze funding. (See Table 1, bottom of page).

Yet the SNP has consistently claimed its funding for local services was a good deal. Together, local authorities and health boards employ 93% of public sector staff in the Scottish Budget. The SNP claims to be supporting employment, and defended the priority given to health in its budget on economic grounds, that sustaining public employment aids recovery and health is a major employer.  That argument is even more relevant to local government! 

In four years of SNP government, employment in health grew each year, from 154,200 to 162,600, or growth of 5.4%, whilst local government staffing fell from 318,300 to 301,900, a fall of 5.1%. The Scottish Government employment stats state some of the reduction reflects transfers from Glasgow City Council to an arms-length organisation, CORDIA, which it claims explains the 7,700 staff reduction from 2008 to 2009.  In fact, only 2,342 staff were transferred. Accounting for this number leaves 14,058 posts, or 4.4% lost between 2007 and 2010, with losses in each year (See Table 2). 

As the UK government squeeze bites further during 2011-12, further job losses are being forecast by both the NHS and the councils, yet the SNP is still pretending its council tax freeze is beneficial. 

The SNP also claims it will make Scotland fairer as a strategic objective. Ironically, their main criticism of the council tax is it is unfair and regressive and takes no account of ability to pay.

This ignores the impact of council tax benefit, which is claimed by 25% of Scottish households. As the Burt Report observed, an effective benefit system is a key element in making any property tax progressive. In Scotland, 80% of benefit recipients live in low cost housing. 

The freeze, therefore, provides no relief or support for households on full benefit. By contrast, as Table 3 below clearly shows, the level of savings is greatest in higher cost housing for those households outwith the benefit system (See table 3).

This shows clearly the regressive nature of the tax. Based on data presented in the Burt Report, I would estimate that nearly one million households got no benefit from the council tax freeze, whilst 100,000 households in the most expensive housing saved around £500. This is not creating a fairer Scotland.         

Lessons for Labour

The council tax freeze has had perverse consequences on local services. It has served to reduce employment, not sustain it as Mr Swinney claimed, it has reduced frontline services, not protected them, and it has a regressive impact on women in low-paid council jobs, low income households, and disadvantaged households most dependant on council services.

 Secondly, this trend reflects SNP decisions. It began in 2007, well before cuts in UK grant materialised in 2011. It favoured populist options over sound finance.

Thirdly, these sustained cuts in spending far exceed the 1% pa  delivered by the Thatcher Government in the 1980’s. This trend is not sustainable in the long term. The SNP Government cannot both cut taxes and protect services.

In the 1980’s Labour councils used their tax powers to protect council services and communities from the cuts agenda. They consistently produced evidence of the impact on services of making dodgy financial assumptions in allocating grants.

 The council tax freeze has a number of key lessons for labour. These are:

  1.  It is regressive, as it provides the greatest cash gains to the wealthier households,  and no cash gains to poorest 20% of households on full council tax benefit.
  2. It has no significant economic benefit , indeed some higher income households will either save or spend some of their on exports, taking resources out of the economy.
  3. Combined with the SNPs persistent underfunding of the Concordat, and the reliance on increased “efficiency” savings, it is council jobs and frontline services that will be cut.
  4. It centralises power by removing the fiscal autonomy councils need for effective political choice and accountability, and improves SNP priorities on other parties.

So, what can be done?  Practical alternatives under devolution are few, as the SNP’s mishandling of the local income tax reform showed. In practice, property taxes are the most common form of local taxation in the world, but in the UK we still raise less from it than other countries. There is scope to make it more progressive.

The main public criticisms of council tax in the Burt Review were the level of increases and the unfairness. These perceptions do not square with the evidence but property taxes tend to be unpopular because of their visibility and their inelastic nature (i.e Income Tax revenues can grow automatically through inflation, council tax revenues do not). 

Moreover, Scottish council tax levels / increases are not particularly high. In the first decade of devolved government, whilst block grant grew by 3.8% per annum in real terms, council tax grew by only 1.8% because of sound grant management. As a result, the average Band D tax in Scotland fell below the English level for the first time in 2002 and was £172 less in 2007.

Secondly council tax is more progressive than it’s critics recognise – In part because of Council Tax Benefit. Burt showed that there is a general relationship between income levels and property bands. 72% of households in Band A have low incomes, whilst 81% of households in Band F-H have higher incomes.

Burt showed that the council tax system could be made more progressive by increasing the number of bands and increasing the multiplier – which determines the Council Tax distribution between bands – from 3 – 7. This would be both generally more progressive but would particularly help single adult households, which are more concentrated in the lower bands. (Burt found no case for special treatment for pensioners as a group).

 The council tax has never been as unpopular as the media inferred. The evidence from opinion polls is that it has never exceeded 4% in Mori’s “Scotlands most important problem” poll, compared with 52% from the poll tax.

The real impact of the council tax freeze should be exposed. The SNP has failed to “improve outcomes, reduce poverty, protect vulnerable people, and provide more employment” as claimed in the local government section of the current budget. It is hampering the economic recovery with the council tax freeze, as councils now have to find savings to attract the grant on top of the budget cuts, making savings of over £1 billion required, plus the efficiency saving targets of around £600m – a total of £1.6 billion!

Centralising trends occur during fiscal crises. In the 1980’s, one researcher described central government’s strategy  as “cut someone else’s budget, not your own” and identified local government as “The major target for central government economies” (1). Thirty years on, the SNP is enforcing the same Thatcherite strategy on local government.

Professor Arthur Midwinter is an Associate in the Institute of Public Sector Accounting Research of the University of Edinburgh Business School.

NB/

  1. See Howard Glennester (1981) “Social Service Spending In A Hostile Environment”. In C Hood and M Wright (Eds) Big Government in Hard Times (Martin Robertson, Oxford)

Tables/

Table1: Budgetary Change in Real Terms, 2007-2011
 

2007

£bn

2011

£bn

 

%

Funding of NHS

11.089

11.360

+2.5

Funding of Local Government Services

11.272

10.946

-3%

 Source: Scottish Budget 2011-12, Annex D – Treasury Deflator applied to 2007

 

Table 2:  Staffing Levels 2007-2010
 

Local Government

 NHS

2007

318,300

154,200

2008

313,800

157,700

2009

306,100

161,700

2010

301,900

162,600

Table 3: Total Savings per Household from Council Freeze, 2007-2011

Band

Saving

Per Week

A

£192

46P

 

B

£224

54P

 

C

£256

62P

 

D

£296

71P

 

E

£360

87P

 

F

£424

£1.02

 

G

£488

£1.17

 

H

£584

£1.40