Governing England: funding matters

by Professor Iain McLean FBA

18 Jul 2018

Most people don’t much care about their councils or how they are funded, but they interact with them all the time. Their council (or one of their councils) collects one of the most hated taxes in the UK: Council Tax. Councils also provide some of the most visible services: everyone knows that the council empties their bins, and notice when collections become less frequent. Most people know that the local council is responsible for local roads, and notice them as they are faced with ever worsening potholes. These problems are worsened, or made no better, by the distribution of public spending.

In 1973 I was elected to Tyne & Wear County Council, becoming vice-chair and then chair of its economic development committee. We established that Scotland was richer than the Northern (now North-East) region of England yet received more public expenditure per head. To the extent that public expenditure relieves poverty, the North of England should have received more.

In the British Academy’s new report, Governing England: Devolution and funding, Rogers and Evans’ show that not much has changed since. Scotland still has greater GDP per head than the Northern regions of England, but receives more, not less, public expenditure per person than these poorer regions. The other stark outlier is London. By far the richest region of the UK, it also benefits from considerably higher expenditure per person than the other regions of England.

Angel of the North near Gateshead, Tyne & Wear, England. Photo by David Wilson Clarke.
Angel of the North near Gateshead, Tyne & Wear, England. Photo by David Wilson Clarke.

Local finance in limbo

The way in which local government in England is funded is set to change. Councils’ grant from central government, the Rate Support Grant, has been substantially reduced and is due to be eliminated altogether by 2020. In 2015 the incoming government announced that local government would be funded only from council tax and business rates, the latter to be fully returned to local authorities by 2020. Since then, some stuff has happened: notably the Brexit referendum and the 2017 General Election. The Chancellor who pushed this localisation, George Osborne, has left politics. The Bill that would have formed the legal basis for relocalisation was dropped from the Queen’s Speech in 2017. Now English local finance is in a potentially dangerous limbo.

These changes have the potential to reduce the amount of equalisation across England. This matters because it risks increasing divergence between the areas of England at a time when demand is increasing – half of councils’ spending goes on social care – but there is no correlation between areas with the greatest need for and those areas best able to pay for it.

Moves towards integration of social care and health

Equalisation is a question that has troubled policymakers since the days of the Elizabethan Poor Law. Relieving poverty has always been seen as a local responsibility. But the areas with the most poverty are also the areas with the fewest resources to do anything about it. Aileen Murphie observes that ‘business rates yield varies between areas through accidents of history and geography’.

Social care is increasingly spoken of as being integrated with health, but for now it is not. While social care is paid for by councils and individuals, the NHS is centralised – it has never been under local government control. David Phillips’ chapter in this volume explores some of the issues around health and social care: two statutory services, one locally funded and organised centrally, the other a mixture of private and local government spending but increasingly centrally mandated.

Delivering a service on the basis of need, without regard for circumstances requires equalisation but need for state-funded social care is highest in those council areas where the lowest proportion of those needing care have the resource to pay for it.

What underpins the National Health Service, indeed the ideal of the welfare state, is that everyone pays in and everyone is covered, getting the same quality of service. But how far does people’s belief in this ‘social union’ go? People may, reluctantly, accept a postcode lottery in bin-emptying and pothole-filling. But what about social care? Recent moves are towards integration, even parity, with the NHS– that there should be national standards which each citizen should be entitled to, regardless of their wealth, income, geography or whether they live in a council area with a robust or a weak tax base. Delivering a service on the basis of need, without regard for circumstances requires equalisation but need for state-funded social care is highest in those council areas where the lowest proportion of those needing care have the resource to pay for it.

Shortcomings of Council Tax

The Rate Support Grant used to be the way that local government was equalised, but it is set to wither to nothing. Knowsley has a lower tax base per head than Kensington whatever the measure. Knowsley also has more needs, especially as spending is focused more and more on social care. As Tony Travers explains, in 1976 Sir Frank Layfield and colleagues asked the government to face the choice: either give local government a serious tax base or make it an agent of central government. For forty years, governments have ducked Layfield’s challenge.

A street in Kensington, London, UK. Photo by Yaanch.
A street in Kensington, London, UK. Photo by Yaanch.

Local income tax would not solve the Knowsley/Kensington dilemma, but it does tax individuals on the basis of their ability to pay. Both of the taxes used to finance local government, Council Tax and Business Rates, fail even that test. Rogers and Evans set out many of the shortcomings of Council Tax and call for it to become part of the political debate.

Councils now rely more than ever on council tax and business rates. To get more money a council must grow its tax base by, most obviously, granting planning permissions for new housing and commercial (re)development. But here local politics kicks in. Those who already live in the area have votes. Those who might move in if new houses are built or new businesses attracted do not.

Tackling the inadequate tax base for local government

Recent proposals for change fail to tackle the inadequate tax base for local government. In cities, the problem is most acute, but the solution is closest to hand. Because infrastructure improvement is fastest in cities, so is the uplift in land values. When that planning permission is granted land values increase, sometimes dramatically but almost all that uplift has been a windfall for property owners. If a way were found to tax it, at any rate less than 100%, property owners would still get an uplift and the finances of conurbation local government would be transformed.

Most of the value of a house is the value of the land it sits on.  With commercial properties, the market is less dense but several studies have shown that calculating the uplift in land values created by planning permissions and infrastructure developments is feasible. Land value capture could revive local government in England more surely than any of the devices that have been tried since (and including) the Poll Tax.

The amount of government money going to councils is being reduced and the demands on them are increasing. Something has to give. With Brexit looming and public finances in the news again, it is now all the more important to assess objectively how England is funded.

Iain McLean FBA, FRSE is a professor of politics at Oxford University and a fellow of Nuffield College, where he directs a public policy research unit.

Governing England: Devolution and funding comprises of five new essays which examine how government and public services across England are, have been, and should be funded from a range of perspectives.

This new report is part of the British Academy’s Governing England programme which explores questions about England’s governance, institutions and identity.


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