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Section 6: Do Local Domestic Taxes need to be Locally Set?
Introduction
1. In the previous section we considered the respective powers and responsibilities that the Scottish Executive and local authorities in Scotland have in prioritising, shaping and delivering services for local communities.
2. In this section, we explore fundamental questions concerning how these services are financed. We explore how appropriate it is that funding for these services should be determined and provided by the Scottish Executive. We also consider whether there is value in the cost of these services being met either
in part or in full through taxes set and raised locally.
3. It is clear that the £1.96 billion currently raised each year by council tax on domestic properties must either continue to be levied or be replaced by some other forms of tax. The question is whether those taxes should be set centrally or by local authorities.
The Need for Scottish Executive Funding
4. It is clear that some of the funding for local government must come from the Scottish Executive. The principal reasons why there must be an element of Scottish Executive funding for local government are:
- Macro-economic considerations;
- The size of the local tax base and local tax capacity;
- Local variation in service requirements and costs; and
- The unpredictability of tax yields.
Macro-economic considerations
5. Layfield argued in 1976 that "the local government financial structure should reflect the relationship between the government and local authorities". 72 For him central government was seen as responsible for the overall management of the economy. This included:
- The level of output and employment;
- The balance of payments;
- The level of wages and prices;
- The distribution of income and welfare; and
- Ensuring that public expenditure is managed in a way that does not prejudice the Government's economic objectives.
6. While the environment surrounding the UK economy has changed in the intervening three decades since Layfield reported, the underlying principles remain. About 25% of total government expenditure in the UK is spent by local authorities. 73 It is important that the balance of funding (in terms of who has power to set taxes for local services) is set at a level that does not undermine the ability of the Government of the day to control overall taxation levels and manage the economy effectively.
The size of the local tax base and local tax capacity
7. Central government is funded through a basket of taxes, which are balanced to reflect ability to pay and to meet economic and social objectives. Few local communities have a sufficient tax base to be able to fund the totality of local services which today are provided by local authorities. It may not be possible and it certainly would be very complex and expensive to create an equivalent basket of locally-set taxes at local government level.
8. Some degree of equalisation funding from the Scottish Executive is necessary to take account of differences in the capacity of local authorities to raise tax locally.
Local variation in service requirements and costs
9. Both the cost of providing particular public services, and demand upon those services, vary across the country. For instance, the cost of providing school education will be higher in remote rural areas (where the low population density results in relatively low school sizes) and in areas of deprivation where a relatively high proportion of pupils might have additional support needs, such as free school meals.
10. Equalisation funding from the Scottish Executive takes account of these factors, so the additional costs do not fall on local council tax payers. The aim is to provide broad consistency in service provision but not necessarily identical standards of service ( e.g. people living in rural areas cannot expect to have the same degree of proximity to hospitals, schools, libraries and other services as residents of large towns and cities).
Unpredictability of local tax yields
11. In practice, nobody can predict with certainty tax yields in any one year. For local authorities to rely entirely on local taxation would expose the provision of services to risks of tax volatility.
Do We Require Locally-Set Taxes At All?
12. In analysing this question, we have considered first and foremost the effect of local taxation on local accountability.
13. Our consultation revealed quite strong demand (around 90 responses or some 30% of individuals who responded to the Consultation Paper) for a removal of local taxation altogether. This was seen as being achieved through either 100% funding from the Scottish Executive or a nationally set local income tax. However, our public research work revealed less interest or enthusiasm for change.
14. All except two local authorities that expressed an opinion were strongly opposed to 100% funding or the removal of any local tax-setting powers.
15. Inter-dependency of local funding and local accountability have been regarded as received wisdom since Layfield reported. Layfield 74 and McIntosh 75 both concluded that the position of local government was being undermined by increasingly centralised control and lack of financial autonomy and they appeared to assume that local tax-raising powers were a necessary element in local democracy: perhaps a cost of "no representation without taxation".
16. The comparison with The Scottish Parliament is perhaps appropriate. It is recognised as having democratic legitimacy and the Scottish Executive is more than simply a regional administration for Scotland. The Scottish Parliament has limited tax-raising powers and has not used the powers it has. The status of the Scottish Parliament as a legislature and government for Scotland is based on the extent of the powers they have over Scottish life.
17. This inter-dependency appears to have become an unconsciously assumed principle of local government funding that is rarely questioned, let alone challenged. However, we were unable to obtain evidence to justify this tenet, even though we raised the question a number of occasions during oral evidence sessions and we also wrote to COSLA for assistance in understanding their reasons for this position.
18. Those local authorities that oppose 100% Executive funding argue that this would destroy local accountability. For those councils, the ability to give local electorates the choice, either to increase budgets for additional services or to reduce budgets by cutting local tax levels, is critical as a feature which distinguishes local government from local administration. The basis for these views appears to be a belief that there is a direct and inextricable link between the extent of councils' tax-raising powers and their overall powers. Ironically, this view was echoed by some members of the public who expressed support for 100% Executive funding but their opinions appeared to reflect a lack of trust in how local government uses the powers it has.
19. However, Orkney Islands Council and Comhairle nan Eilean Siar saw local funding powers and the question of local accountability as separate. In oral evidence to us, the Comhairle made clear that neither they nor their residents viewed the council as being accountable only for their use of those funds that are raised through council tax:
"We have to be accountable for every penny we spend no matter where it comes from … We have to respond to our own people and tell them how we are looking after their funds."
20. This view was supported by the Orkney Islands' representatives at the meeting.
21. We asked those local authorities who see tax-raising powers as an essential element of local government for evidence in support of their position. They were unable to provide any objective evidence. As one councillor told us in oral evidence in answering a question as to whether he had any evidence to support the argument that tax-raising powers are an essential element of local accountability: "Well, I believe in God but I have no evidence that He exists either". 76
22. We appreciate that it is difficult for local authorities to point to precise examples of activities they have been able to fund specifically as a result of setting council tax at a certain level or of how they have been able to afford constraints on council tax increases.
23. We are not persuaded that the existence of local tax-raising powers is an essential element of local accountability. To us, the principal distinction between local government and local administration does not turn solely on the extent or otherwise of tax-raising powers. Accountability depends on how well the services delivered by the local authority meet the community's needs and the power that authority has to prioritise and shape local services, as well as to deliver them.
24. Both Eilean Siar and Orkney told us in oral evidence that they might accept 100% Executive funding, provided the quid pro quo was much greater local discretion over spending decisions.
25. Our scepticism about the tenet that tax-raising powers are essential to ensure accountability is supported by the MORI Scotland survey which, as referred to earlier, showed that the public are more interested in the quality of services that local authorities provide and how efficiently they use public funds than in their use of tax-raising powers.
26. One reason that several local authorities gave for the need for local tax-raising powers is that the funding system otherwise gives councils very little flexibility in which to cope with perceived inadequacies in the funding settlements they receive from the Scottish Executive. If these councils' argument is correct, then the answer is to address the problem, not look for a way to alleviate it.
27. We see no evidence of any link between local tax-raising powers and local accountability from the perspective of local taxpayers. It is not clear that taxpayers recognise the extent to which annual changes in council tax result from local spending choices rather than from Scotland-wide funding and spending decisions such as changes to levels of Executive funding, other adjustments to the broader funding methodology or any additional costs to local government that arise from implementing national policy initiatives.
28. One striking trend relating to council tax rates across Scotland has been a gradual but steady convergence of most authorities' rates towards a national average. In 2002-03, the highest Band D council tax rate (£1,141) was 41% more than the lowest (£810). In 2006-07, the difference has virtually halved to 21% (£1,213 cf £999).
29. In reaching this view, we have considered the following other factors, namely:
- Parallels with funding for the Scottish Executive;
- Possible conflict with the European Charter of Local Self-Government;
- How 100% Scottish Executive funding might be introduced; and
- Assessment and collection costs.
30. None of these factors persuade us that local tax-raising powers form an essential element of local accountability.
Parallels with funding for the Scottish Executive
31. In oral evidence, we asked several local authorities why they have such difficulties with the concept of 100% central funding, when the Scottish Executive is presently financed in the same way. They tended to respond that local government provides local services or that arrangements for funding the Executive are unsatisfactory and that, in any case, the Scottish Parliament at Holyrood can apply the Scottish Variable Rate ( SVR) to adjust the Executive's budget.
32. We recognise there is a growing public debate about the extent of the tax-varying powers of the Scottish Parliament. To quote Lord Steel of Aikwood:
"The current settlement has improved the ability of Scotland to address its own problems with its own solutions, However it has not solved the problem of a deficit in accountability caused by the UK's highly centralised fiscal system. No self respecting Parliament should expect to exist permanently on 100% handouts determined by another Parliament, nor should it be responsible for massive public expenditure without any responsibility for raising revenue in a manner accountable to its electorate. Greater accountability is not an abstract matter but a principle of good and effective government." 77
33. Should the case for fiscal reform for the Scottish Parliament become compelling, then we accept that with it might come a stronger argument in favour of tax-raising powers for local authorities.
Possible conflict with the European Charter of Local Self-Government
34. It could be argued that 100% funding would run counter to the European Charter of Local Self-Government which states that "Part at least of the financial resources of local authorities shall derive from local taxes or charges of which, within the limits of statute, they have the power to determine the rate". 78 There is no evidence provided in the Charter to justify the proposition.
35. Our understanding is that the Charter has a very limited status in law at present, and this will continue to be the case unless and until it is enacted into domestic law. Nonetheless, the UK Government has ratified the Charter. This, combined with explicit references to the Charter and principles derived from it in subsequent policy statements, 79 could cause difficulty for legislation which ignores the Charter.
How 100% Scottish Executive-set funding might be introduced
36. We have considered how 100% Scottish Executive funding might be introduced in practice. Using the Scottish Variable Rate ( SVR) for this purpose would permanently deprive the Scottish Executive of its availability for other purposes. Furthermore, even if the SVR were used to increase the national basic tax rate by the full 3p, it would only provide around £750 million in 2006-07, 80 or around 40% of total council tax income yield gross of Council Tax Benefit.
37. The Executive could achieve 100% funding by introducing a local tax at a nationally-set rate for Scotland. The local tax could still be collected by councils themselves (as non-domestic rates are now)
or by HM Revenue and Customs if the necessary legislative provision was made.
Assessment and collection costs
38. A tax which is assessed and collected locally - as with council tax - but which is set centrally, as with non-domestic rates, might reduce collection costs but any such savings are unlikely to be significant. This factor was referred to by several members of the public who responded to our consultation.
Conclusions
39. The Committee are satisfied that the Scottish Executive must continue to contribute via central grants towards the cost of providing local services.
40. The Committee have received no evidence that satisfies us as to the need in principle for locally-set taxes and, in particular, that local tax-raising powers are necessary for local accountability.
41. The Committee have been unable to find any evidence in any of our research as to why accountability is enhanced by local government having its own tax-raising powers. Obviously financing local government requires money and later sections deal with the Committee's assessment of the merits and practical feasibility of different tax options. But the argument that local tax raising powers for local government's accountability are "essential", rather than merely "debatable", has not been made.
42. One argument put forward for "centralisation" is the increasing public demand for a standard level of services - the avoidance of any "post-code lottery" factor. We recognise there is a need for common minimum standards across the country. But thereafter, the evidence we received from respondents and from local authorities themselves recognised that different communities have different needs. There is a strong view amongst local authorities that they could best meet the needs of their local community if they were given more freedom to manage the delivery of services. We do not think that the "centralisation" trend is either necessary or desirable. The Committee concur with the argument put forward by the local authorities.
43. The Committee unanimously believe in the principle of subsidiarity and are concerned by the creeping erosion of local government's discretionary ability to manage its affairs. Increased "centralisation" has been occurring for decades. We do not believe that this is the most effective way to provide local services.
44. The Committee found compelling the arguments for allowing councils greater or even total power over how they run their affairs. The Committee sees no reason why the principle of devolution should stop at Holyrood. The Committee recommend that the Executive consider exactly how councils could be given control in future over how services are delivered in order to meet the objectives laid down by or agreed with the Executive. Councils should have the power to manage the process of delivery to the objectives rather than be controlled by, say, being given ring-fenced funds.
45. The Committee were attracted by the idea of local tax in whatever form being set centrally with the funds assigned to councils on a "one-line budget" basis - i.e. each council would receive a block grant and then have agreed targets and objectives which they would have to achieve. How they achieved them would be up to each council. Consequently, a council's accountability to their electorate would be focused unambiguously on the delivery of their services.
46. The Committee recognise that such a proposal would be considered radical. However, we believe that the idea is worth further consideration, but only if local authorities were given much greater discretion over their spending decisions.
47. In the meantime, the Committee's recommendations on how to improve local government finance are set out in subsequent sections. We make no recommendation on the retention, reduction or extension of current tax-raising powers for local authorities.
48. We conclude therefore that the answer to the question "Do local domestic taxes need to be locally-set?" and the extent to which they fund local government must be determined in the light of our Recommendation 1 in section5.
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