Chapter

14 United Kingdom

Editor(s):
Teresa Ter-Minassian
Published Date:
September 1997
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Author(s)
Barry Potter

The United Kingdom had a well-established system of local government finance and intergovernment fiscal relations, which remained relatively stable from Victorian times until the late 1980s. Over the last 15 years, however (and particularly since 1988), significant reforms in the functions, structures, and above all, the financing of local government have begun to reduce the role of local government within the economy. The functions and hence the size of local government has diminished, and the structure is being simplified.

The reforms pursued over the 1980s (which culminated in the introduction of the community charge or poll tax) were intended to encourage greater local accountability and to devolve financial responsibility. But the reforms failed: indeed, the result, by the early 1990s, was the reverse of the original intention. Local governments’ freedom to set their own budgets and to determine local taxes have been progressively circumscribed by the central government. Contrary to developments elsewhere in Europe, the principle of subsidiarity (often cited as desirable by the U.K. government in other contexts) has been clearly subordinated to greater central control over macroeconomic aggregates and the local tax burden.

Structure of Government

Local government structures differ in each of the three countries within Great Britain (England, Wales, and Scotland).1 Historically, the emergence of powerful city councils is often traced back to the late nineteenth century but the traditional shire authorities in rural areas stretch back much longer, to before the Middle Ages. The most recent comprehensive structural changes were undertaken in 1974, following the Redcliffe-Maude report. In both England and Wales, a two-tier system of elected local governments was established, covering shire counties and districts in rural areas, and metropolitan boroughs and districts in urban areas. (In Scotland, except for a few single-tier island authorities, the senior tier was referred to as a region rather than a county or borough.)

Under the 1974 reforms, the main local authority functions in England and Wales were split between the two tiers. The principal services allocated to the lower tier included housing, environmental services, and certain local transport responsibilities. The upper tier was given responsibility for education (which accounted for about 50 percent of total local government spending), police, fire, social services, and structural planning. The 1974 reorganization of local government was widely recognized to have been expensive, leading to a general levering up in salaries and numbers of personnel.

Nonetheless, in the light of the decreasing functions being undertaken by local authorities over the course of the 1980s, the government announced in 1992 that a new Local Government Commission would review the local government structure in England. (Separate reviews were established for Scotland and Wales.) Initially the broad policy intent seems to have been to shift toward more unitary councils but, in practice, the commission in England has largely favored retention of the status quo with some boundary changes, plus the creation of a few additional single-tier authorities, for example in areas of rapid population growth, such as new towns. Apprehension about the possible “cost of change” consequences in terms of higher personnel expenditures has discouraged a more extensive reform of the present structure. By contrast, in Scotland and Wales, a different approach was pursued: single-tier authorities were reintroduced in 1996, reflecting a widespread sentiment that the two-tier arrangement was too cumbersome for small countries.

Current Arrangements

Expenditure Assignment

After a progressive addition of new responsibilities following World War II, particularly in social areas, transport, and planning, since 1979 there has been a considerable reduction in local authorities’ powers and functions. Whereas local government accounted for 42 percent of total government spending in 1979, by 1994 that figure was reduced to 36 percent.

The main changes have taken place in housing, education, and transport (see Tables 1 and 2). In housing, the extensive sale of social rented housing to existing tenants, the elimination of the right of local authorities to build or buy houses, and the substitution of housing associations as the main provider of social housing have substantially reduced local government net capital expenditure. In education, the removal of polytechnics, sixth-form colleges, and colleges of education from local authorities’ control and the transfer of some schools to grant-maintained status (run by the Department of Education rather than local authorities) have cut back local authority capital spending and reduced the growth of current expenditures on education. In transportation, the privatization of local bus services and removal of local rail and bus subsidies have also been significant in lowering local government spending. In Scotland, in 1996 water services were also taken away from local authorities’ control and privatized. Indeed, over the last 15 years only one major new service has been entrusted to local authorities—community care (essentially care of the elderly). Even that decision seems to have been taken somewhat reluctantly by the government (it was delayed for several years), and in the absence of a better alternative.

Table 1.United Kingdom: Local Authorities’ Current Spending by function(In millions of pounds)
1979198319891993
Current accountPercent of totalCurrent accountPercent of totalCurrent accountPercent of totalCurrent accountPercent of total
Education17,53261.311,95559.917,56156.920,10249.4
Housing850.71680.82330.84431.1
Personal social services1,50412.22,60613.14.39514.26,90917.0
Fire services and police1,81414.83,27416.45,41217-58,14820.0
Transport and communications8296.81,2916.51,6165.22,2255.5
Other economic affairs and services5164.26513.31,6345.32,8907.1
Total12,280100.019,945100.030,851100.040,717100.0
Source: Central Statistical Office, National Accounts (Tables 8.2 and 8.3).

Current account data exclude expenditure of polytechnics in England from April 1989 and FE sixth form colleges from April 1993.

Source: Central Statistical Office, National Accounts (Tables 8.2 and 8.3).

Current account data exclude expenditure of polytechnics in England from April 1989 and FE sixth form colleges from April 1993.

Table 2.United Kingdom: Local Authorities’ Gross Capital Expenditure in England(In millions of pounds)
1987/881988/891989/901990/911991/921992/931993/94
Education1592766890813798767853
Housing23,2463,4314,9082,9392,5212,2462,278
Personal social services144171218168160160198
Fire services and police53606948515772
Transport and communications7759611,1349641,0871,2611,447
Other economic affairs and services1,1991,5302,1771.3461,1801,0181,243
Total6,0096,9199,3966,2785,7975,5096,091
Sources: H.M. Treasury, Public Expenditure, Statistical Supplement to the Financial Statement and Budget Report 1994–95, and Statistical Supplement to the 1992 Autumn Statement.

Includes housing association grant.

Capital account data exclude houses for specific services (for example, police); these appear under the service concerned. Data are net of receipts from sales of council houses and other.

Sources: H.M. Treasury, Public Expenditure, Statistical Supplement to the Financial Statement and Budget Report 1994–95, and Statistical Supplement to the 1992 Autumn Statement.

Includes housing association grant.

Capital account data exclude houses for specific services (for example, police); these appear under the service concerned. Data are net of receipts from sales of council houses and other.

Tax Assignment

In principle, two local taxes are now raised by local authorities—the national nondomestic rate (also known as uniform business rate) and the council tax. Until 1988, there were separate domestic rates for households and nondomestic rates for businesses. Rate payments were the product of a rateable value per property, estimated on rental values revised every five years (“revaluation”), and a rate poundage set by each local authority. After a hostile public reaction to the revaluation of properties in Scotland in 1985, a political commitment was announced to find a replacement. The outcome—which was to have fundamental repercussions for central and local government—was the introduction in 1989 in Scotland of a community charge (colloquially referred to as the poll tax); this community charge was introduced a year later in England and Wales.

The community charge was a poll tax, levied on all adults (over 18 years) in each household. Community charge rebates were available to poorer adults, including students, but all adults were required to pay a minimum of 20 percent of the community charge set by the local authority. The universality of the community charge was designed to promote local accountability: since all adults paid the charge for local government services, they were expected to take account of the size of the charge and quality of local services in casting their votes. However, the community charge created immense practical and policy problems: there were widespread campaigns against the tax on the grounds that it was regressive, excessive in size, and inequitable. There were riots on its introduction; noncompliance and noncollection proved to be serious problems. After two years, the abolition of the community charge was announced.

In its place, the domestic tax base returned to a modified form of domestic rates, termed the council tax. But the modifications were substantial. First, the tax base was changed from rental values to capital values; as under domestic rates, however, the tax liability falls on the householder (that is the occupant, whether tenant or owner) in the property, rather than on the owner. This was intended to retain the household principle that each adult should contribute to the tax payment—although it is unenforceable and tax liability in practice falls on the head of household. Second, the council tax was based on a broad banding of properties into eight categories, rather than a specific capital value. Third, a reduction in council tax liability was made available for single person households, despite the obvious disincentive to optimize the use of housing. This feature of lower liability for single adult households was also held over from the community charge. Fourth, more extensive income-related subsidies were available to householders than there were under domestic rates and the community charge.

More difficult to define is the nature of the national nondomestic rate. When the community charge was introduced in the late 1980s, this replaced the local nondomestic rate. Previously, this nondomestic or business rate had been set locally and formed part of the local authorities’ tax base. Under the post-1988 regime, a single national rate poundage was set separately in Scotland, England, and Wales. (The rate poundage is indexed year by year.) The proceeds of the tax payments were pooled nationally and redistributed on a per capita basis to the local authorities. This arrangement was broadly unchanged under the 1993 regime, although the precise basis for distributing the pool to local authorities is determined annually by the central government.

In practice, therefore, the national nondomestic rate is better seen as a central government tax whose proceeds are earmarked through a current grant to the local authorities. A single national nondomestic rate in each of the three countries has not been achieved, however. There remain subsidies paid to businesses to prevent rate bills from rising faster than inflation in areas where the switch to a national basis raised tax payments. There are also special arrangements in Scotland to enable gradual harmonization between the Scottish and English rate poundages.

Grants

The grant systems are separate in England, Wales, and Scotland. All are highly complex, but are based on the same general approach. In essence, there are two kind of grants: a block grant, termed revenue support grant in England and Wales, and a series of specific grants. The annual block grant is determined as follows.

First, the central government sets a guideline figure for total standard spending for local authority current expenditure, determined essentially on macroeconomic grounds in the context of setting the annual public expenditure budget. The total standard spending is then split between categories of authority within each county in England, for example, between metropolitan districts, metropolitan counties, rural districts, and rural counties. Second, for each local authority, there is a standard spending assessment. This is the amount the government estimates should cost the local authority to provide a common level of local services, consistent with the aggregate total standard spending. The revenue support grant is distributed so that, if a local authority spends at its approved standard spending assessment, the authority can charge a standard council tax (a government-set norm) for a household in a middle-band property. Thus,

Revenue support grant = standard spending assessment − distributed share of national nondomestic rate income − council tax revenue at standard council tax.

The standard spending assessment for each authority is built up on a service-by-service basis, usually by multiplying the numbers in the client group (for example, pupils for education) by an estimated unit cost, allowing for additional costs (for example, transport of pupils in remote areas). These allowances for additional costs are based on cross-section regression analysis, which is used to attach weights to factors such as climate and population density, that influence unit costs.

The determination of standard spending assessments is not carried out by an independent body, 2 but rather by the responsible government department in each of the three countries, in consultation with the local authorities. The distribution of the grant in each country has thus, in part, become a political, rather than a fully objective process. There are several opportunities for this political input. First, the share of total standard spending for each the four types of councils can be varied. Second, the weight given to each of the seven main services within the total can also be changed, for example, by boosting the total standard spending assessments for education, while compressing that for environmental services. Third, the weight attached to the factors determining relative needs for services can also be varied. Indeed, it is common for individual authorities or groups of authorities to lobby for the inclusion of new factors (a recent example is miles of coastline as a determinant of the cost of fire services) or for greater weight to be attached to existing factors. One result of such lobbying is a proliferation in the number of service programs or subprograms for which needs indicators are specified; moreover, the number and complexity of such indicators have also increased. A cycle has developed whereby the government (or more accurately government officials) reduce the number of programs or subprograms and indicators, most recently in 1989, in the interest of transparency. Then programs are subdivided over time in the name of greater sensitivity and fine-tuning, until the resultant complexity again overwhelms understanding. In early 1996, the government announced that the Institute of Fiscal Studies would review the formulas again.

In practice, as the complexity grew, relatively small shifts in the share of types of council or services or in the weights attached to specific needs indicators produced considerable movements in grant entitlement. This lack of stability in year-to-year grants received is acknowledged to be undesirable, since it prevents careful planning of future service delivery. Dampening mechanisms have therefore been introduced from time to time to prevent sharp year-on-year changes to individual authority grants. Thus, in 1994–95, an additional specific grant—the standard spending assessment reduction grant—was paid to local authorities whose standard spending assessment fell by more than 2 percent.

While the grant entitlements are built up from the service-specific indicators of need, the general grant is not hypothecated by service. Thus, grant receipts justified, for example, by greater unit costs for primary school education need not be spent on primary schools or even on education: they could be used to finance more spending on the police. The central government determines total revenue support grant transfers, but individual local authorities still control the distribution of grants among local services.

Over the last 15 years, however, there has also been a shift away from the revenue support grant toward more use of specific grants (although the revenue support grant still accounts for the bulk of grants received; see Table 3). Such specific grants are paid over and above the block grant, thus boosting to a higher level the grant percentage covering the relevant expenditure item. In origin, specific grants were conceived as a means of ensuring that a particular service item to which the central government gave priority was likely to be fully supported by local government—for example, a specific grant to encourage the purchase of computers. In addition, tight grant conditionality could ensure that the money was spent in precisely the ways that the central government intended. The disadvantage is that such specific grants involve centralized determination of relative priorities. Moreover, the greater the percentage of total grant allocated to specific grants, the less local authorities can switch resource allocations to reflect local conditions—for example, in the above case the availability of used, but up to date, computers from a nearby computer business at no cost.

Table 3.United Kingdom: Financing of Local Government(In millions of pounds unless otherwise indicated)
1987/881988/891989/901990/911991/921992/931993/94
Revenue support grant112,55412,77612,98213,12713,60321,79522,332
Specific grants2,6222,8113,2363,7989,7055,0695,228
Other current grants26,2926,0996,4958,46610,06112,23313,007
Nondomestic rate payments39,76410,53711,33812,09314,23514,05513,215
Capital4,5454,3864,2925,0435,7276,0795,922
Total central government support to local authorities335,77736,60938,34242,52753,33159,23059,705
Local authority financed hy local taxes and from asset sales49,22710,71115,51515.08510,78010,19210,500
Local payment as a percent total local authority expenditure542.244.928.826.216.814.715.0
Total local authority expenditure45,00447,32053,85757,61264,11169,42270,200
Sources: H.M. Treasury, Public Expenditure, Statistical Supplement to the Financial Statement and Budget Report 1993–94, and Statistical Supplement to the 1992 Autumn Statement.Note: Components may not add to totals because of rounding.

Rate support grant for the years up to 1989/90 (1988/89 in Scotland).

Mostly current grants outside aggregate external finance wholly, expenditure on certain national policies that local authorities administer, such as community charge benefit, housing benefit, and student awards.

For 1989/90 (1988/89 in Scotland) and earlier years the estimated yield of nondomestic rates has been used as a proxy for nondomestic rate payments.

For 1987/88 and 1988/89 adjusted to exclude nondomestic rate payments.

For 1987/88 and 1988/89 includes nondomestic rate payments. For 1989/90 through 1992/93, includes community charge grant. For 1993/94, includes council tax.

Sources: H.M. Treasury, Public Expenditure, Statistical Supplement to the Financial Statement and Budget Report 1993–94, and Statistical Supplement to the 1992 Autumn Statement.Note: Components may not add to totals because of rounding.

Rate support grant for the years up to 1989/90 (1988/89 in Scotland).

Mostly current grants outside aggregate external finance wholly, expenditure on certain national policies that local authorities administer, such as community charge benefit, housing benefit, and student awards.

For 1989/90 (1988/89 in Scotland) and earlier years the estimated yield of nondomestic rates has been used as a proxy for nondomestic rate payments.

For 1987/88 and 1988/89 adjusted to exclude nondomestic rate payments.

For 1987/88 and 1988/89 includes nondomestic rate payments. For 1989/90 through 1992/93, includes community charge grant. For 1993/94, includes council tax.

Capping

No account of the current U.K. arrangements could be complete without consideration of capping. In the early 1980s, a series of measures was taken intended to discourage additional spending above the guideline (a then similar concept to the standard spending assessment) set by the central government for each authority. Various models at first reduced the proportionate amount of extra grant on such extra spending,3 but culminated in systems that withdrew grant for spending above the government guidelines. None of these systems proved effective.

In their place, rate capping was introduced from 1986, initially as an emergency measure. Its purpose was to enable the government to judge as excessive either the absolute expenditure level relative to the guideline or the year-on-year increase in spending plans. If the expenditure was found excessive, the government could cap the size of the local tax set. Between 1985 and 1989 relatively limited use of these powers was made, with typically no more than a dozen authorities (out of more than 200) capped annually. Although the caps and, more specifically, the government’s interpretation of “excessive” was challenged in the British courts, no such court case brought against the government was successful.

It was widely assumed that with the introduction of the community charge in the late 1980s capping would be dropped. The thesis upon which the community charge was introduced was greater electoral accountability. Unlike domestic rates, all adults would pay (even the poorest would contribute). All spending above government guideline by a local authority would be highly geared at 4:1; that is, with no extra grant available for spending above the standard spending assessment, a 1 percent increase in spending would require a 4 percent rise in the community charge. In these circumstances, the accountability of local government to the electorate would dissuade the local council from excessive spending. In logic, there was no need for capping: in practice, it was retained, at the insistence of the then U.K. Chancellor as a fallback.4

Faced with very high local taxes when the community charge was introduced, the government realized that the legislation permitted the capping procedures to be extensively applied.5 Capping has now become a permanent feature of the local government fiscal regime, including under the 1992 Local Government Act that introduced the new council tax. Actual application of the caps is rare: it is the threat, via the preannouncement of the likely criteria for applying caps, which encourages local authorities to moderate their budget plans. The threat has become more effective over time: only three local authorities had their budgets capped in 1993–94. Although the cap is formally applied to the local tax, the impact is on holding local government expenditure to levels deemed appropriate by central government. In short, a high grant percentage (over 80 percent of total local authority current expenditure), combined with an actual or threatened cap on local taxes that pay for the rest, enables central government to exercise a high degree of control over total local government current spending.

Borrowing

In the United Kingdom, local governments are prevented by law from borrowing for current expenditure purposes. Local authorities are permitted to borrow for capital spending and may do so either through a commercial bank or from the Public Work Loans Board—a body with access to funds from the U.K. National Loans Fund and therefore able to offer better borrowing rates than the commercial banks.

The regime to control local authority capital spending and borrowing has become highly complex. Starting in the mid-1980s, local authorities were first encouraged and then required to sell social rented houses to existing tenants on demand (the “right to buy”), at a large discount against the market price, although often at prices much higher than historical building costs and the associated debts. This flood of asset sales provided local authorities with the capital revenues needed to finance much of their capital programs. From the mid-1980s onward the central government imposed limitations on the rate at which such capital revenues could be used. In addition, under the 1989 Local Government and Housing Act, comprehensive controls were put in place on borrowing. (In part, this was necessary to stop a number of abuses adopted by local authorities to reclassify current as capital spending and vice versa.)

There are now tight controls over the spending from capital receipts: only 25 percent of capital receipts from housing and 50 percent of other capital receipts may be used for capital expenditure, with the residual to be set aside for debt repayment. Each authority is also given an annual capital guideline. Part of this comprises an assessment of its ability to finance capital spending from asset sales, known as receipts taken into account. The remainder of the annual capital guideline is issued in the form of credit approvals (basically permissions to borrow), comprising basic credit approvals and supplementary credit approvals. (The latter are earmarked for particular services or projects.) Finally, there are also limitations set on each authority’s overall net indebtedness, based on marginal additions consistent with the annual credit approvals and the stock of outstanding debt.

Administrative Structure

Tax Administration

Much of the administration of the council tax lies in the hands of the lower-tier district authorities. In addition to setting a council tax for their own services, these authorities levy a precept charge (that is, council tax) on behalf of the upper tier. The key accounting concept—the collection fund—receives all grants (including receipts from the national nondomestic rate) and council taxes and allocates funds to each tier. Determination of the tax base lies with the central government through the government Valuation Office, an agency that compiles and maintains valuation lists. For the creation of the new council tax bands, nearly 60 percent of the valuation work was contracted out to the private sector. Appeals can be made both by householders (against their band) and by businesses: if no settlement is reached within six months, a formal hearing is given at a Valuation Tribunal. There is of course much less need for precision under this banding arrangement for the council tax than under the previous domestic rating regime. Nonetheless, hundreds of thousands of appeals have been registered in the first few years.

The payment of income-related subsidies to council taxpayers is also administered by the lower-tier authorities, in cooperation with the Department of Social Security. However, the relevant income scales and rates of subsidy are determined nationally. Partly in reaction to what were seen as inadequate subsidies under the preceding community charge regime, the subsidies are now more generous. In particular, 100 percent subsidies are available to the poorest households, whereas only 80 percent was paid under the community charge. Subsidies extend well up the income scale and are paid to households in the first four income deciles.

Implications

Macroeconomic Management

The present local government fiscal regime in the United Kingdom does not lead to any significant problems from a macroeconomic management perspective. This reflects the paramount importance attached by the government (from the mid-1980s onward) to achieving macroeconomic control of general government expenditure. The very high percentage of local authorities’ current spending now financed by central government grant (more than 80 percent) combined with the tight capping on the remainder financed through local taxes and borrowing limits enables tight overall control of local authorities’ current spending.

Throughout much of the early to mid-1980s, it was argued that local government spending was increasing faster than other kinds of government spending. This was partly fueled by capital revenues from asset sales. Whatever the cause, as Table 4 shows, the growth in local authority spending was faster than that of central government. Total local government spending is now under firm control. As the table also shows, since 1988 local government spending has grown at less than half the rate of central government spending.

Table 4.United Kingdom: Growth Rates in Total Expenditure on Goods and Services at 1990 Market Prices
Average 1983–87Average 1988–93
Local government12.00.8
Central government1.12.3
General government1.71.8
Source: Central Statistical Office, National Accounts..

Total final consumption plus expenditure on fixed assets.

Source: Central Statistical Office, National Accounts..

Total final consumption plus expenditure on fixed assets.

A different macroeconomic problem was generated during the second half of the 1980s and early 1990s by the sales of local authority assets, particularly housing. Despite the discount against current market value, house sales were profitable for the local authority when measured against historic cost and associated debt. Moreover, the debt had often been contracted at relatively low interest rates; as interest rates throughout the economy rose in the latter half of the 1980s and early 1990s, local authorities appreciated the scope for a form of “round tripping.” Rather than repay the debts with the proceeds of asset sales, local authorities placed large amounts into the U.K. money markets. So large were these deposits that they were sufficient to generate extra liquidity in the banking system; this made it more difficult for the Bank of England to keep the banking system short of funds so as to control interest rates, and threatened to require additional issue of government debt. While various solutions were proposed, the subsequent reduction in interest rates and gradual dissipation of the deposits through higher capital spending have largely removed this problem.

While macroeconomic management may not be a problem, it would be wrong to think there are no wider economic problems associated with the current local government fiscal regime. On the contrary, several issues arise.

First, the high percentage of local authorities’ spending supported by government grant has injected a very high gearing level for marginal spending. As pointed out in a Institute for Fiscal Studies paper,6 if local authorities spend at 10 percent above the standard spending assessment, this will lead to an addition of nearly 70 percent on the council tax above the government norm—a ratio of 7:1. Moreover, unlike the community charge where the more modest ratio of 4:1 was widely criticized, the gearing is no longer common to all local authorities. For some authorities, the ratio can be as high as 12:1. Now that the tax base plays an important part in the grant determination and only partial resource equalization is achieved,7 this gearing ratio puts a considerable burden on the needs assessment for determining standard spending assessment and thus grant entitlement. Arguably, it is more than regression-based analysis can bear, particularly when the analysis is further refined by a political input. The smallest error in determining standard spending assessment can have a sizable fiscal impact on low-resource (and often high-need) areas.

Second, the failure of the community charge has had a lasting impact on the overall tax structure of the United Kingdom. Because the community charge was judged to have reached an unacceptable level, the 1991 budget included a switch from community charges to VAT; by raising the latter by 2½ percentage points, it was possible to reduce the level of community charges by around one-third. Earlier, in 1989–90, the “nationalization” of the nondomestic rates, severely cut back the size of the genuinely local tax base (see Table 3). Finally, when the council tax replaced the community charge in 1993, to ensure a smooth introduction, the level of the council tax was held below that of the community charge, measured on a comparable basis. This substantial contraction of the local tax base and growth in central taxes over the last five years is the counterpart to the high grant percentage. Resistance to local taxes has grown. In 1995–96, the government cut back central government grant so as to raise local taxes. It is proving politically very difficult to raise local taxes because of troubled recent history. Local government is now more able to make public the link in public pronouncements between grant received and the local tax burden.

Third, in political terms, the reforms introduced in 1988 and 1989 to promote local accountability and good stewardship of resources have led to a fiscal regime in which such accountability has been very largely dissipated. Each council on average collects less than 20 percent of the resources it spends: the rest is determined by the central government, and any addition judged excessive can be negated by the central government through actual or potential capping. Far from enhancing local democratic accountability, the reforms have made local authorities less accountable for the local taxes they set.

Fourth, despite the re introduction of a property-based tax, the current council tax, like its predecessor, the community charge, is still regressive in income terms. Many households living in properties within the same council tax band have significant differences in total income. This situation arises, in particular, for multiple-adult households and two-income households. Even to the extent that there is a broad correlation between household income and capital values, an overall limit has been set on the size of the maximum council tax bill at three times that in the lowest band. Since the relationship between capital values and income seems to be greater than three to one, the council tax can be judged regressive. However, the availability of extensive subsidies to some degree limits the regressivity at the lower end of the income scale: it is certainly less regressive than the community charge.

Structural Reform

The most interesting structural issues on local government can best be considered under functions, the configuration of local councils, and local democracy.

Functions

Over the last 15 years, as noted, local authority functions have been progressively diminished. In some cases, the changes have been clear and clean, for example, the removal of colleges of further education from local authorities’ control and their transfer to the central government. But the change in other functions is less clear-cut, for example, that with regard to schools. Local authority schools have been allowed to opt out of local council control and into grant maintained status, that is, broadly under the control of the Department of Education. As the numbers of such schools have grown, the original formula for their financing (equal to the amount while in the local authority sector) has become less satisfactory. Their financing is now to be based on a separate formula, so there is an obvious link back into the question of assessing local authorities’ financial needs for education in the context of determining the revenue support grant. Uncertainty over the future status of individual schools makes the planning of school place requirements more complex.

Similarly, in housing the transfer of functions has not been clear-cut. Local authorities retain responsibility for the management and maintenance of large social housing estates, yet new building is in the hands of housing associations. Again, the basis upon which these associations make their decisions about relative needs and the feedback of their activity into housing-need indicators for local authorities have not been resolved satisfactorily. In other areas—local transport, social services, and environmental services—many responsibilities have passed to central government, which funds service provision through an agency that is nominally private but is largely financed by the central government. The assessment and coordination of relative service needs, the establishment of local cross-service priorities, and the accountability for service standards all seem to have been weakened under the present arrangements. The current position in areas such as education is also widely seen as unstable, a temporary solution at best.

Structure

On structure, there is much political controversy about the need for change. The possible introduction of a new regional government tier (“devolution”) in Scotland and in Wales with varying powers over local services is proposed by the two political opposition parties. That would require a thorough review again of the fiscal environment for local government though the reintroduction of unitary authorities, and exclusive administrative devolution already in place (the Scottish and Welsh offices) has simplified the task of such reform. In any case, the progressive reduction of the functions of the senior tier (metropolitan and shire counties) in England has raised questions about their future role especially because Scotland and Wales have now moved to a single-tier regime. In particular, any further contraction of education responsibilities might make it difficult to defend a two-tier structure.

Local Democracy

Finally, there is a broader issue of the loss of local democracy, the counterpart to the centralization of powers and control. The role of local democracy is reduced to the effective stewardship of given resources—getting value for money and the best service standards. Local authorities are assisted both by the work of the service inspectorates, for example, on education, policy, and fire services, and by value-for-money reports by the Audit Commission, which compare, contrast, and can identify set service practice. Yet, major elements of local services, including part of education and provision of social housing, are now under the command of private associations—essentially spending agencies financed by the central government. These associations are managed by boards appointed by the central government. Moreover, government ministers with central government have emphasized the arm’s-length relationship of boards. Complaints about service standards thus have to be pursued fundamentally through the courts rather than through political representation. There are also no fixed requirements for the coordination of policy between such associations and the relevant local authorities. The loss of information may damage future capacity planning.

Conclusion

Despite the many reforms of the last 15 years, it is difficult to believe that the present intergovernment fiscal relations in the United Kingdom are stable. The arrangements for financing current expenditure owe more to the problems encountered in introducing the community charge and the need to find a hurried alternative, than to a carefully delineated scheme based on well-argued or widely accepted economic principles. For example, it is acknowledged that the new arrangements involve a high degree of central government control and that, despite stated objectives, they have failed to introduce more electoral accountability in local government. On the contrary, the reforms have set back further the cause of greater accountability.

Also, the transfer of part or all of certain functions from elected local authorities to unelected private associations, under the direct financial control of the central government, can be only an intermediate solution. The accounting and reporting requirements on such associations, the precision of their mandates, and the arrangements with local government for coordination in assessing service needs and agreeing on service delivery all lack transparency. Whether such transfers proceed further or, on the contrary, functions are reintegrated within the local authority network will in part depend on political developments.

Whatever the wider macroeconomic advantages, the United Kingdom has been unusual in the extent to which centralization and control of formerly local services has proceeded. It can be argued that, even with the capping regime in place to limit total expenditures, local authorities can shift priorities and change and improve the means of service delivery; thus, the role of the central government in determining levels and patterns of service delivery should not be exaggerated. But the direction of change over the last 15 years in the United Kingdom has been unequivocally toward centralization and restriction on local government action. Elsewhere in Europe, there has been a tendency toward more fiscal federalism and greater freedom, for example, in Germany and Italy. The arguments for greater fiscal freedoms for local government are familiar: the better assessment of local needs, the ability to choose between local priorities, and the delegation of greater fiscal responsibilities—the broad principle of subsidiarity. The deepening of democracy is also cited as an advantage. In economic terms, such greater fiscal federalism may lead to different standards of local services, and different local tax payments encouraging further factor mobility. By contrast, the United Kingdom has proceeded down an altogether different course, striving to achieve commonality of local services through strong and dirigiste financial controls. The logic and structure of these systems also point toward similar local tax burdens. The current systems seem to reflect a deep-rooted lack of confidence in local government and in local democracy.

Northern Ireland is excluded from this chapter; the structural and financial arrangements there have been largely untouched by the reforms introduced elsewhere in the United Kingdom over the last few years.

This is in contrast to the Australian government’s approach, which relies on an independent Grants Commission.

Under the pre-1988 systems, the amount of revenue support grant received depended on actual spending rather than the standard spending assessment or equivalent spending guidelines.

For an interesting description of how “accidental” this key policy mechanism was, see Thatcher (1993), the chapter on “The Community Charge.”

Full resource equalization applies only for spending at standard spending assessment.

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