When is an incentive not an incentive?

The Council Tax Freeze Grant is simple as Government grants go; agree not to increase Council Tax and the Government gives an authority the equivalent of a 2% increase in cash.   What could be easier?

Why then is it reported that at least 40% of authorities in England and Wales are not taking up the offer this year?   There are probably a number of reasons.

The first and most obvious is that the grant offer is time-limited but the Council Tax Freeze has an ongoing effect, so the deal has never been a ‘no-brainer’  as far as authorities are concerned.   But that has always been the case with this grant scheme. In spite of the obvious flaw, in the first year of the grant virtually every authority took advantage and last year around 90% did so.  

Secondly, you can point to the difference between this year’s scheme and last year’s much more popular offer.   In 2012, the Government gave a one year grant equivalent to a 2% rise in Council Tax and was criticised for not making it more permanent.   This year they appear to have tried a psychological trick.  The grant is equivalent to a 1% rise but lasts for two years.  In other words, exactly the same amount of grant but spread over a longer period.   The trick hasn’t worked.

The reason is that there are two ways of looking at this year’s offer, neither of which make it look attractive. 

One way to look at it is as a 2% offer spread over two years. The problem is that we all know it can be better to have a smaller sum of money now than a larger one in the future.  Something very like this is embedded in human psychology;  every child knows that a bird in the hand is worth two in the bush.   Any offer that looks likes pain today and jam tomorrow is therefore peddling uphill.  

To many, though, the second year’s grant is not a big enough incentive to keep the Council Tax down this year because next year there will be another Council Tax setting process and another decision.   The second year’s grant is factored into the 2014/15 forecast and therefore relates to next year’s decision, not this year’s.    

Thirdly, and most interestingly, as the financial climate for local authorities gets increasingly difficult and savings become harder to find,  more authorities seem to be making the choice in favour of tax increases rather than further cuts.. Authorities are probably also thinking about the Chancellor’s announcement that austerity will continue on the same trajectory until 2018 and considering the need not to close off too many financial options,  educating their communities (and the Government) that tax rises might be necessary if services are to be preserved.

This is something that George Osborne might want to note.  Local authority members are pretty close to their communities, and the growing failure of Council Tax Freeze Grant may be an early sign that the public’s views about tax increases as against spending cuts may be starting to change.