Local tax reforms begin to impact

Behind the cloud of austerity that obscures so much, a quiet revolution is happening in local government finance in England. 

Authorities are currently setting their budgets for 2013/14 and they are only at the start of the formal process, but anecdotally the abolition (after eighty years or so) of a needs based general funding formula and its replacement with a system of partial retention of business rates income is having a more immediate impact than many thought it would.

Over time it is fully expected that authorities in areas where the economy is growing will do better than those areas where it is contracting or stagnant. The assumption up until now has been that the first year of the new system will see relatively little effect, because funding in year one is supposed to be the same as the funding each authority would have received had the Formula Grant still been in place.

But some authorities are already planning to collect more business rates next year than the Government ‘baseline’ predicts, while others are indicating that they will struggle to meet the baseline figure.  This is because the baseline is calculated on an average of several years past performance, and the business rates system is surprisingly volatile in the amount of cash it generates. 

This is interesting because it increases the prospect that rates retention will make a noticeable difference to local government spending decisions quite quickly – probably before the next round of Council elections, and what is more, before the next General Election.  

For authorities that see their futures are residential rather than commercial, rates retention is mirrored by the New Homes Bonus, which provides extra income on a temporary basis to authorities that grow their council tax base and again is intended to act as an incentive to authorities to allow and encourage the tax base to grow.

What is completely unknown, of course, is how the new system will change things in the longer term.  The mechanics of the new arrangements will alter the distribution of funding, but the impact of this will be watered down by periodic ‘resets’ which on the face of it are intended redress some of the balance in favour of authorities in greatest need.  This avoids the ‘Detroit’ effect in which economically moribund areas gradually lose their capacity to generate tax income.  But if the new system is kicking in more quickly than many expected, more change can be expected between resets than might previously have been assumed. 

Not that the old system ever adequately provided for need. The introduction of damping arrangements over recent years had already broken any last link between the analysis of need and the amount of money authorities actually received.  When resets take place they are also likely to be hedged round with arrangements that stop the funding of individual authorities changing too much in any one year. 

So in one sense the new system could be the worst of all worlds. It will have provide an imperfect relationship between funding and spending need but also an imperfect relationship between funding and economic growth.  Over time it is hard to see how a ‘postcode lottery’ of local authority provision can be avoided.

At least under the new system it should be clearer to local authorities what they need to do to get more money.  The Government hopes for a sea change in the way local authorities see their local economies and engage with the Government.  The old system of needs related grants was seen as a disincentive for authorities actively to manage economic development but also encouraged authorities constantly to approach the Government with the begging bowl.   In future, the Government  expects local authorities to look closer to home to meet their income needs.   That should be a considerable shot in the arm for local government.  

It would be nice to think that the changes will encourage local authorities to take a harder look at how their activities can create wealth.  Unfortunately, even in areas where the local economy is growing strongly,  the effect of austerity will mean that all authorities will still be making cuts, but some authorities will have to cut further, deeper and more quickly than others.  This probably means the begging bowl will not be consigned to the attic just yet.

Another consequence is that local government finance has suddenly become a whole lot more complicated, which will make it harder for everyone, including governments and voters to understand what is going on.

The old system was supposed to work in such a way that differences in spending choices were reflected in the relative levels of Council Tax.  Under the new system,  authorities will still differ from each other according to how they manage costs, but they will also now differ more strongly than in the past in the way they manage tax income.  This means that if my authority now sets a higher Council Tax or makes bigger spending cuts than  its neighbours, it might be because they are profligate and inefficient, or it might be because the Council next door is the one with the new estate and the out-of-town shopping centre.

Rates retention will change the way we all think about local government finance in England in unpredictable ways, and the indications are that it may have a more immediate impact than expected.

The public sector is built on moral foundations

With resources dwindling, the moral questions behind public spending and taxation have been thrown into sharp relief.   It must always be remembered that the post war consensus known of Butskellism, which has been a feature of most of Britain’s history over the last fifty or sixty years, was formed in an environment of relative prosperity.   As we move through a period of austerity the moral differences between left and right become more evident.

In the last couple of weeks, for example, we have heard the Public Accounts Committee talk about the morality of companies avoiding tax and, just last week, Chancellor George Osborne told Councils that putting up Council Tax is morally unacceptable.  The inference that all politicians who advocate the opposite position are therefore immoral represents a raising of the stakes in political rhetoric.  Will the next General Election campaign be about politicians trying to out-moralise each other?

This is an awkward one for public servants, who are supposed to be politically neutral.  Would George Osborne have me question my own morality before I advise politicians to put up taxes, or am I entitled to set the moral issues aside and think solely about the cash? 

With all that in mind perhaps public servants should be thinking more about the moral side to public provision and how we pay for it.  To help us, the psychologist Jonathan Haidt and his team believe they have discovered the foundations of human morality. Inherited from man’s earliest ancestors who lived for generation after generation in extended family groups,  these are the psychological traits that supported this way of life and are still the basis on which human cultures are built.

The six foundations, wickedly paraphrased for the sake of this blog, are;  care for others; a sense of fairness, a desire for liberty, group loyalty, respect for authority and a sense or purity or sanctity. 

Without going into too much detail (there is a great deal of good stuff on the internet for those who are interested),  genes that support these traits have survived in the gene pool because they help human beings work together and optimise survival rates.  Groups that didn’t look after each other, that turned in on themselves too easily and that weren’t competitive enough with their neighbours dies out.  Hence the moral foundations exist, Haidt believes, in every human population anywhere in the world.

Of course the moral foundations are only genetic tendencies, and like all other such tendencies, they are shaped and moulded by culture, religion, upbringing, experience and, last but not least, freedom of choice for the individual.  

This is important because, fairly evidently, there are moral dilemmas implicit in the moral foundations. Group loyalty and care for others, for example, works best when the people we are called upon to care for are inside the group.   A strong commitment to group loyalty also explains why we have a tendency to be antagonistic towards people different from ourselves, to a point that often descends into violence.   But going to war sooner or later kicks up the dilemma of when to stop trying to kill the other side and when to show mercy and compassion to the wounded and displaced.  Culture and religion attempt to solve these dilemmas and not surprisingly they are solved in different ways in different populations.

One of Haidt’s fascinating pieces of work around the moral foundations studied how people with different political views take different practical attitudes to the six moral foundations.  ‘Conservatives’  tend to have more respect for authority, greater group loyalty and a greater sense of what is pure than ‘liberals’,  for whom care for others and fairness tend to trump everything else.

But the implication of this is that the stuff of politics is not in the moral foundations of the human species, which are universal, but the way cultures and individuals interpret them.

It seems that pretty much everything the public sector spends money on, and hence for which we pay our taxes, appears to have a basis in one or more of the moral foundations.  Economists may justify public expenditure in terms of  such matters as market failure and the need for public goods, but these are not the kind of things people think about when they pay their taxes.   It is likely that the broad consensus we have over what things we are prepared to give up some of our earnings to pay for is based on some fundamental agreement amongst ourselves over what is morally right.

I am not yet sure what the implications for moral foundations theory might be for the public sector, but I am pretty sure that if the theory turns out to be true they are there to be found.  There has already been a piece of work designed to help charities use moral foundations to improve giving.

I will continue to permit myself a wry smile from the sidelines when I hear politicians talk about morality., but if this debate leads us all to give more consideration to moral questions then it won’t be a bad thing.

Merry Christmas to all my readers!

Small or large, it’s not a good time to be an outlier

This week, within hours of each other, two very different local authorities announced causes for concern about their future financial viability.

West Somerset (know to many from childhood holidays at Minehead) is the smallest District in England in terms of budget and population.  This week the Council published an LGA report that showed that its unavoidable annual budget growth bill of £150,000 dwarfs the maximum it can raise by increasing Council Tax in line with the 2% cap, which is just shy of £40,000.   With grants shrinking this is an arithmetical bind from which there is no escape and all the Council can do, the report acknowledges, is seek to put off the day when it holds up its hands and tells the world it can no longer meet its statutory obligations.   

Birmingham, on the other hand, is England’s largest unitary authority, with a population about 30 times larger than West Somerset.   Its problem is that it has to set aside at least half a billion pounds – and probably more- to cover equal pay claims from some of its women workers, backdated for several years.  Arguably the scale of Birmingham’s operations have contributed to the extent it unwittingly breached the Equal Pay Act.   There is much more Birmingham can do to balance the books than West Somerset can, but unless it is allowed to capitalise current these liabilities , it will have to find considerable additional savings this year on top of those brought about through austerity. 

As readers will know,  Chubby Cat frowns upon public sector bodies putting off for tomorrow what it should really be paying for today (or yesterday), but in this case the effect on current service users of mistakes made in the past would be very unfair unless the cost is managed over a longer period.

Part of the problem, of course, is the local government finance system does not deal very well with authorities at the extremes,   It is difficult to devise a system that doesn’t result in outlier authorities ending up with either too little or too much.     When the pieces of the system are being thrown up into the air,  as they are at the moment, the risks for organisations multiply.  From next year, market factors will decide some of the distribution of funding between local authorities and the system will become less easy to manage.  

Only the week before last an elected Member expressed to me his concern that more than one local authority would go bust as a result of austerity,  I intend to return to this issue in the future,  in particular the question of what happens next if such an eventuality arises. 

In the meantime it is enough to note that perhaps at the moment it is best to be medium sized.