John O’Connell is Chief Executive of the TaxPayers’ Alliance.
Today’s headlines suggest that councils will be allowed to raise the social care precept by more than two per cent. This comes as little surprise: costs are rising, partly due to the living wage which has cost significantly more than the social care precept has raised, but largely because the nation’s demographic headwinds mean that caring for the elderly is only going to become more of a challenge.
However, just raising Council Tax to meet immediate funding needs is short-sighted. For a start, the usual arguments against raising the cost of living for taxpayers hold true. Tax is one of the greatest contributors to the cost of living and every time the Government insists on taking more it only increases the burden. Furthermore, Council Tax went up by an average of 58 per cent in England between 1997 and 2015. More increases seem egregious when bills have already risen by so much.
But the funding pressures facing social care are undoubtedly very real so what, if anything, can be done to square this circle?
In the short term, allowing more houses to be built would broaden the tax base to bring in more revenue without raising rates. This would also help ease the housing crisis which has largely been caused by planning constraints and consequentially dwindling supply.
Looking to the future, however, the crux of the matter is that councils have to be given greater responsibility for their own affairs. According to the OECD, in 2014, just over 25 per cent of UK state expenditure was at the local level – but less than five per cent of tax is collected locally.
This is not only highly unusual amongst OECD member countries but it also creates a disjointed approach as local government becomes more reliant on pleasing central government than its residents.
We should pursue a system where local authorities have much more freedom, where they will be able to experiment with what services they offer and the residents can vote both at the ballot box and with their feet if they don’t like what the council is providing.
This would make councils more responsive to local concerns and needs rather than fulfilling the demands of top-down, one-size-fits-all government. It would allow greater efficiency as unnecessary or unpopular programmes could be discontinued and resources shifted to areas where needs are greater – in social care, for instance. Differentiation of this type also allows greater competition between councils and further efficiency gains as they must compete for residents. And it may incentivise councils to focus on business-friendly policies that would, in the long run, allow for greater economic growth and consequentially higher tax receipts.
With fiscal decentralisation, local authorities will be even more accountable to their local communities and their success parameters would be set by those they serve, not Whitehall mandarins who currently control the flow of funds.
There are moves towards this, with councils allowed to retain an increasing proportion (and eventually 100 per cent) of Business Rates but it could go much further with local income and sales taxes. The former should come as part of a much wider reform of income tax (as proposed in the 2020 Tax Commission) but apportioning an element of existing income tax as variable according to where an individual lives is certainly achievable. The latter would, in fact, be fairer than existing Council Tax as every individual would pay it. This is in contrast to council tax which only applies to householders, business rates which only apply to businesses and income taxes which only applies to earners.
There would be no obligation for councils to charge either of these taxes and in doing so they could potentially gain a large advantage in competitiveness compared to their near neighbours. They would attract residents and consequentially could make up foregone revenues.
A low-taxing council that delivered core services well would probably be popular, but a low-taxing council that failed to provide basic services may not. There would, of course, be considerable concerns that such plans would allow “loony left” councils to crank up the tax rates and decimate their local authority finances. But with central grant funding cut back substantially from current levels, even the “looniest” councils would be forced to strike a balance between bumping up tax rates to maximise revenues in the short term, and cutting rates to stimulate business growth over the long term. Crucially, they would be accountable.
The challenges of funding social care are acute. Furthermore, demographic headwinds mean they will only get worse. As such, real, long term, solutions are required and decentralising our tax system – while reforming healthcare – will help us meet those challenges.