Professor Tony Travers sets out recommendations of the Independent Commission on Local Government Finance in Wales
Local government is important to all of us, wherever we live. Clean streets, bin-emptying, child protection and schools are among the services councils deliver week-in, week-out. Without them, life would be impossible. The forthcoming Assembly elections and European referendum could not take place if local authority officers did not maintain electoral rolls and organise polling day. Democracy itself depends on the quiet efficiency of the 22 councils in Wales.
Local government also allows residents in particular areas to influence the shape of communities and the delivery of services. First, the demands of people in Conwy or Powys are different from those in Newport or Swansea. There are good democratic reasons for expressing such difference. Second, there are also constitutional arguments for local government, most obviously the avoidance of over-concentrated political power. Third, there are efficiency benefits from delivering services closer to the public: taxpayers can better understand how resources are used. Finally, running government at the local and town level strengthens the underpinning of democracy by allowing more people to be involved.
The National Assembly for Wales and Welsh government are the legislative starting-point for councils’ powers and funding arrangements. However, the UK government is still influential because of its control over the Chancellor’s annual budget, spending reviews, the so-called Barnett Formula (which determines the amount of money the Treasury allocated to Wales) and its power to devolve of tax-raising powers. Stamp Duty on houses, landfill tax and, eventually, income tax powers are being transferred to Cardiff Bay.
Successive UK governments and devolved administrations in Cardiff, Edinburgh and Belfast have struggled to produce a rational local government finance system. Today, councils in Britain operate on the basis of a single, small, inflexible, locally-set tax. This is the council tax, whose bills thud onto our mats at this time of year.
In Wales, council tax is set on the basis of values that were last updated as long ago as 2003, though in fairness this is rather more recently than in England. Business rates are, in effect, nationalised. Councils have few incentives to strengthen their tax base. The relationship between tax raised and public expenditure is currently weak.
The Independent Commission on Local Government Finance in Wales was appointed by the Welsh Local Government Association to take stock of the situation. The Commission has taken evidence from public, private and voluntary organisation and commissioned its own research. While there was little evidence of pressure for a revolutionary reform of local authority finance, nor was there contentment with the current system.
The operation of the arrangements for paying central grants to councils, in particular, attracted criticism. The erratic path of the local government funding total was also seen as a problem. There were some concerns about the fairness of council tax and also about the fact local authorities depend so much on the Welsh government for their income. People find it hard to be sure which part of government is responsible for what.
However, there is no demand in Wales for a major upheaval. The Commission has therefore concluded there need to be evolutionary improvements to the finance arrangements. It would be a waste of time to make bold proposals which had virtually no chance of implementation: Commission members did not want their proposals simply to sit on a shelf, gathering dust. Rather, my colleagues and I considered the evidence presented to us and developed a series of proposals to improve the working not only of local government finance but also, over time, to strengthen the Welsh economy.
We have suggested that business rates should become a local tax, subject to arrangements to ensure there are no winners or losers when the reform occurs. City regions, such as those evolving in Cardiff and Swansea, would be given the power to raise an additional small rate to pay for projects such as better transport.
Council tax should remain a locally-set revenue, but there should be more frequent revaluations of the tax base. In city regions, and possibly in other groupings that emerge, it might be possible to make changes to the amount paid by homes of different value. It should also be possible for councils to decide to introduce small local taxes, for example, on the number of tourists who spend a night locally or, possibly, to encourage improved public health. The yield could be used for related service improvements.
In addition to greater freedom to keep local taxation, the Commission proposes a simpler and more stable grant regime, with fewer small grants set by the Welsh government in an attempt to deliver minor policy changes. We also believe that there need to be finance settlements for three years ahead. In addition, a new Independent Grants Commission should be established to oversee the development and operation of a new distribution formula.
To support this move to a more locally-controlled system with greater incentives for councils to build up their local tax base, and thus their economy, the Welsh government should review its arrangements for guaranteeing improved performance management by authorities. There needs to be robust evidence about how well councils use their new freedoms. Separately, a Welsh Office for Budget Responsibility should be created to produce an independent analysis of the robustness of Wales’s tax and public expenditure position.
Taken together, the Commission believes these proposals would improve the relationship between the Welsh government and the 22 councils, while stimulating a more entrepreneurial attitude to building up the local economy. The more a council developed its economy, the greater the opportunity to use the extra resources produced to spend on local services or investments. The Welsh government could have a more strategic, but more effective, role. The prize would be a better, distinctively Welsh, system of council finance. This is the challenge we have (constructively, we hope) set for the new government.