Elliott Keck is Head of Campaigns for the Taxpayers’ Alliance.
How do you solve a problem like local government finance? With Nottingham council following Birmingham, Thurrock, and Woking councils issuing section 114 notices in the last year alone, and warnings of many more to follow, the local government finance settlement published in December 2022 already feels out of date. There have been increasingly shrill warnings from town halls about the state of their balance books. Beyond the spectacular headline implosions, we’ve had leaders in Wales expressing concerns about bankruptcy, and warnings raised by the County Councils Network that one in ten of their members are staring over the edge of solvency.
Some of this should be seen as what it is, which is pitch-rolling for yet another year of near-universal maximum council tax hikes, as well as an attempt to squeeze a bit more cash out of central government. Remember that council reserves rose by almost 50 per cent during the pandemic. By 2024/24, core spending power is expected to be 7 per cent higher in real per-capita terms than in 2015/16 according to the Institute for Fiscal Studies. The crisis does not seem as imminent as some councils would have you believe.
That isn’t to say that local authorities aren’t facing significant challenges. For the second year running, Council Tax rises will be below inflation, requiring difficult decisions to be made. In many ways, it feels as though the council funding model of recent years has already begun to topple. Surely, then, now is the time to consider what comes next. Instead of sticking-plaster solutions which leave councils trying to squeeze as much cash out of households as possible every year, what is needed is a complete restructure of the tax system that provides simplification and long-term stability – both for government (local and beyond) and taxpayers. The TaxPayers’ Alliance’s much-touted Single Income Tax proposals provide exactly that.
In broad strokes, these reforms involve the abolition of a swathe of direct taxes, including income tax, national insurance, corporation tax and capital gains tax and their replacement with a single tax rate for all forms of income at 30 per cent, with a personal allowance of £14,000. Stamp duty and inheritance tax would go. Indirect taxes would be significantly reformed, with some being merged, others being replaced and a few being abolished. The end result would be a much simpler tax system, and an overall reduction in the tax burden to around 33 per cent.
The key plank of this plan for local government would be allowing councils to raise 75 per cent of their revenues locally. At present, British local authorities have a markedly lower degree of tax autonomy than their counterparts elsewhere. To rectify this, these reforms would see Business Rates devolved fully to local authorities, along with the power to raise a flat rate local income tax and an optional local sales tax. Council Tax would still exist.
This would significantly decentralise power and economic decision-making in the United Kingdom, providing significant opportunities for competition between town halls over who can develop the best economic climate for people and businesses to thrive. Some may focus on raising revenues using these powers, if, say, they have significant numbers of elderly people needing care. But others would take the Texas approach and aim to attract business investment and entrepreneurs through competitive tax rates.
Conservatives often like to proclaim that they run councils better than the other lot, and that they keep Council Tax lower. As former party chairman Greg Hands said ahead of this year’s local elections: “up and down the country, it’s Conservative councillors and councils who have a proven record of managing taxpayers’ money wisely and providing better local services.” The reality is more complicated than that, of course. And for as long as the UK remains highly centralised, and councils revenue-raising powers remain limited, the differences between the various parties and councils, will be relatively small.
This isn’t a solution for tomorrow, and critically should only come as part of a broader reform of the national tax system which would significantly ease the overall burden on individuals and businesses.
But devolving more tax-raising powers offers a genuine opportunity to not just fix the problem of local government funding, but ignite healthy competition between the different parties involved in running councils and providing robust key services to local residents. Only then we will really be able to put Hands’ claim to the test.