Whither Localism – nowhere without new funding arrangements

The new Con-Lib Dem coalition is keen to promote the local agenda but until local government has greater control over its own finances it will ever be at the whim of the centralisers deep in their Whitehall bunkers. My time at the Treasury highlighted the lack of knowledge of many key civil servants of anywhere north of the Watford gap. Being responsible for regional policy I recall having to drag my reluctant boss to places he had never been to before such as those remote and unknown places known as Newcastle and Birmingham!

If we are going to revitalise our towns and cities outside the south east we need to give them independence to innovate, invest and do their own thing.  Some will get it wrong and have to be bailed out but others will flourish and provide the much needed counter weights to London and the Whitehall view of the world.

At present, councils receive just over 50% of their funds from central government grants amounting to over £50bn. Around a quarter comes from residential council tax and a fifth from non-domestic rates. However, for the latter all the money raised goes into a central pot and then is redistributed.  There is no link between the activities of a local council in attracting employment and the revenue it gets from those activities.

It is time to reconnect local councils with their economic base without giving councils the need or ability to raise any new revenues themselves. This can be done through allowing local councils to keep a share of the VAT and income tax revenues raised from their areas as well as their own non-domestic business rates

To raise the required amount of money would require the equivalent of a local council VAT rate of 3% and a central government rate of 14.5% – so the overall rate would remain at 17.5%. While for income tax the equivalent of a tax rate of 8% of the basic rate would go to your council. Again, the actual amount of income tax you pay would be unchanged it is just that it would clearly show on your payslip that this was the proportion of tax that was going to your local council. The system would require no new additional work for employees, employers or councils.

To provide the right incentives to councils the tax contribution would be based on both workplace and residence.  So for example, if you worked in Manchester but lived in Liverpool your income tax deduction would  show a 4p in the £ contribution to Manchester and a 4p in the £ contribution to Liverpool, while if you worked and lived in Liverpool then it would show a 8p in the £ contribution to Liverpool.

 There would still need to be some form of revenue distribution otherwise Westminster would be overflowing with cash while Hartlepool would be poverty stricken. However, such distribution of tax revenues would encourage councils to attract new employment and economic activity to their areas as there would be direct linkages between economic performance and council tax revenues. High quality public services will help to attract higher earners leading to higher revenues while it would highlight to tax payers how much their council services cost.


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