There must be a better way!

At this time of year Councils are heavily involved in preparing budgets for the next financial year.

We can be sure of two things:

1)They, (especially Conservative controlled councils), will be wrestling with tight finances imposed by the Treasury nationally, because the Government is having to cut back, due to past overspending and the current economic climate.

2)The commitments laid on local authorities, in terms of services they must supply, will not have diminished., and to the extent that they are labour intensive the costs will rise by more than the inflation rate

What is clear is that even if central government imposes a cap, many councils will struggle to keep their spending increase to much less than 5%.

So the faults of the present system look likely to continue – people on relatively fixed incomes will lose out, - particularly pensioners whose state pension has risen far less than prices over the past 10 years. Indeed, the decision by Gordon Brown as chancellor to reject the traditional measure of inflation (RPI – based on a large range of prices and costs) in favour of the CPI which omits many commodities bought by pensioners and which have increased more rapidly in price, has meant that in some years pensions were increasing by about 2%, while prices faced by pensioners increased by up to 8% or 9%.

There must be a better way of dealing with local expenditure!

People are suggesting that local expenditure should all by financed locally. Of all the money spent by local authorities, no less than 75% comes from Treasury grants. (The Treasury receives 90% of all taxation, so the system is very centralised, in fact only in Ireland among all the countries of Europe is the system more centralised.) The end result is that there is no incentive to save money, or next year’s grant will be reduced, and every incentive to waste money – inefficiency is rewarded! There is also a lack of transparency and accountability – local councils may be blamed, when the fault is from central government.

The Government seems determined to make the present system more precise – the council taxes will be based on minute differences in housing quality. Thus it will penalise those who are living wealth rich but income poor, eg a pensioner in a pleasant house, and reward those who are income rich but wealth poor, eg four working adults in a smaller house. No doubt various adjustment will be proposed to make the system more acceptable to retired people, and as the scheme will be bureaucratic and computerised every one shudders at what may happen.

Alternatives suggested include a local income tax, espoused by the LibDems, so rates are paid according to the ability to pay. So thousands more of revenue officials will be needed, and our personal details will travel even more than they do now. Will there be allowances against tax, will the tax be collected by communities where people work and are paid, or where they live? There is potential conflict here. All income recipients would have to be included, not just those gainfully working. It would be very cumbersome and expensive to collect.

Another tax suggested is a local sales tax. It is a coincidence, but a fact, that the Treasury raises in VAT about as much as it grants to local authorities. No-one, I hope, would suggest a locally determined VAT, which would be too complicated and expensive. A local sales tax could be like our old purchase tax, imposed only at the point of retail, and would be simple and inexpensive to administer. It is well known in the various states in the USA. The local authority would level a tax at a rate to cover their costs. Some goods could be exempt, - food for instance, and luxuries could be penalised. Councils would have every incentive to keep costs down as they would be levelling tax on voters, and periodic elections arise! The one major problem could be the view taken on it by the European Union, but if this proposal is wanted because of its efficiency, transparency and accountability, then perhaps we might have to become firmer with the EU.

One problem with the financing of local expenditure is that there is little connection between what a person pays and what he receives by way of services. Tax is levied on some other basis than consumption of council services, and services are offered on social needs. Some council services could be sold, as for instance entry to public baths or gymnasia, receipt of planning permission, etc. Even the present Government was feeling its way towards charging by “un-conserved” rubbish in bins. The principle could be extended to many other areas.

Not only do “free” goods tend to be undervalued and wasted, there is the further difficulty that there is a principle of democracy. The pole tax was introduced because it was estimated that about 25% of the adult population paid rates (- usually the husband, as “breadwinner”) but the other 75% could vote for provision of goods without facing the consequence of paying for them. (The 75% included spouses, children aged 18 and many people who had relief against council taxes.)

The overriding advantage of the sales tax is that everybody who buys anything will make a contribution, the wealthier making a bigger contribution, and everyone will know that their spending and their consumption of services has a connection. The sales tax is the only alternative which is cheap to administer, transparent to the tax payer, and arranges that all voters must pay something to the cost of the free services they enjoy.