The Coming Crisis of Local Government Finance

1. The Coming Crisis of Local Government Finance Iain McLean Public Policy seminar, DPIR, HT 2005

2. Overview • 3 systems of formula funding in UK: • Only one works • VFI and HFE: what they are and why they matter • The Layfield Doctrine • Echoes of the Big Bang: Poll Tax today • The land tax solution

3. 3 systems of formula funding in UK • Health works (in England only)

4. 3 systems of formula funding in UK • Health works (in England only) • Barnett fails (Scotland, Wales, NI)

5. 3 systems of formula funding in UK • Health works (in England only) • Barnett fails (Scotland, Wales, NI) • LG finance fails (England)

9. VFI and HFE • Vertical Fiscal Imbalance • UK has highest in OECD, except small unitaries (e.g. IRL) • Centre levies 96% of taxation, local 4% • LAs spend 25% of pub exp • Therefore VFI = 21/25 = 84%.

10. VFI and HFE • Horizontal Fiscal Equalisation • Wide range of fiscal capacity • And of spending need (mostly inverse to fiscal capacity) • If business rates relocalised (or land tax)… • HFE more urgent (Heathrow has more rate revenue than Liverpool)

11. The Layfield Doctrine • Layfield Committee 1976 • Provoked by a rates revolt • Outstanding report: must deal with VFI • Universally praised and ignored • Decide between centralism & localism • Move functions from local to central, or • Move tax powers from central to local

12. Layfield-consistent centralism • Poss function transfers from local-central: • Education (happening de facto) • Personal soc svcs (should happen, but centre scared) • Police (happening de facto (Humberside)) • Fire (no argument against) • Would end net VFI but castrate local govt

13. Layfield-consistent localism • Poss tax transfers • Relocalise business rates • Local income tax (Layfield and LDs like, but a silly idea) • Congestion charging • Land value taxation

14. Echoes of the Big Bang: Poll Tax today • PT followed a rates revolt • In ensuing panic, govt doubled VFI by nationalising business rates • And rigged equalisation grant • ‘Maximise grant to boroughs near the river beginning with W’ • Everybody does it: • Area Cost Adjustment; ethnic weighting for schools

15. Council tax – the new poll tax? • The council tax revolt • ‘Devon pensioners’ • Balance of Funding Review • Too near election to report • Lyons Review • A review to review the review

16. The land tax solution • Taxation of economic rent • Which is created by govt….

17. Lloyd George 1909 (1) • [A] fully-equipped Duke costs as much to keep as two Dreadnoughts - and they are just as great a terror - and they last longer. • (After the Duke of Buccleuch had said that the land tax would make it impossible for him to support the village football club any more)

18. Lloyd George 1909 (2) • The question will be asked “Should 500 men, ordinary men chosen accidentally from among the unemployed, override the judgment – the deliberate judgment – of millions of people who are engaged in the industry which makes the wealth of the country?” That is one question. Another will be, who ordained that a few should have the land of Britain as a perquisite; who made 10,000 people owners of the soil, and the rest of us trespassers in the land of our birth[?]… These are the questions that will be asked. The answers are charged with peril for the order of things the Peers represent; but they are fraught with rare and refreshing fruit for the parched lips of the multitude… (At Newcastle upon Tyne, October 10, 1909, quoted by Jenkins 1968, p. 94)

19. Who said this? When? Who repeated it? When? • Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.

20. The land tax solution • Taxation of economic rent • Which is created by govt…. • And badly taxed now • Stamp Duty • IHT • S.106 agreements • LVT would be more efficient and more equitable

21. Answers • Winston Churchill

22. Answers • Winston Churchill • 1909

23. Answers • Winston Churchill • 1909 • Kate Barker (commissioned by G Brown to report on why the housing market fails)

24. Answers • Winston Churchill • 1909 • Kate Barker (commissioned by G Brown to report on why the housing market fails) • 2003