A Tory freeze on Local Government grants - the effect on Council Tax rises in the South East 2005-7
Dr Alan Whitehead MP - March 2005
On February 16th 2004 the Conservatives announced their medium term expenditure strategy. Shadow Chancellor Oliver Letwin said:
'The fifth component of the Medium Term Expenditure Strategy
relates to all programme expenditure covered by departmental expenditure limits outside the NHS and schools budgets
I have agreed with my Shadow Cabinet colleagues that the baseline for spending across all of these departmental budgets will be 0% growth for the first two years, followed by 2% growth per year for the remaining four years of the period covered by the strategy.'
He excluded from this spending on health and schools, but clearly included other spending on local government.
Lest it be said that this represents outdated policy, the strategy is explicitly endorsed on the 'better public services, better value' document posted on the Conservative Party website at the end of February 2005. This clearly links the February 2004 speech and strategy to the outcome of the James Review. It says:
'...Last February, we set out our medium term expenditure strategy. The heart of that strategy is a path for public spending that is affordable...in this document we set out how we will achieve that affordable spending' .
Page 2 of the document helpfully includes a table that sets out spending 2005-2008 in 'priority' and 'non-priority' areas. 'Other grants to local government and the devolved administrations' is listed in the 'non-priority' group (i.e. includes all support for local government outside education and children's social services) and records a real-terms increase over the period of 1% (£39.4 billion to £42.0 billion) - that is, a freeze for the first two years of a Tory Government, and as previously outlined, a 2% increase in year three.
What would the effect of a two year freeze in spending be on local government? We know from Spending Review 2004 and the announcement by ODPM that settlement figures will in future be for three year periods, what future assumptions local authorities can make concerning the contribution central government will make to their budgets should a Labour Government be returned in 2005: we also now know in principle how those assumptions might change should a Tory Government be elected.
We can say in overall figures what the loss in grant to local government will be by taking 2004 as a base year and then deducting the known two year increases set out in the spending review, taking into account the effect of an increase in the element that would go to schools. The figure over two years comes to £4.207 billion.
But how would this collective loss of funding translate into council tax increases? Such calculations are notoriously difficult to make, since council tax raising decisions essentially occupy the 'gap' left after elements of the agreed budget for each authority covered by revenue support grant and national non-domestic rate are calculated. The need to raise funds for services that are above what might be covered by the uprating in grant is the basis of the 'gearing' effect, which, very roughly means that a budgeted increase in services of 1% over what can be covered by grant needs to be underpinned by a 4 - 5% increase in council tax. Since each authority's percentage increase in grant and their objective budgetary position relative to their grant increase is different, calculations will necessarily be approximate, but will be helped because we know for each precepting authority what the increase in council tax relative to grant increase was for 2004, and we know what grant increase they can expect for 2005 and 2006, assuming a Labour Government is in office. We also know that NNDR cannot, under present legislation increase by more than inflation, and we can assume that a Tory government would stick to this arrangement.
We can, therefore, without making too many dangerous assumptions, come to a view about the range of increases that a standstill central budget would mean for council tax in each billing authority both in 2005-6 and 2006-7, representing the two declared years of a freeze from a new Tory government.
We might make the following moves to achieve this:
" Each Billing Authority will have, for 2004-5, a figure against it representing the overall increase in Council tax presented to the public as a result of the precepts from County or Unitary, and the Police and fire authorities. This figure represents the joint decisions precepting authorities will have made on the extent to which council tax will need to be raised in order to fill the gap in income to meet their budgets after central grants and NNDR have been taken into account. In light of the fact that ODPM has announced that grant increases will be stable for three years, if service levels remain the same in future years, council tax increases will also be the same.
" Under Tory proposals, however, Local Authorities, if they are to maintain services at 2004-5 levels will need to raise their council tax by the amount they would have had additional grant been received AND levy additional tax to compensate for the loss of grant over the two year period.
" The education element of their grants will not be frozen, (some 43% of the total) but all other elements will be. However, all increases in educational income were, it was assumed, to be 'passported' to schools in 2004-5, and we can assume that the same regime would apply for increases promised by an incoming Tory government. Increases in the education budget would therefore have no effect on council's decisions on tax, but would have an effect, in aggregate, on the 'gearing' effect when Council tax raising decisions are made. Overall, Government Grants totalled 66% of revenue expenditure in 2004-5, whilst Council Tax and NNDR came to 19 and 16% respectively. If we take out education expenditure, the ratio changes to grant 52%, Council tax 26% and NNDR 22%. This will be the relevant ratio to calculate the gearing effect on council tax rises following a freeze in central grant if we discount rises in education expenditure.
" The effect of a freeze on budgets, therefore, is that local authorities will lose approximately half of the percentage increase they had previously been anticipating - the loss of an anticipated rise of -say- 10% in grant will cause a 5% hole in the budget overall, and will need to be made up by a geared increase in council tax.
" However, business rate will continue to rise at the rate of inflation, and this will fill an element of this hole. Again, using the modified ratio of contribution to income, the 'hole' will be plugged across the council budget by about 20% of the likely rate of inflation increase.
" If we do these sums, we will then have a 'net' budget hole that will need filling in each billing authority area if services are to remain the same. Council tax to cover the hole will have to be raised by the moderated gearing level - i.e. x4.
" The overall Council tax increase in each billing authority area for 2005-6 will therefore be this figure plus the increase in council tax from the previous year.
" Since the freeze will continue into year two of an incoming Tory government, the effect on council tax will cumulate, if the local authority simply tries to defend service levels in year two: i.e. the 'hole' previously identified will double. An indicative level of council tax increase for year 2006-7 can be obtained by adding the council tax necessary to plug the 2005-6 'hole' to the total increase calculated for that year.
Summary
The figures in each South East England billing authority's area, using this methodology are set out in the attached table*, and represent the range in which council tax would increase under a Tory funding freeze regime. District Council bills would rise by an average of 26.8% whilst Unitary Council rises would average 44.29% from 2005-07. They may vary slightly as the exact 'gearing' effect of council tax rises will themselves vary a little to some extent from authority to authority. There is no doubt that Council Tax bills will rise to record levels over the next 2 years if the current Conservatives spending plans are ever implemented.
Alan Whitehead MP
House of Commons
*nb for a copy of the attached table please e-mail sam@alan-whitehead.org.uk