Contact: Jon Pittam, (01962) 84 7400; [email protected]
Jenny Heath (01962) 847402; [email protected]

1 Introduction

1.1 The Government established an inquiry into Local Government funding led by Sir Michael Lyons in July 2004 with a remit to consider, in the light of the report following the Government's review of the balance of funding, the detailed case for changes to the present system of local government funding. Sir Michael was requested to report to the Chancellor of the Exchequer and the Deputy Prime Minister by the end of December 2005. The Cabinet agreed a submission to the inquiry in February 2005, in response to a series of questions on which the inquiry sought evidence.

1.2 In September 2005, the Government invited Sir Michael Lyons to extend the remit of the inquiry to also consider the role and functions of local government, before making recommendations on changes to the funding system, with the deadline for the final report put back to the end of December 2006. The invitation to extend the review was made following the Government's decision to postpone the revaluation of council tax which had been due for implementation in April 2007. Subsequently, the inquiry published a consultation paper and interim report in December 2005, inviting responses by 13 March 2006. The report follows the extended terms of reference of the inquiry by including separate parts on Local Government Role and Functions and Local Government funding and this report reviews the questions and issues raised in each part of the report and recommends a response on behalf of the County Council.

2. Part 1 - Local Government Role and Functions

2.1 The proposed response to part 1 of the interim report is set at a strategic level, highlighting five key issues relating to the role of local government:

(a) Relationship of trust - national standards and local determination

(b) Focus on outcomes

(c) Responsibility with authority

(d) Provision of local services

(e) Public understanding and the democratic mandate

This approach avoids being distracted by different interpretations of the questions raised in the report and reflects the fact that the issues are inter-related. The detailed questions are attached at appendix one .

2.2 Relationship of trust - national standards and local determination

At the heart of this debate is the need to develop a relationship of trust between central and local government. The Council recognises the validity of the research which highlights the distinct nature of the UK model as seeking to ensure consistent standards of public services across the country. This has resulted in high levels of national prescription over targets and standards and leaves little flexibility to be responsive to local needs. The answer lies in acknowledging the need for running dual agenda and being able to respond to adverse media attention about regional variations with a robust defence that while central and local government share a joint agenda of improving the quality of life for all they value the rich diversity of localities and their different needs and aspirations.

2.3 Focus on outcomes

Local government has felt the burden of over-prescriptive direction from central government in recent years. The Council recognises the validity of implementing national initiatives at the local level but resists the micro-managed processes which accompany them. It strongly suggests that central and local government should agree on WHAT needs to be achieved, leaving local government (or other local providers) to determine HOW. This will enable the greatest degree of choice and flexibility in local provision - which can be passed on to the end user.

2.4 Responsibility with authority

Local government is working increasingly in partnership with others. This is a valuable tool, minimising the need for constant restructuring - but one which needs careful management to be effective. When new initiatives are to be implemented through partnerships, accountabilities need to be clear. Local government is well placed to deliver the community leadership role but this role needs to be legitimised so that local government can be as effective as possible. This means being given authority to act as `first among equals' in order to secure improved outcomes for communities, rather than being left powerless with added responsibilities.

Local authorities are also asked to act as equal partners, so a one size fits all approach is inappropriate. The answer lies in ensuring there is clarity over governance issues and recognition of the democratic mandate that local government carries.

2.5 Provision of services

Local government is first and foremost a provider of flexible, local public services. The Council is strongly committed to a mixed economy of service provision, on the one hand regulating the market through internal supply and introducing fresh thinking from external providers on the other. The essential ingredient for successfully delivering services in this way is to promote a culture of continuous challenge to the status quo, constantly asking for evidence of value for money.

Local government has experienced extensive reduction in responsibility for services over the years. Any further reduction would fragment the ability to exert influence among partners and to exploit the synergies between services, which overall deliver improved outcomes tailored for the local community.

The Council recognises the challenge of inconsistent standards, the so-called `postcode lottery', which at a national level can signify unacceptable performance. This would be better addressed by an agreement between central and local government on a core set of minimum standards for a small number of key services. As stated above, managing performance against these standards should be by reference to progress towards agreed outcomes.

2.6 Public understanding and the democratic mandate

The interim report correctly identifies the public's weak understanding of local government's role and the way it is financed. Attempts to tackle this by explaining the complexities of the public sector are more likely to reinforce silos between the different elements of government and other public services, rather than change perceptions about value for money and the public's inability to influence decisions.

Managing expectations may be better addressed by:

· promoting the role of councillors as the voice of local communities. Their democratic mandate is a critical element in ensuring their accountability to residents.

· emphasising the role of socially responsible citizens as people who contribute to the overall health of their communities - regardless of their personal expectations of receiving local public services.

3. Public consultation on the Lyons Inquiry

3.1 The interim report suggests encouraging public engagement in the debate about the role of local government. The County Council undertakes a wide range of public consultation and has a substantial amount of evidence of the public's views of local services and the role of local government. The Corporate Communications Team will extract key messages relevant to the Lyons Inquiry and these will be appended to the response. At that time options to carry out targeted work on the role of local government will be considered, in anticipation of sending the results through to Sir Michael Lyons after the 13 March deadline.

4. Part 2 - Local Government funding

4.1 Whereas the interim report poses a number of specific questions in relation to the role and functions of Local Government, the report identifies a number of key issues relating to local government funding and invites respondents to express a general view on the issues. The report also examines a number of possible models for reforming council tax in conjunction with revaluation and invited comments on the appropriateness of the models and on further options for modelling a reformed council tax by 31 January 2006. Comments were submitted to the inquiry in consultation with the Leader.

4.2 The key issues highlighted are as follows, together with suggested responses:

(a) The positive attributes of Council tax - it is stable, predictable, easy and inexpensive to collect and has high collection rates. Property owners contribute to the cost of local services in relation to their stake in the local community, as reflected in the value of their property, while all those who occupy but do not own domestic property in a locality also contribute.

Council tax as a property based tax undoubtedly exhibits the positive attributes identified in the report, despite the criticisms to which it has been subject. Property taxes exist as a form of local taxation in most countries because of these attributes, and the County Council supports the retention of a reformed council tax as the basis for domestic local taxation in England.

(b) Council tax as a property tax - the report queries whether the Council tax should become a purer property tax with a stronger direct link between the capital value of the property and the tax payable, than under the current system of bands and multipliers.

The County Council supports the view that there is a case for increasing the number of bands and amending the existing multipliers so that the tax payable is more proportionate to the capital value of the property.

(c) Council tax as a local service charge - council tax has a variety of discounts and exemptions designed to relate to tax liability partly to the make-up of the household, rather than solely the value of the property.

This feature of the Council tax was designed to retain some aspects of the community charge within the replacement council tax system and has been generally accepted as fair. The County Council supports the retention of the 25% single person discount and of the various exemptions within the current system.

(d) Council tax as a hybrid - the hybrid nature of council tax reflects a desire to balance a number of potentially competing objectives. The public do not strongly understand these objectives or the tensions between them - in particular the balance between a `fair' source of taxation and a property tax.

Much of the criticism of the `unfairness' of council tax is less because of the inherent features of a property tax than the context in which council tax has operated. Council tax has increased much faster than incomes since 1993/94 partly in the earlier years as a conscious objective of Government policy and latterly because of the effects of the increased ring-fencing of government grant and expectations of improved local services. Many who are entitled to council tax benefit have not taken it up and the limit on savings has meant that some pensioners in particular with low incomes have been ineligible. Greater acceptance of a continued role for a property based local tax is dependent on dealing with these two problems.

(e) Understanding the problems of council tax - these are summarised in terms of the scale of annual increases, the high visibility of council tax, the `gearing effect', public confusion as to what council tax pays for, the `unfairness' of council tax.

The scale of annual increases is undoubtedly a problem and one that can only be solved by fair and transparent increases in government grant and by widening the local taxbase, so that council tax does not take all of the strain of an inadequate grant increase. The visibility of the tax can be perceived to be a problem, but also promotes accountability in a way that less visible taxes do not. The introduction of the new schools funding arrangements in 2006/07 though unwelcome in reducing the role that democratically elected local councils play in relation to the funding of Education, does have a significant effect on the gearing ratio between council tax and formula grant. Overall the balance of funding changes from around 75:25 to around 50:50 but because the changes have been confined in 2006/07 to local education authorities, council tax is now contributing the majority of funding of the budget requirement for education authorities. Public confusion with the system of local government funding has been heightened by the introduction of the four-block presentation of formula grant this year. If the public are to understand what government grant and council tax are intended to pay for, a more transparent approach to the presentation of formula grant distribution needs to be re-introduced.

(f) Council tax and ability to pay - council tax benefit

The inquiry team has done some research on the impact of council tax benefit in making council tax more `fair' which concluded that if council tax benefit was taken up in full that council tax liability would represent a relatively constant proportion of people's income, other than at the top of the income range. The inquiry had also received evidence that pensioners with savings over £16,000 and therefore not eligible for council tax benefit can pay a relatively high proportion of their income in council tax.

This is an important conclusion and suggests that a high priority needs to be given to improving the take up of council tax benefit, including examining ways in which the benefit system could be translated into a rebate, which does not require individuals to submit claims. Consideration should also be given to raising the savings limit for pensioners as the current system discourages individuals with relatively low retirement incomes from saving for their old age and seeking to maintain their independence.

(g) Revaluation - the interim report comments on the Government's decision not to go ahead with revaluation in 2007 in the following terms ` Whilst I understand this decision, I believe that revaluation will be necessary if council tax is to remain credible as a property based tax in the long term.' It also highlights the poor public understanding of how revaluation might work, ignoring the Government's commitment that the total amount of revenue collected by council tax would not increase as a result of revaluation, so that there would be gainers as well as losers from making the tax fairer.

The County Council supports the view that after 15 years a revaluation is necessary to maintain the credibility of council tax.

(h) Options for reforming council tax and ability to pay - the modelling of alternative ways of reforming the council tax structure does not appear to have a big impact on fairness in terms of the link between council tax and ability to pay. Reform of the council tax benefit system would have a bigger impact, but the report concludes that `I am interested in exploring further options to reform the structure of council tax'.

The modelling carried out so far includes an examination of having regional rather than national band limits, but only as a means of adjusting for differentials between regions in the rate of increase in property values between 1991 and 2005. This suggests that for the South East region as a whole prices have increased at close to the national average. However this takes no account of the extent of house price differentials that existed in 1991 and in responding to the January deadline for comments on modelling of council tax reform options, it was suggested that the inquiry should seek to model the effect of introducing regional bands to reflect house price differentials, rather than simply movements in prices since 1991.

(i) Local income tax - public attitudes analysis supported the linking of tax liability to ability to pay, but people were dubious about having an additional tax alongside council tax to fund local spending, which was the basis of the terms of reference for the inquiry. Evidence given to the inquiry indicates that it would be possible to introduce a local income tax, alongside council tax, but it would be a substantial task and would require a considerable time to implement.

The County Council continues to support a property based tax as the basis for domestic local taxation. Introduction of a supplementary income tax would unnecessarily complicate the system of local taxation.

(j) Business interests and business rates - most local authorities argue that the freedom to set the business rate should be returned to local authorities. A large number of businesses and representative organisations expressed concern that local control would make taxes less predictable, could lead to an increase in the taxes paid by businesses, and that there was no mechanism for local accountability to businesses on the level of business rate. However some support existed for a degree of local discretion over business rates, linked to consultation with business and use for purposes such as road improvements and regeneration activity in which business had a direct interest.

The response of the business community is understandable and any decision to relocalise the business rate would need to be introduced in a way that resulted in some businesses paying lower rates than at present, and with safeguards to protect local business from excessive increases and to prevent local authorities increasing business rates at the expense of council tax. Nonetheless, the County Council believes that the relocalisation of the business rate represents the most effective means of widening the local taxbase and improving the links between local businesses and local authorities.

(k) Land taxation - a number of economic arguments have been advanced for taxing the value of land, rather than the property that occupies it. However it also has disadvantages as a local tax and would require further work on compiling a national register of land ownership.

There are separate arguments for taxing the increase in the value of land created when planning permission is granted for development and a consultation is in progress on a planning gains supplement which it is proposed would be primarily used to provide funding for local authority investment in infrastructure. There do not seem to be any compelling arguments to justify the costs of change that would be associated with substituting a local land value tax for a property based tax.

(l) Tourist related taxes / other taxes and charges - tourist taxes and local sales taxes recognise that not only people who live and pay council tax in an area benefit from local public services. Other potential sources of revenue have been identified - either from localising existing national taxes on introducing new waste or transport related charges.

The County Council in its initial submission to the Lyons inquiry did not support the introduction of a range of new minor taxes or the assignment of national revenues as a preferred means of widening the local authority taxbase. The introduction of new taxes or charges relating to waste or transport should be judged on their beneficial impact on changing behaviour or providing earmarked funding for a related purpose rather than as a supplementary form of general local taxation.

(m) User charges for services - the extension of charging for services is acknowledged to be controversial and public attitudes research reveals a general resistance to charging for key services, though it would provide a means of improving public understanding of the cost for services.

Current statutory provisions limit the range of services for which charges can be levied, but there is potentially scope to charge more for some services particularly in relation to social care. However without a fundamental review of current legislation, reviewing charges is critical to managing new budget pressures or responding to expectations for increased choice, but is unlikely to have a fundamental impact on the balance of funding.

(n) Equalisation - the inquiry's international research on the funding of local services revealed that the mechanisms for needs and resource equalisation in the English system are one of the most complex in the world and seeks to achieve a high level of equalisation. The importance of central government grants can weaken effective local accountability and the extent of equalisation weakens the incentives for local authorities to promote economic growth in their areas.

The extent of equalisation is heavily influenced by the issues raised in Part 1 of the report about the degree to which service levels are determined by national standards rather than local choice. Taxpayers in similar circumstances in different local authority areas will expect to pay a similar local tax to receive a nationally determined standard of service. The County Council supports the principle of needs and resource equalisation but believes there are some fundamental flaws in the current arrangements that add complexity and instability to the local government funding system.

Additional recognition of unmet need associated with higher levels of deprivation, particularly for social care, has tended to be accommodated within relative needs factors by squeezing the basic amount within the formula without any underpinning evidence to support the reduced basic amounts. The extent to which specific grants targeted towards areas of deprivation have been allowed for in determining relative need to spend from general grant is also questionable. The process of resource equalisation has also been destabilised by the uplift given to relative needs factors both in 2003/04 and more recently in 2006/07 ostensibly to reflect actual levels of local authority spending in excess of the levels supported by Government. This was a major factor accounting for high council tax increases in 2003/04. A basic principle needs to be established that equalisation should be linked to spending levels that the Government is willing to support. It is reasonable to expect additional spending determined by the local authority in excess of the levels supported by Government to be financed from local taxation.

Recommendations

1 That paragraphs 2.2 - 2.6 form the Council's response to consultation on the role of local government and comments on local government funding are based on the responses outlined in paragraph 4.2, so that both can be returned to Sir Michael Lyons by the deadline of 13 March 2006.

2 That Corporate Communications examine existing evidence of the public's views in relation to the role of local government and determine whether further work should be undertaken to inform the Lyons Inquiry as it continues.

Section 100 D - Local Government Act 1972 - background documents

The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report.

NB: the list excludes:

1. Published works

2. Documents which disclose exempt or confidential information as defined in the Act

Documents: noneAppendix 1

Paragraph 5.19 of the report summary:

The strategic role of local government, one we might term "place-shaping", encompasses:

(o) Building and shaping local identity;

(p) Representing the community, including in discussions and debates with organisations and parts of government at local, regional and national level;

(q) Regulating harmful and disruptive behaviours;

(r) Maintaining the cohesiveness of the community and supporting debate within the community, ensuring smaller voices are heard;

(s) Helping to resolve disagreements, such as over how to prioritise resources between services and areas, or where new housing and development should be located;

(t) Working to make the local economy more successful, to support the creation of new businesses and jobs in the area, including through making the area attractive to new investment and skilled workers, and helping to manage economic change;

(u) Understanding local needs and preferences and making sure that the right services are provided to local people through a variety of arrangements including collective purchasing, commissioning from suppliers in the public, private and voluntary sectors, contracts or partnerships, and direct delivery;

(v) Working with other bodies to respond to complex challenges such as dealing with natural disasters and other emergencies.

Questions asked in the report

The strategic role of local government

Question 1. What is the strategic role of local government? Is my description sufficient, or are there more elements you would add?

Which elements of this role should extend to services other than those for which local government is directly responsible, and how?

How does the strategic role vary between different types of councils?

Question 2. What tools do councils need to perform the strategic role more effectively?

What are the existing barriers to councils performing this role effectively?

In what circumstances does it work well and less well?

Are further improvements in performance, efficiency and accountability needed before local government can most effectively play this strategic role and be trusted to do so?

What are the key signs of success and failure?

Question 3. How important is the fact that local government is elected in relation to its ability and legitimacy to perform this role?

Devolution and decentralisation

Question 4. Which services (or parts of services) should meet national standards in all areas of the country? Which should meet minimum standards? Which should be entirely down to local choice?

Are there aspects (such as standards setting, funding or choice of delivery mechanisms) of individual services which should be nationally controlled or locally controlled?

Are there services where greater variation in standards would be acceptable if there was clearer accountability and consultation with local people?

Question 5. How has the Government's approach to devolution and decentralisation affected your area and your local services?

Which aspects of the current system are helpful and unhelpful, and why?

Have changes based on central government priorities differed from those that might have been driven by local pressure and opinion?

Managing pressures on local services

Question 6. How can pressures on local services be managed more effectively?

What are the main types of pressures faced by local services and how are they currently managed?

Which are the most difficult to manage and why?

Would greater devolution of responsibility enable pressures to be managed more effectively?

Does confusion about responsibility and duplication of effort contribute to pressures?

Would greater public understanding of the actual costs of public services help to manage expectations and pressures?

How can we ensure that the system provides the proper incentives and rewards for using resources efficiently?

Scope for a new agreement

Question 7. How could responsibility for local services be made clearer between local government, central government and other agencies?

What might this mean for the current performance management framework?

Would a more contractual approach for a small number of central priorities help to achieve this?