5.1 A good local tax will achieve a balance between the interests of local people and those of central government. It should be based on a strong link between a council's budget, the level of its tax bill and the cost and quality of services provided, while ensuring that it contributes to the achievement of national policy objectives. The present system has got the balance wrong. Local accountability is not strong enough and central government exercises its powers in a way that is disproportionate to achieving its objectives. Both local and central government's role in the tax setting process needs to be reconsidered.
5.2 In the consultation papers previously published, the Government has made a number of proposals for improving local accountability.
5.3 The Government is developing a best value regime to improve the quality of local services, and the efficiency and economy with which they are delivered. It will apply to all authorities and all services, and is intended to ensure sustained improvements in performance.
5.4 An important aspect of best value is that it will strengthen the link between local authorities and its service users and council taxpayers by requiring authorities to consult on the standards of the services for which they are responsible, and to report back each year on their performance against those standards. Local authorities will be expected to carry out a rolling programme of fundamental service reviews. These should, amongst other things, ensure that authorities' performance is rigorously examined in relation to that of other authorities and the private sector, that the full range of alternative ways in which performance can be improved is explored, and that local people and others are provided with an opportunity to engage in the planning of their authority's services. The outcome should be improved services, both in respect of cost and quality. Local Performance Plans will spell out the targets and show how they are to be met. They will act as the principal means by which authorities are held accountable for the quality and efficiency of the services. Plans will be published, and external joint audit/inspections will provide local people with the information they need to challenge local performance where it falls short. Local Performance Plans could be backed up with more detailed service plans which could be used for consultation with specific groups of service users.
5.5 Under best value, local taxpayers and service users will be in a much stronger position to influence the services which are provided and the council taxes which people pay. Local people will be given the information that they need in order to make informed judgements about the council's spending plans and proposals. By requiring explicit targets to be set and reported on, and by involving local taxpayers and others in decision making, best value has an important contribution to make towards improving local accountability.
Q.4 The Government would welcome views on the way in which budget and council tax decisions might be made more transparent, and better informed by the consultation required under best value in relation to the quality and cost of local services.
Increased public participation
5.6 There are currently many initiatives being pursued by local authorities to involve communities or particular interest groups much more closely in their decision making. They range from focus groups, seminars, standing committees and citizens juries or panels, through to wider opinion polls. The Government wishes to encourage authorities to involve their citizens in this way. Many of these mechanisms could form part of a wider community planning process, for example, but some could also be used specifically to bring a direct input to the setting of an authority's budget. There would be considerable advantage in bringing together people interested mainly in service issues and people more interested in tax levels.
5.7 The Government is committed to move to annual elections for a proportion of councillors for each authority, in order to improve accountability significantly. This will give the electorate a chance every year to give its verdict on the performance and policies of its council. It will provide greater continuity and stability and reduce the possibility of leaving difficult decisions to the year following the election. This will allow a more consistent long term approach to emerge.
5.8 Annual elections would help encourage regular debate on the budgetary decisions of authorities. Councils would not be able to leave budget increases to the year after the election as they can where the whole council is elected once every four years. This could encourage a more long term and ordered approach to financial planning in some areas compared to the stop-go policies possible under four-yearly elections.
5.9 The consultation paper on local democracy has suggested that local referendums might become part of the local decision making process. They could be used to help develop spending and council tax decisions.
5.10 Referendums would increase accountability by putting spend and tax choices clearly before local people. They would give local people a motivation to become more involved in local decision making. And they would lead councillors to feel more accountable to local people for their decisions.
5.11 On the other hand, referendums would represent an additional cost. Some argue that they only present crude choices to the electorate. The Government places great store by representative democracy, and does not see referendums as a substitute for it. One way of minimising any risk of referendums reducing the importance of local elections would be to hold referendums and elections on the same day. There are also other potential problems with referendums that would need to be addressed. For example, the questions, set by a small number of people, might give only a small range of choice to the electorate. And there cannot be an assumption that referendums would automatically lead to higher or lower spending and tax levels.
5.12 Because there are two or more tiers of local government two or more referendums might be needed in some parts of the country. Both the need to conclude the budget setting process and the desire to minimize the costs of the referendums would argue for them to be held on the same day.
5.13 It would be possible to give authorities a power to hold a voluntary, consultative referendum. This would give them an opportunity to test for themselves whether their spending proposals reflected local opinion and to seek information on their electorates' preferences in areas like the balance of spend between services. The results of such referendums would not be binding in law, although an authority could if it wished commit itself to following the results of the referendum.
5.14 There are two broad possibilities for triggering referendums which only apply in a small number of authorities in any given year.
5.15 Referendums triggered by exceeding a budget ceiling might take place automatically if a centrally defined ceiling were exceeded. The ceiling could be based on: the budget, which might be most meaningful in terms of the finances of the authority and the services it is providing, or the level of council tax, which might be most readily understood by the electorate. The trigger based on either budget or council tax might be defined in terms of the level, perhaps in relation to a standard level such as SSA or the council tax for standard spending; the increase since the previous year; or the percentage increase since the previous year.
5.16 Whatever the chosen trigger, this approach would require central government, rather than local people to decide the circumstance under which a referendum would take place. That trigger could be set in the statute or annually by the Secretary of State. For the latter case, the criterion determining whether a referendum would be necessary could appear crude and universal, although authorities would be ultimately able to set a higher council tax or budget if their local electorate wanted them to, subject to reserve powers.
5.17 Referendums on demand would be triggered by demand from the local people. A set proportion of the councillors or of the electorate could be given the right to require a referendum on budget proposals. There are a number of difficulties with this approach. Timing would be a very important issue, since there would be two stages needed. First the relevant number of signatures would have to be collected and checked, then the referendum called and held. The process could not start until the council had proposed a budget and it would then take at least eight weeks to trigger and hold a referendum. To allow time to fit this in before final budgets and council taxes were set, either budgets would have to be proposed sooner than at present, probably in the first half of January; or councils where a referendum had been called would have to be given dispensation to delay their budget and tax setting until after the present statutory date. Alternatively the referendum could be held after the tax had been set but the issue of bills might be delayed.
What would be the question?
5.18 In any referendum, but particularly for selective referendums, the framing of the question and who should ask it would also need to be carefully considered. Should any referendum merely ask whether the proposed budget is acceptable? If so, should rejection mean automatic adoption of a centrally defined limit where one existed? Or of last year's budget? If not, then what should be the rules guiding the setting of the budget if the answer is no?
5.19 A better alternative might be for the referendum to include a number of proposals. These could be budgets proposed by each party on the authority or perhaps by the executive and non-executive parts of an authority which had adopted that model. There would then be only a single referendum and the proposal which proved most popular would be the one adopted. This could of course lead to an option supported by a minority of voters (say 25% in a five choice referendum) emerging as first choice.
5.20 The question also arises of who should be entitled to vote in a referendum about a budget decision. The normal electoral franchise is the most obvious constituency, and would minimize costs since voting entitlement would be determined by the electoral register current at the time of the referendum. Although there are alternatives they have many disadvantages not least the cost of a new register. The Government would therefore stick with the normal electoral franchise.
5.21 There is also the question of what would constitute a sufficient degree of support for a proposal for it to be ratified. This could be on the basis of a simple majority as in elections but it would also be possible to set a threshold for ratification such as requiring a proposal to receive more than two thirds of votes cast or the votes of more than half of those entitled to vote.
Q.5 The Government would welcome views on the principles and practicalities of achieving a more direct universal input to the decision on the budget from the electorate through referendums on the proposed budget.
5.22 In addition to these measures the Government is also considering two other changes which could improve accountability.
Timing of elections
5.23 Elections, whether they are annual or every four years, are currently held after the budget for the year has been set. This allows the electorate to vote out a council which has set its budget or council tax at an unacceptably high level. And the fact that councillors have to face the electorate very soon after higher bills have come into effect is a powerful influence in election years. This is one of the main reasons why the Government is proposing annual elections. However, the disadvantage of the current approach is that the election can only be a reaction to events which had already taken place. And while any new administration (or a continuing one which had got a bloody nose from the electorate) could reduce the budget set, it would incur the extra costs involved in rebilling if it chose to do so.
5.24 If the aim were to achieve the maximum electoral leverage on the decision on the budget for the coming year, it might be better to hold the election at a different point in the financial year. With the financial year starting in April, an election before December would be little better, and probably worse, than a May election as it would be further away from when the last bills were sent out. If elections were held in January or early February there would be a realistic opportunity for a new administration to change things in time for the new financial year but turnout would probably be lower because of bad weather and dark evenings.
5.25 An election in late February or early March could effectively determine the electorate's view of the spending and tax plans of the current administration. If there were a change in control it should leave the new administration just enough time to determine its detailed budget and bill people accordingly especially if there were a dispensation to set budgets a little later and allow later billing in these circumstances.
Q.6 The Government would welcome views on whether the date of local elections should be brought forward to put them before the council had taken budget and tax decisions for the following year.
Reimbursement of council tax benefit subsidy
5.26 Central government provides support for local expenditure in the form of council tax benefit subsidy. On average a fifth of any increase in council tax is met by the Exchequer through council tax benefit. The effect of this is that local decisions to increase council tax lead to the authority drawing down extra government grant.
5.27 The proportion of council tax payers receiving council tax benefit varies considerably from authority to authority and in some local authorities council tax benefit can be more than 30% of council tax revenue. Although council tax benefit is administered by local authorities, the cost is met by central government by way of a direct subsidy of 95% to fund actual council tax benefit expenditure for each local authority. Not only does this mean that part of the direct cost of local spending decisions is met nationally, it may also obscure the link between local spending and taxation. The Government would not consider in this context any changes which affected the entitlement of individual taxpayers to council tax benefit. The Government cannot see any good case for denying welfare support to individuals because they live in an authority where expenditure and tax have increased. But funding mechanisms could be altered to counter these effects.
5.28 One possibility would be to ensure that any council tax above the council tax for standard spending (CTSS) was not eligible for benefit subsidy. This would be consistent with the rest of the council tax setting arrangements which mean that any budget requirement above an authority's Standard Spending Assessment is funded entirely from council tax. The effect of the change would be to place the whole of the cost of spending above standard on local taxpayers rather than sharing it between local and national taxpayers. That would be reflected in higher local council taxes for authorities spending above SSA. It would fit well with the remainder of the local government finance arrangements and would not impose any new central constraints or guidelines for local spending decisions.
5.29 If implemented in one year, this approach could lead to large increases in council tax in some authorities, particularly those where a small increase in revenue requirement leads to a large increase in tax, or with a large proportion of benefit recipients, and spending well above SSA. A phased change in subsidy arrangements in which an increasing proportion of any council tax above CTSS was borne locally might be feasible. It might however make the reasons for council tax changes less clear.
5.30 An alternative would be for the Government to calculate each year a guideline increase in council tax which would be eligible for council tax benefit subsidy but above which any increase would be wholly or partly ineligible. The guideline might be calculated as a common percentage increase everywhere in the country, or it could be tailored to the circumstances of individual authorities. This approach would bear less heavily on authorities levying taxes well above CTSS than that in paragraph 5.28 and more heavily on those with taxes just above, or below the CTSS which were increasing their tax level.
5.31 The proportion of taxpayers receiving council tax benefit varies quite considerably from authority to authority. Limitations on benefit subsidy could potentially have a much greater impact on council tax bills in authorities where a large proportion of local people receive council tax benefit, than in those where a smaller proportion do. Although that would be consistent with a principle that the consequences of local decisions should fall locally, it might cause difficulties for taxpayers in some authorities. The Government would consider making arrangements so that councils with above average proportions of residents receiving council tax benefit were not affected more severely than a council with an average proportion in receipt of the benefit.
5.32 At present the billing authority administers council tax benefit and receives the associated subsidy. That approach could continue and subsidy limitation only apply to the total council tax for an area. The cost of council tax benefit higher than the eligible level would fall entirely on the billing authority. But it would not give a direct link between spending decisions and the tax consequences, particularly for upper tier authorities. It would allow extra spending in one tier to be offset against lower spending in another. It could thus mean that the consequences of an upper tier's spending decisions might be felt differently by taxpayers in one of its constituent billing authorities than by taxpayers in another. The Government therefore proposes that any changes in council tax benefit subsidy arrangements in this context should be designed to bear equally on all taxpayers in the area of an authority which had triggered reduced eligibility.
Q.7 The Government would welcome views on options for some or all of the council tax benefit cost of additional local spending becoming the responsibility of local people.
Chapter 6 - Looking after Government's interest
Published on 30 March 1998
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