An important election issue

If there were any doubts that cynicism and opportunism are the way of politicians, the on the hoof development of local finance policy should banish them. The Tories made a significant volte-face by withdrawing support for property revaluation. Labour, rattled, responded by saying the revaluation would be ‘revenue neutral’ and no new high end council tax bands would be created. Only the Liberal Democrats emerge unblemished on this issue, though plans for a local income tax are misguided.

At least we should be glad that an important issue has been highlighted. Local taxation has always been a hot issue. Over the years, central government has undermined the power of local government to raise revenue. This has been achieved by rate capping and direct delivery of services through unelected Quangos. Council tax now accounts for only 25% of local revenue. The dilemma for governments is obvious: people don’t like paying taxes. When council taxes rise, popular ire is directed mainly at the central government. Unlike many other countries, we do not have genuine local democracy. It is central government that calls the shots and carries the can.

There is an issue here more than just about local finance. It is the pressing need to reinvigorate local democracy. If we had genuine local democracy, as found in many countries around the world, a cultural change would be brought about that would enable people to think along the lines of ‘local accountability for local decisions’. At present, central government encroaches on everything that should be local: from education and health to planning. Local authorities are now directly responsible for an ever decreasing number of services. Where they retain responsibility, they are subjected to numerous targets and performance indicators. The public has seen through the façade of local democracy and blames central government when things go wrong.

On the issue of local taxation, there is little doubt that reform is needed. A local income tax has the attraction of sounding progressive. Yet on closer scrutiny it becomes clear that abandoning council tax in favour of a local income tax would be a retrogressive move. Inequalities in asset ownership are far greater than income inequalities. A large proportion of the nation’s wealth is tied up in property. In the UK, property gets off quite lightly when it comes to taxation.

Given the exponential rise in house prices, many people are now sitting on a notional fortune. Their income has obviously not arisen as fast, which means they are paying a higher proportion of it in council tax. At present, the top property band for council tax purpose is valued at £320,000. This means if your property is valued at over a million pounds, your council tax liability is the same as a property worth £320,000. Given the house price inflation, there are likely to be parts of the country where people on relatively modest incomes have seen their value of their house increase three-fold since 1990.

Council tax needs to be reformed, by the introduction of new top and bottom end bands. Labour has taken a self-interested, short term view by removing plans for new top end bands from the revaluation exercise.