Audit Scotland on Council Finance

Audit Scotland have published their annual  Financial Overview of Councils . It doesn’t paint a happy picture, in fact it should probably come with a soundtrack.

The report talks of ‘significant challenges’ for Local Government finance.  If that sounds like accountant speak for bad things – it is. Boiled down to its absolute basics they say “All councils face future funding gaps that require further savings or a greater use of their reserves.” For “further savings”  read “cuts.

The reports says that councils are, generally speaking, managing their finances well but that funding gaps are developing which will mean either more cuts or greater use of council reserves.  They urge councils to do more long and medium term financial planning but acknowledges that single year grant funding from the Scottish Government can cause problems with this.

 Overall Council Spending is at £19.5 billion. This is lower than in 2011/12 although spending on some services has increased - the most obvious being social care due to rising demand. Some councils are overspending on their social care budgets and Audit Scotland warn that this needs  to be tackled (BTW  that isn’t accountant speak for cuts – they mean that councils should be doing better at saying how much they will be spending on particular services).

Scottish Government grants are councils’ major source of income. Between 2010/11 and 2015/16, Scottish Government funding (combined revenue and capital) for councils reduced in real terms by around £186 million (1.7 per cent) to £10.9 billion. Taking into account 2016/17 funding, councils have experienced a real-terms reduction in funding of 8.4 per cent since 2010/11.

Councils have usable reserves of £2.5bn that can be used to support services . Most (23) Councils added to their reserves in the last year. Reserves can be used to support services but obviously this is not a sustainable source of long term funding. The Commissions estimate is that Councils are planning to use a total of £87m ( 75) of total reserves  in the coming year to plug gaps in funding . Reserves are what might be reasonably considered as rainy day money – and it might be reasonably considered to be wet weather  so there use to maintain services and jobs is a good thing. But as Audit Scotland point out , this is hardly a sustainable method of funding services.

Recent years have  seen a decrease in the amount of funding coming from Council Tax and in increase in both the number of services for which councils charge and the amount charged.  Councils are criticised for not being clear about how charging decisions affect local citizens.

Around 2250 staff  took packages and left Local Government in the last year giving a total of just over 13 000 staff leaving councils in the last five years .   Audit Scotland note that equal pay ‘remains a substantial issue’ for local government – they will publish a report on this in 2017

Councils spend around £1.5bn a year on servicing debt.  Most tales the form of traditional fixed interest rate loans. The exceptions to this are PFI /PPP/NPD and LOBO’s ( Lender Option, Borrower Option)  loans. The commission notes that PPP/PFI/NPD predict ( repaymants are often inflation dependent – so exact repayment levels  are more difficult to plan for) . This just backs up the case that UNISON Scotland has made that effort needs to go in at both council and Scottish Government Level  to explore either buying out or Combating Austerity toolkit these projects. It’s also the case trhat the Public Works Loan Board isn’t always the cheapest way of doing things either . Some ideas that might help kget the cost of debt down are explored in our combating austerity toolkit     

Looking ahead Councils are expecting demographic changes to put demands on key services like social care and are assuming a ride in the wage bill of between 1%-1.5% in each of the next two years. Overall  councils anticipate an £87m in-year shortfall between their  General Fund revenue income (before using reserves ) and expenditure. That’s after approving savings or cuts of £524m. You hum it he'll play it. 

In other news councils are also urged to do  more long and medium term financial planning but acknowledge that single year grant funding from the Scottish Government can cause problems with this.

The Audit Commission are also making it plain that  Councillors need to get better at scrutinising the plans put to them by senior officials Councils need to get better at explaining their financial position – so that it’s in an  understandable format for a wide audience.  Being polite accountant types who talk about savings rather than cuts they don’t say any more than that – but perhaps they might be thinking that the need  for councils to explain things might be about to go up sharply. For all too obvious reasons,  altogether now 

Let's have a proper reform of the council tax - not another sticking plaster

We understand that the Council Tax is a difficult issue for politicians, but this latest sticking plaster isn't the solution.

I was giving evidence to the Scottish Parliament’s Local Government Committee this morning on the secondary legislation implementing the Scottish Government’s latest tweak to the Council Tax. These involve increasing the higher bands, ending the freeze and changes to the reduction scheme. More details in my briefing.

Increasing the multipliers for the top bands is a modest progressive move. However, it still leaves those in a £212,001 home paying the same bill as those in a million pound one. The Commission on Local Tax Reform indicated that the tax on highest value homes would need to be 15 times that of the lowest value homes in order to achieve proportionality. The current system means a £400K house pays three times as much as a £40K house - not ten times. This means that like VAT, it takes up a bigger proportion of low income households than high.

This chart compares the impact of the Commission’s proposals with the Scottish Government’s plan.

The government also needs to clarify how it expects water charges to be treated under the new bands.

In addition, there is to be no revaluation, so the new bandings will be based on 1991 property values. That simply isn’t credible when 57% of properties are in the wrong band. No one doubts that revaluation is politically challenging, even if there are likely to be equal numbers of gainers and losers. It could also introduce transitional provisions. The question is, just how long does the government intend to avoid revaluation before biting the bullet?

A bigger problem is that the Scottish government has decided to take the additional revenues, estimated at £100m, to allocate to their priorities – a new form of ring-fencing. Similarly, they have capped increases to the Council Tax at 3%. Both of these measures undermine local democracy.

Any improvements in the council tax reduction scheme will be welcomed by low income households. However, this cost used to be met by central government, not councils, who lose £333.2m through the system. This means the plan appears to impact on the income of councils with the most low income people. These people may well also find that any savings made on their council tax bills will not make up for cuts in the services they use or extra charges for those services. Charges now make up almost 7% of council budgets while council tax revenue has shrunk to around 15%.

All of these changes need to be effectively communicated to the public; otherwise it will be front line staff that take the flak for the confusion.

Setting up a fair property tax and rate that reflects the real values of properties is what will make the system fairer. We also need to design a system for those who struggle to meet their property tax obligations because of low incomes, which doesn’t unfairly impact on the budgets of local authorities with disproportionate numbers of low income citizens and deferment opportunities for the small group of property rich, cash poor pensioners.

While we welcome the end of the council tax freeze and improved bandings - we simply cannot go on with short-term fixes that damage services and undermine local democratic accountability.

Inequality: What Can Be Done?

Anthony Atkinson’s book on inequality was high up on this year’s summer reading list for policy geeks with very good reason. It shows us what can be done. Often books by academics are great on detail and analysis with lots of graphs and tables. This is too technical to gain widespread readership and often leaves the reader in despair feeling that nothing can change. This book is very different: understandable for the non-economist but still full of detail and information and with a clear programme for change
The book is full of references to the importance of trade unions and highlights our crucial historical role in redressing the imbalance of power. Atkinson’s programme calls for changes to trade union laws to ensure unions can continue to do this. Maybe that’s why the government is so keen to reduce our effectiveness with the opposite: even more restrictive anti-trade union laws. The book also looks at the wider role of trade unions in bringing expertise to the development and implementation of public policy in particular through a role on his proposed Social and Economic Council. Among his ideas for reducing inequality through the tax system is a progressive property tax: something that UNISON has been campaigning for to replace the council tax for some time.

The book is in three sections:
Diagnosis
Proposals for action
Can it be done?

The 15 Proposals– What can be done?

Proposal 1: The direction of technological change should be an explicit concern of policy-makers, encouraging innovation in a form that increases the employability of workers and emphasises the human dimension of service provision.
Proposal 2: Public policy should aim at a proper balance of power among stakeholders, and to this end should
(a) introduce an explicitly distributional dimension into competition policy;
(b) ensure a legal framework that allows trade unions to represent workers on level terms; and
(c) establish, where it does not already exist, a Social and Economic Council involving the social partners and other nongovernmental bodies.
Proposal 3: The government should adopt an explicit target for preventing and reducing unemployment and underpin this ambition by offering guaranteed public employment at the minimum wage to those who seek it.
Proposal 4: There should be a national pay policy, consisting of two elements: a statutory minimum wage set at a living wage, and a code of practice for pay above the minimum, agreed as part of a “national conversation” involving the Social and Economic Council.
Proposal 5: The government should offer via national savings bonds a guaranteed positive real rate of interest on savings, with a maximum holding per person.
Proposal 6: There should be a capital endowment (minimum inheritance) paid to all at adulthood.
Proposal 7: A public Investment Authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and in property.
Proposal 8: We should return to a more progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent, accompanied by a broadening of the tax base.
Proposal 9: The government should introduce into the personal income tax an Earned Income Discount, limited to the first band of earnings.
Proposal 10: Receipts of inheritance and gifts inter vivos should be taxed under a progressive lifetime capital receipts tax.
Proposal 11: There should be a proportional, or progressive, property tax based on up-to-date property assessments.
Proposal 12: Child Benefit should be paid for all children at a substantial rate and should be taxed as income.
Proposal 13: A participation income should be introduced at a national level, complementing existing social protection, with the prospect of an EU-wide child basic income.
Proposal 14 (alternative to 13): There should be a renewal of social insurance, raising the level of benefits and extending their coverage.
Proposal 15: Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income.

It really great to see a detailed programme to reduce inequality particularly one that recognises the both the previous successes of unions and that we are central to delivering more change. All we need to now is ORGANISE....

IFS and council tax reform

The IFS briefing 'Taxation in an Independent Scotland' inevitably attracted attention as part of the independence debate - highlighting the fiscal challenges that an independent Scotland would face.

However, the briefing actually had more to say about the design of taxation and it's analysis is particularly interesting for those areas that are already devolved, because Scotland will have autonomy over these areas even if it does not opt for independence. 

Of particular interest to UNISON a members is the council tax and business rates because that is already devolved. Scotland has made some different choices in this area than England and Wales have including the treatment of second homes, rebate schemes and of course generally lower levels of tax including the council tax freeze.

Despite this all political parties in the Scottish parliament have ducked more fundamental reform of these taxes. The council tax is still based on 1991 property values, with the same band ratio and the same 25% discount for sole occupants. Business rates are still levied on the basis of assessed market rental values of properties, and at the same percentage of value as in England.  IFS is rightly critical that even the most obvious reform, revaluation, has been ducked as the parties put sticking plasters over the system, rather than facing up to reform.

One of their options for raising revenue in an independent Scotland involves the council tax. They argue that there would be a strong case for relying more heavily on taxation of property, an immobile tax base, as the creation of a Scotland-rUK border made mobility of other tax bases more of a concern. A 10% increase would raise approximately £170 million for local authorities (net of the resulting increase in council tax support for low-income families). 

IFS also argue that the council tax as it stands is flawed. The most obvious problem is the need for a revaluation and they usefully remind us that this is not inherently revenue-raising or revenue-reducing, though it does inevitably redistribute from those whose homes have risen in value by more than the average since 1991 to those whose property values have risen by less. Similarly, making rates (more) proportional to property values would inevitably involve redistribution but could be made to raise or cost as much as desired by adjusting the tax rate(s). The other major weakness in council tax is the single person’s discount – the 25 percent reduction in council tax liability received by one-adult households. Removing this discount would raise £140 million from such one-adult households (again, net of the resulting increase in council tax support) and in the process remove a substantial distortion in the housing market which results in single adults occupying larger properties, and larger households smaller properties, than they otherwise would.

While much of this is pretty challenging stuff, we should be grateful to IFS for trying to wake policy makers out of their lethargy. Credit also to Magnus Gardham in the Herald who also drew attention to these aspects of the report. He said, "Its (Scottish Government) concise response went to the heart of the long and sorry saga of Holyrood's continued failure to tackle the issue of local government finance. It said the council tax was "unfair," it said freezing bills was "overwhelmingly popular," and it said efforts to sort things out would start "later". Labour, despite misgivings felt by many in the party, have been no less guilty than the Nationalists when it comes to the hard-nosed business of campaigning. And so the problems continue. By and large the better off continue to benefit disproportionately from freezing bills while councils face a growing problem providing services which, by and large, the less well off rely upon."

UNISON Scotland agrees that a proper debate on this issue is long overdue. We will shortly publish a new discussion paper to support the debate. A political consensus might be wishful thinking, but we simply cannot duck this issue for ever.