Local government finance reformed

The product of a long reflection on the subject, we put forward for discussion this radical proposal for local government reform.

Local government finance has been a festering political sore for at least the past hundred years. A difficulty with any form of local taxation is that resources and needs do not match. Consider, on the one hand, the London boroughs of Westminster, and on the other, boroughs such as Haringey, Lewisham and Newham, just outside the central area. In Westminster are to be found Parliament, major centres of shopping and employment, and some of the most sought-after residential areas of the capital. The latter boroughs include some of the poorest people in the land. In Westminster, there are many possible taxes that would easily raise sufficient revenue to pay for public services, and probably at quite a low rate. In Haringey, Lewisham and Newham, there is no possible tax that could produce the revenue. This problem is usually described as a mismatch of needs and resources. It has usually been solved by some kind of equalisation scheme in which funds are collected centrally and redistributed according to need, using some formula or other.

Land value taxation would suffer from precisely the same problem if used as a local tax, and it is for this reason that were have come round to the view that the rate of LVT should be set nationally. This raises questions about how local services should be paid for.

A radical proposal

We put forward for consideration the suggestion that, with the introduction of LVT, tax-raising powers be removed from local authorities altogether, leaving them only with service charges as an independent source of revenue.

Services provided by local authorities to national standards could be fully funded from a national LVT fund; examples include classified roads, police and fire services, education and social services.

Local authorities would in addition receive a capitation payment, paid from out of the national LVT fund, based, in principle, simply on the number of residents living within their boundaries. Councils would be free to spend this as they wished.

What about accountability?

Where does this leave accountability? Supporters of local taxation argue that local authorities have the right to have all publicly funded projects paid for by local LVT. If a local council decides to build a school, or road, or sewage works – then the funding should, they argue, come from LVT raised locally. But why should it have to? If local authorities have a sufficient allocation of money to spend at their discretion, they will not have to go ‘cap in hand’ to another level of government.

Does a system of capitation payments remove accountability, and if so, how? Surely the accountability arises in relation to how the funds are spent?

Another mistaken argument is that “He who pays the piper should call the tune”. This is certainly not the case in relation to LVT. Land values belong to the entire community from the outset, as of right. No-one is paying the piper. That is the whole point of LVT.

So are locally set taxes a prerequisite for local democracy? And again, if so, why? Surely it is locally determined spending that must be democratic? If local authorities have their pot of money they can decide how to spend it, to pay for those things which local government is not obliged by central government to do – but which democratically elected politicians want to do.

There is one exception to this general principle. Local authorities can influence land value by their own activities. Urban improvement schemes enhance land value. Parking and congestion charges cut into land value. The latter effect can be minimised by requiring that the revenue from such charges be spent on transport improvements, thereby sustaining and enhancing land value.

To ensure that that local authorities have an incentive to carry out projects such as urban improvement schemes, a share of their local land value should be returned to them. How this can be achieved in an equitable way is something that needs more thinking about.