Local Government Finance

James Mitchell, Professor of Public Policy in the Academy of Government at the University of Edinburgh, summarises a recent presentation he delivered to CoSLA on local government finance.

The Commission on Local Tax Reform, co-chaired by a Scottish Government Minister and President of the Convention of Scottish Local Authorities (CoSLA), has been meeting since February. The hope is that a consensus can be achieved across central and local government and across participating parties (all main parties but the Conservatives) that will lead to manifesto commitments for next year’s Scottish Parliament elections.

Reforming local government finance is fraught with dangers and there has been an understandable tendency to stick with a suboptimal system for fear of unintended and unforeseeable problems that will arise with reform.

The Commission’s remit will need to be interpreted broadly if it is to have maximum impact and if the Commission is to engage with broader public policy concerns. An exclusive focus on local government taxation might result in significant improvement but would be a missed opportunity to apply the much vaunted ‘Scottish model’.  The claimed consensus across parties and government

favouring the ‘Scottish model' it seems does not always rise beyond rhetoric. A much broader perspective on local government taxation is needed.

The Scottish Government will continue to contribute to local government funding regardless of reforms proposed by the Commission. An aim may be to allow local government to raise a far higher proportion of its own revenues but there will still need to be a significant grant element. There is a danger that the Scottish Government will simply free up local government to raise revenue while reducing grant to local government, essentially forcing local government to make difficult choices. This was a major concern of local authorities in the 1970s when devolution was then being debated. The fear then was that a Scottish Assembly Government would cut local government grants thereby forcing local authorities to raise domestic rates (the form of local taxation that existed then) as a backdoor means of getting round the Assembly’s lack of tax-varying powers. Now, of course, it is not the lack of tax-varying powers but the reluctance of Scottish Government to use such powers.

The failure to take account of the grant element in local government finance might involve devolution of penury rather than meaningful devolution of power to local government. Giving local government the power to raise more of its own revenue might be welcome but pushing unpopular choices onto another level of government, especially if other areas of Scottish Government spending are protected, would come at an unwelcome cost.

This raises a related matter. For some time, Scottish Government spending has broken down into roughly three equal parts: local government; health; and all other matters under Scottish Government responsibility. With grant from UK Central Government being cut and health spending protected, the burden of cuts falls heavily on local government.

The temptation to shift that burden onto local government will only increase. The pattern of expenditure cuts that Scotland has experienced is broadly the same as the rest of the UK with grants to local government cut while NHS spending has been protected.

What would the Scottish model of policy-making suggest?

A more integrated approach to service delivery needs to take account of both vertical and horizontal linkages ie central-local integration and integration across functional services. Protecting one area of current spending can only be achieved either by increasing revenues or cutting elsewhere. It may be that there is a confluence of disparate influences with local and Scottish government reaching a common conclusion in the reform of local government taxation while having different logics. But the limits of any common ground should not be exaggerated. Local government wants the power to raise more money because it wants to continue to deliver the same level of services. The pressure on local government services will increase with demographic changes and the impact of welfare reform. Scottish central government also wants to maintain levels of services but has the added pressure of having to make cuts.

The Commission on Local Taxation might end up allowing local authorities to raise more revenue. It may find a scheme that is more progressive than that currently used. However, unless the Commission’s work is set within a broader debate on spending priorities and ring-fencing, the end product may be that local authorities end up subsidising Scottish Government spending by the back door.