The Coming Crisis of Local Government Finance

Iain McLean

Public Policy seminar, DPIR, HT 2005

Overview

• 3 systems of formula funding in UK:– Only one works

• VFI and HFE: what they are and why they matter

• The Layfield Doctrine

• Echoes of the Big Bang: Poll Tax today

• The land tax solution

3 systems of formula funding in UK

– Health works (in England only)

3 systems of formula funding in UK

– Health works (in England only)– Barnett fails (Scotland, Wales, NI)

3 systems of formula funding in UK

– Health works (in England only)– Barnett fails (Scotland, Wales, NI)– LG finance fails (England)

Figure 1 Scatter-plot of per capita Public Expenditure and GDP, for UK regionsand territories

GDP per head (£)

17000160001500014000130001200011000100009000

Pub

lic E

xpen

ditu

re p

er h

ead

(£)

(P

UB

EX

P)

5000

4000

3000

2000

UK

NI

Scotland

W ales

North EastNorth W est

Yorkshire and Humber

East Midlands

W est Midlands

South W est

Greater London

East

South-east

Figure 2: Spending on devolved services in England, Scotland, Wales and Northern Ireland 1986–2000 (UK spending = 100)

Source: PESA various years

60

80

100

120

140

160

180

200

1986

-198

7

1987

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8

1988

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9

1989

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0

1990

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1

1991

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1992

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1993

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1994

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1995

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1996

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England

Scotland

Wales

Northern Ireland

60

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200

1986

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7

1988

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1990

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1

1992

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1996

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1998

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2000

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Northern Ireland

Scotland

Wales

England

60

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1986

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7

1987

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1988

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1989

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1991

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1992

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1999

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Northern Ireland

Scotland

Wales

England

Figure 4: Raw and PPP-adjusted residuals: actual regional governmentexpenditure per head minus simulated expenditure under inverse GDP

formula, £

-1000

-500

0

500

1000

1500

South-east

East

Greater London

South W

est

West M

idlands

East M

idlands

Yorkshire and Hum

berside

North W

est

North E

ast

Wales

Scotland

NI

R aw residual

R esidual a t PPP

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outh

-eas

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tland

NI

Raw residual

Residual at PPP

VFI and HFE

• Vertical Fiscal Imbalance– UK has highest in OECD, except small

unitaries (e.g. IRL)– Centre levies 96% of taxation, local 4%– LAs spend 25% of pub exp– Therefore VFI = 21/25 = 84%.

VFI and HFE

• Horizontal Fiscal Equalisation– Wide range of fiscal capacity– And of spending need (mostly inverse to fiscal

capacity)– If business rates relocalised (or land tax)…– HFE more urgent (Heathrow has more rate

revenue than Liverpool)

The Layfield Doctrine

• Layfield Committee 1976– Provoked by a rates revolt– Outstanding report: must deal with VFI– Universally praised and ignored

• Decide between centralism & localism– Move functions from local to central, or– Move tax powers from central to local

Layfield-consistent centralism

• Poss function transfers from local-central:– Education (happening de facto)– Personal soc svcs (should happen, but centre

scared)– Police (happening de facto (Humberside))– Fire (no argument against)

• Would end net VFI but castrate local govt

Layfield-consistent localism

• Poss tax transfers– Relocalise business rates– Local income tax (Layfield and LDs like, but a

silly idea)– Congestion charging– Land value taxation

Echoes of the Big Bang: Poll Tax today

• PT followed a rates revolt• In ensuing panic, govt doubled VFI by

nationalising business rates• And rigged equalisation grant

– ‘Maximise grant to boroughs near the river beginning with W’

• Everybody does it:– Area Cost Adjustment; ethnic weighting for

schools

Council tax – the new poll tax?

• The council tax revolt– ‘Devon pensioners’

• Balance of Funding Review– Too near election to report

• Lyons Review– A review to review the review

The land tax solution

• Taxation of economic rent

• Which is created by govt….

Lloyd George 1909 (1)

• [A] fully-equipped Duke costs as much to keep as two Dreadnoughts - and they are just as great a terror - and they last longer.

• (After the Duke of Buccleuch had said that the land tax would make it impossible for him to support the village football club any more)

Lloyd George 1909 (2)

• The question will be asked “Should 500 men, ordinary men chosen accidentally from among the unemployed, override the judgment – the deliberate judgment – of millions of people who are engaged in the industry which makes the wealth of the country?” That is one question. Another will be, who ordained that a few should have the land of Britain as a perquisite; who made 10,000 people owners of the soil, and the rest of us trespassers in the land of our birth[?]… These are the questions that will be asked. The answers are charged with peril for the order of things the Peers represent; but they are fraught with rare and refreshing fruit for the parched lips of the multitude… (At Newcastle upon Tyne, October 10, 1909, quoted by Jenkins 1968, p. 94)

Who said this? When? Who repeated it? When?

• Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains — and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.

The land tax solution

• Taxation of economic rent

• Which is created by govt….

• And badly taxed now– Stamp Duty– IHT– S.106 agreements

• LVT would be more efficient and more equitable

Answers

1. Winston Churchill

Answers

1. Winston Churchill

2. 1909

Answers

1. Winston Churchill

2. 1909

3. Kate Barker (commissioned by G Brown to report on why the housing market fails)

Answers

1. Winston Churchill

2. 1909

3. Kate Barker (commissioned by G Brown to report on why the housing market fails)

4. 2003