Replacing the Council Tax in Scotland

I think I can (reasonably) safely predict that this will not be the last post by me on this subject. Today the Scottish Government announced its intention to establish an independent commission on a replacement for the council tax as a means of raising local taxation from the domestic sector. I think this is long overdue though I completely understand the political economy of the barriers to rational, progressive reform. As with the Smith Commission’s proposals, the analysis and conclusions and their subsequent implementation should be done right, not quickly. Another recurring refrain is that the ultimate proposals will require durable consensus if they are to stick – and the stakeholders at the table must include local government.

In the Programme for Government released today, the 2011 manifesto commitment to replace the council tax with something better in terms of ability to pay was highlighted. The objective is to set up an inclusive independent commission that will lead to a proposition for an alternative to be put to the people at the Scottish election in 2016. The stress is on ‘collaborative tax policy development’. The intention is that any new such tax should meet the ‘established principles’ of: efficiency, convenience, certainty and progressive ability to pay. The Government hopes that this will involve the full role of local government and seek political consensus across the parties. Although I could not see it in my skim through the large document, one of the briefings I saw suggested that the commission would also investigate or review the council tax freeze.

Under the earlier minority SNP Government there was a short-lived proposal to use the then income tax varying powers (up to 3p in the pound) to pay for local services. This sounded vaguely progressive because it was tied to incomes and seemed a bit of a wizard wheeze – for about 5 minutes. It did not add up and the government decided, wisely, not to proceed with this idea. The desire to move away from a property based tax and move towards a progressive income tax has however remained.

At the same time Scottish governments have become increasingly centralising – freezing the council tax for eight years through a series of carrots and sticks that cumulatively over time reduce local government’s autonomy and accountability (as is clearly expressed in the recent strengthening local democracy report). Remember that non domestic rates are set nationally and that all local government is heavily reliant on grant in aid from Holyrood, in a context of deep austerity cuts now falling on town hall.

There is a lot wrong with the council tax. The tax has a banded structure which compresses differentials so that high value properties that can be hundreds of times more valuable than the median only pay a fraction more. People in low value properties pay a higher proportion of their income on council tax. Outside of Scotland we now have a patchwork of local council tax reduction systems with different means tests driving a coach and horses through the principles of welfare reform and simplified tapers. And, of course, the council tax is fixed at 1991 values. I don’t think the possible introduction of a mansion tax is more than a small and rather poorly aimed step forward.

Actually, the problem begins higher up with the broader system of local government finance. We still operate the poll tax system: it is just we have this hybrid council tax instead but the levers constraining local government are still broadly in place. One should really go up a further stage and recognise that, as the Layfield Commission did in the 1970s, that we need to work out the simultaneous spatial boundaries of local government, the functional split between different tiers in terms of service delivery and the financing system. This is what I have called before a Rubik’s cube problem of multiple dimensions. Tinkering with any one element is highly unlikely to generate a sustainable solution for local government.

What is to be done? The aim must be to give more financial responsibility back to local government and make them not Holyrood responsible in reality for tax setting. It should be a long term goal to have councils responsible for setting at least half of their annual budgets from locally levied taxes. This will take time because it will require more than doubling the current share but there are creative things that can be done let alone reform council tax and non domestic rates. This is surely in line with greater devolution and does not in any way abandon the principle that the Scottish Government should seek to design incentive driven grant equalisation mechanisms.

And the council tax? The starting place must be to assess and evaluate different forms of local tax (including the option of more than one smaller yield taxes e.g. a property tax for local amenity based services and an income tax or nationally-levied land value tax reflecting national services like education and social work delivered locally). I don’t think the Scottish Government has a monopoly on good tax criteria. A succession of different commissions and inquiries proposed a range of criteria with which to judge local taxes but these tend to boil down to: technical feasibility (set-up costs, collection costs, buoyancy, avoid instability); fairness (progressivity but also something to do with paying for benefits-received); accountability (visibility and transparency, connection to voting, local responsibility): and, a wider set of issues to do with economic effects, reducing undesirable spillovers and other unintended consequences).

On such a basis I think there remains a strong case for a property tax to play at least a major role, provided it is well-designed, regularly revalued and this is in statute, and there are proper safeguards for those on low incomes (probably through some form of benefit). It is hard to avoid, is related directly to many local services, and it offers the opportunity to widen the tax base and correct for the critical absences in UK taxation (as identified by the Mirrlees Tax Review). Ideally, I have come fully round to the case in the long term for a land value tax but could also see this play an important role as a national tax alongside a local property tax on more conventional lines. Both could be important tools to help moderate the volatility of our housing market and tax wasteful economic rents.

There are many barriers however that may well frustrate this end but that should not stop us having the debate, making the case and seeking to support more localism, more accountability and better taxes. Then we can start to think about boundaries, sharing services and all that. However, delivering a report by the Autumn of 2015 will be a tall order even with the depth of knowledge, expertise and evidence out there on local taxes.

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The Return of Dudley Smith

I have spent much of the last ten days reading Perfidia, the new crime novel by James Ellroy. He is well-known for his series of novels blending fact and fiction, real and imagined people, in a continuous historical narrative stretching across nearly 30 years of post war American history mainly in Los Angeles. Several of his books have been filmed along with other screenplays. LA Confidential was a huge celluloid success; the Black Dahlia, less so.

There are three interconnected stages to the mature Ellroy books – first the four crime novels that start with the Black Dahlia and end with White Jazz. Second, there is the biographical My Dark Places which tells the story of his mother’s murder, his subsequent journey through tortured times till he became a successful novelist and then used his newly found resources to re-investigate his mother’s death. Everyone should read this book but don’t expect light entertainment. Third, he constructed his own fictional account of the alternate 1960s focused around the Kennedy and King assassinations, Hoover, the CIA and the Mob, drawing extensively from characters introduced earlier in the crime novels. The Underworld Trilogy began with American Tabloid and the Cold 6000. After a long delay the third book (Blood’s a Rover) moved to the early 1970s and dealt with the CIA in Central America, less so with domestic politics, and also rounded off the arc of the key remaining characters.

The classic crime and political novels are characterised by large ensemble casts, complex and highly detailed plotting, electric and often shocking prose, a highly stylised form of writing in the historical vernacular, and the unceasing, relentless analysis of evil in the pursuit of money, power, racial prejudice and control (usually) over women. It can be very dark but when it works it is compelling.

My introduction to Ellroy was White Jazz, out of order and last of the 4 LA crime novels. I had never read anything like it – how could the main protagonist, Dave Klein, someone of dubious morality himself, but wholly committed to an ethical goal, possibly survive and achieve his ends whilst multiple forces are arrayed against him. I think I then saw the film of LA Confidential and thereafter read the four novels in order. The Big Nowhere is probably the classic crime novel of the set but the book version of LA Confidential is by far the most complex story and much richer and deeper than the admittedly excellent film.

The key character through the LA quartet is Dudley Smith, the epitome of premeditated evil and avarice, all embodied in a clever, funny, smooth Irish-American police detective. Smith is to my mind one of the greatest creations of modern crime fiction.

The political trilogy that begins with American Tabloid and the Cold 6000 were broader and bolder and reinvented the Sixties in a powerful series of dark conspiracies, hidden agendas and political brutality. Scapegoats and media manipulation are developed alongside the unfolding plans of highly professional operators in the pay of different illiberal puppet-masters.

Each book is structured around on three or four characters with each short chapter loosely from one of their perspectives or tracing their actions and thinking processes. You see this sort of approach in a lot of modern writing but Ellroy is for me the master of this relentless style. The books have grown larger and more dense but are none the worse for it. You need to commit and submerge yourself in their fascinating though often shocking worlds that operate under the Hollywood radar.

So it is with this baggage that I approached reading Perfidia. I was slightly disappointed with Blood’s a Rover, his previous book, and while I looked forward to the new planned quartet of wartime LA crime novels involving younger versions of the key characters from both existing series, it was with a little trepidation.

I need not have worried. The new book is simply tremendous and a genuine return to his best form. Several of the key characters from both the Black Dahlia and American Tabloid are present and correct. There is the development of a new key character, the future LA police chief William Parker. There is the usual melange of serious crime and murder mayhem interwoven with powerful economic interests and political corruption and conspiracy – on this occasion the LA response to Pearl Harbour and Japanese internment. Best of all, at the heart of the book is a younger but instantly recognisable Dudley Smith who dominates the book. It is great to have him back, monster that he is.

I won’t say anything about the plot or its multiple threads to war, politics, crime and Hollywood. Racism in its different forms often plays a key role in Ellroy’s books and in this one the treatment of the American Japanese and the cynical manipulation of the situation to secure advantage is laid out in detail.

This has been the fictional book of the year for me (thus far) and it is great to have him back. I hope the next volume will not take 5 years. I know that Ellroy is not to everyone’s tastes but for those of who do like his books, Perfidia is very welcome and contains quite a few surprises.

Immigrant Song

There was much froth earlier this week after UCL widely disseminated their academics’ fiscal effects of migration study, published in the Economic Journal. Politicians made claims about the research, lobbies like MigrationWatch UK made predictable points, media commentators struggled with the research. There was more heat than light. So, I thought it would be helpful to actually read the paper (thanks to Tony O’Sullivan who forwarded both the paper and a complementary report [1]).

The paper by Christian Dustmann and Tommaso Frattini is called ‘The Fiscal Effects of Immigration to the UK’ and was newly published by the EJ with the digital identifier – 10.1111/ecoj.12181. The essence of the paper is that the authors consider the fiscal impact of resident immigrant population to the UK for each year from 1995 to 2011. They find that immigrants from the European Economic Area ‘have made a positive fiscal contribution, even during periods when the UK was running budget deficits, while non-EEA immigrants, not dissimilar to natives, have made a negative contribution’. Moreover, ‘for immigrants that arrived since 2000, contributions have been positive throughout, and particularly so for immigrants from EEA countries. Notable is the strong positive contribution made by immigrants from countries that joined the EU in 2004.’ (Both quotes from the abstract of the paper).

The authors start from common concerns widely expressed across Europe and the UK that immigrants receive more in welfare and public services than they pay in through taxation. This was ramped up in 2004 with the accession states entry to the EU and their access to the UK via the single market agreement (though with restricted access to benefits) and of course in the context of the 2014 accession of Romania and Bulgaria. There is a nice descriptive section on immigration to the UK between 1995 and 2011, which is worth the admission price alone.

The researchers use Labour Force Survey data to calculate the probability of different groups receiving benefit payments, tax credits and social housing. They then consider for each year between 1995 and 2011 the total immigrant population (EEA and non-EEA) and compute their ‘net fiscal position’ for each group and for each year. They then go on to undertake the same analysis but for all migrant cohorts who had arrived since 2000 (up to 2011) and this was further broken down between A10 and other EU immigrants. For each year they can therefore compute the net fiscal outcomes for the different immigrant groups as compared to the native population. The authors also perform extensive sensitivity analyses, which do not change the main thrust of their conclusions.

The authors argues that this new study goes well beyond the existing literature on fiscal effects of migrants via its disaggregation of migrant types, it covers a longer period of years and it is more comprehensive in calculating the expenditures and in-kind services versus tax contributions.

Developing their findings, Dustmann and Frattini argue that migrants from this time period were less likely than natives to either receive state benefits or reside in social housing in the same region. This difference is even larger for post 2000 immigrants. At the same time non-EEA migrants are more likely than EEA migrants to use these benefits (post-2000, non-EEA migrants were much the same as UK natives).

The headline figures can be summarised. Between 1995 and 2011, EEA migrants contributed 10% more than natives while non-EEA migrants contributed 9% less than EEA migrants. To put this in perspective, the baseline scenario suggests that between 2001 and 2011, EEA migrants made a net fiscal contribution of £20 billion (£5b of which was accounted for by accession state migrants) and non-European immigrants made a net fiscal contribution of £5 billion. Over the same period, UK natives made a negative fiscal contribution of £617 billion.

A key point not developed in the media yesterday was the additional benefits ot the UK economy arising from the fact that the UK has not paid for the education of these immigrant workers bring human capital and productivity to the UK economy. The authors estimate that for the period 1995-2011 the European immigrants effectively contributed £14 billion in implicit savings of the cost of such human capital to the UK economy. Over the same period non-European immigrants boosted the UK economy in the same way by £35 billion. In short as the authors put it, European immigrants have helped to reduce the fiscal burden for native workers.

How do the authors explain these findings? First, they point to the age structure of the young and economically active immigrants from Europe who generate revenues and have relatively few social outlays. Second, they argue that non-European migrants tend to have children and this may explain how they have higher costs on a par with Native UK residents. However, third, they argue that this second point underestimates the fiscal contribution of these children or second-generation migrants. This is because the education and health costs of children of migrants in the UK is accounted for as a cost but later benefits they contribute as adults are counted as native rather than migrant workers – this therefore is an underestimate of the migrant fiscal contribution.

The final point worth noting is that many European migrant workers return home and actually have age-related higher social and public service costs when they go back to their origin countries. Related to this, the authors argue that many European immigrants are at the start of their career and their language skills, etc. will grow and they will thereby enhance their earnings and hence fiscal potential – so rather than costing more to the public purse as they age (if they stay in the UK), the reverse is the case. The ageing of migrants who remain in the UK does not have a straightforward fiscal impact.

The authors claim that their findings are much more robust because of the long time period they cover and they offer better fiscal outcomes than is the case in other European countries, for instance, Norway. The research suggests further areas for investigation e.g. the drivers of reverse migration by migrant workers; and, related to this, whether it is above average or below average labour market migrant performers who are likely to remain longer in the UK?

This is a strong piece of applied economics. Not only do the authors work hard to make their approach as transparent as possible, they recognise shortcomings and apply exhaustive robustness or sensitivity checks. The key conclusions are backed up and reinforced throughout the exercise. It is for opponents who hold contrary position either based on evidence or not to counter this work with a similar level of detail, evidence and rigour.

Note: Centre for Research and Analysis of Migration (2014) What do we know about migration? Informing the debate. CReAM/University College London.

http://www.cream-migration.org/files/Migration-FactSheet.pdf

 

Deal or No Deal?

Last night, Policy Scotland and the University invited the leader of Glasgow City Council, Gordon Matheson, to talk about the future of the City in the context of the recently agreed City Deal for Glasgow and the Clyde Valley. At a well-attended event, the city’s political leader covered a wider range of topics centered on the notion of the city-region, and the metropolitan economy as key economic driver of the future.[1]

When it was announced, I blogged about the City Deal (September 1 2014), a 20 year project, supported by both the Scottish and UK Governments and signed up to by all eight local authorities and valued at £1.13 billion. This is for the core infrastructure fund described as a ‘once in a generation’ investment. Complementing this will be a range of life science, business support and labour market schemes. Over the life of the City Deal, its proponents argue that it will create an additional 29,000 jobs across the city region (on top of 15,000 construction jobs), active labour market work with 19,000 unemployed residents, and it will lever in a further £3.3 billion of private sector funding.

The lion’s share of the public funds comes from UK Government and the Scottish Government (equally) [2]  but there is also a contribution from the partner councils. It is a binding long term agreement aimed at boosting national economic growth led by the city region over 20 years. It is intended that this will be capital funding for an infrastructure fund (20 projects across the city-region), an innovation fund and support to combat youth unemployment and to help low income workers progress through their careers. The infrastructure projects include a train route from the airport (a long-standing plan), land decontamination on the Clyde Waterfront, unlocking new housing sites in Lanarkshire, and harbour investment in Inverclyde. The Innovation work includes the University’s stratified medicine investments as part of the ongoing Southern General hospital project.

The Glasgow city deal is the largest in the UK and the first in Scotland. But there have been critics. How will the monitoring and accountability mechanisms ensure project delivery, implementation and private sector leverage? Will learning lessons be drawn on from other city deal projects? The public funding is argued to be less impressive when looked at annually. However, like the Commonwealth Games investment, it is to an extent about providing certainty about long term projects, accelerating their development and providing the strategic coherence that long term funds can provide. Also in an echo of the Games, the council leader pointed to the continuing collaboration benefits from the Clyde Valley councils working together in partnership – mainstreaming new ways of working. However, it was striking to place the City Deal in the context of the University’s campus redevelopment plan which involves somewhere between £500-700 million investment in the city’s west end when the University takes over the western infirmary site and in partnership with the city will remake a large part of that quarter of the city.

The council leader’s lecture was peppered with urban studies references: Glaeser, Katz, Leo Hollis, as well as nods to Richard Florida. For instance, on climate change, he cited the athletes village in Dalmarnock as the biggest carbon neutral development in the country and further major recycling plans at Polmadie as well as for combined heat and power across the city. This line fitted with his espousal of Glaeser’s defence of the contemporary environmental policy record of cities, the promotion of compact cities, active travel and higher densities.

It was also from this basis i.e. the metro revolution and city regions as key engines of economic prosperity that Matheson argued for stronger city-region fiscal and functional devolution. He contended that Scotland lags behind English urban policy where city deals are now established in all city-regions, where ‘Devo Manc’ is city deals on stilts’ but in comparison Scottish city-regions lag behind. He referred to the recent Respublica research that suggested the UK was one of the most centralised systems of local government given the dependence in central grant. The position was posited as even worse in Scotland (requiring 80% of grant in aid to fund services). Moreover, the council tax freeze, now in year 8, meant that if Glasgow raised its council tax at the margin it would face claw backs of £75 million.

Matheson went on to argue that while the political classes were focused via the Smith Commission on more powers for Holyrood they were weakening the scope for empowering dynamic city regions. He called for more devolution but less power for Holyrood and Whitehall. He identified a paradox of more devolution to Scotland but yet greater centralisation. More fiscal powers might help to address the imbalance between the core city (600,000 plus population) and the surrounding urban system (1.75m in total) in terms of paying for services provided by the city. Glasgow is a member of the UK Core Cities group and leads on smart/future cities – they see this lobbying collaboration as the way forward.

Gordon Matheson identified a number of functional areas that the council should have greater powers over, one of which was welfare. I asked him what he meant and in particular if he thought council should have more control over welfare benefits. He said he was more concerned with making welfare reform more humane and also that policies that work at a local level should not be compromised unnecessarily by similar but different policies at a higher level of government. A specific example of this was the living wage 12 month wage subsidy policy established in Glasgow provided by the council thereafter followed by an Scottish Government 6 month policy based on the lower minimum wage – sowing confusion among employers.

It was an interesting evening. There is opportunity associated with the city deal and further inter-council collaboration in the Clyde Valley. But there are also huge challenges in terms of revenue spending cuts and austerity that will need to be accommodated. The issues concerning devolution to council levels, fiscal powers and decentralisation chime with what Policy Scotland raised in its own submission to Smith. It was also significant that Glasgow sees itself now as part of a network of UK and international cities, drawing on urbanists and evidence that might promote learning about how to help support urban economic growth.

There is clear complementarity between the agenda set out by Matheson and that found in the Strengthening Local Democracy prospectus. Moreover, devolution was also not seen to stop at the city chambers – there was also much discussion last night about the enhanced role of community partnerships, area partnerships and proposals for community budgeting at the local scale. How this will work in practice is a key element in the What Works Scotland Glasgow case study that will proceed over the next three years.

Finally, there was the dog that didn’t bark – will there be renewed calls for city deals for Edinburgh and further up the east coast to Aberdeen and Dundee? What might that mean if more of Scotland followed the UK urban policy route?

Note
1. A more party political and less policy-focused account of the lecture can be found in the Herald, November 6 2014, ‘Matheson: Sturgeon is stifling revolution for cities’

2. This is an updated version of this post. David Waites pointed out correctly that SG and the UK Government both put £500m into the pot – not, as I had originally suggested that more had come from the UK end. Mea culpa.