‘Back to the Future’ or Council Tax: How we Arrived Here

by Ken Gibb

Last week I was invited to a session of the Local Tax Commission to provide a context-setting potted history of local government finance in Scotland. I am no historian but it was an interesting task to delve back into the pre-20th century material as well as the more recent post-war period and especially the last 30 years. I started active research investigating the poll tax and its impact on the housing market, so my historical work was also self-reflective, looking to my own papers from the late 1980s (I even found a longhand essay from 1988 – I used to have quite good handwriting!).

The longer term perspective allows us to think more about the sustainability of local government finance systems and also about recurring themes and problems, some of which predated 1900. A number of generalities struck me as I assembled material for the presentation.

First, there is nothing new in the centralization v localization tensions so apparent since the post-1970s. Goshen reported in the 1870s on local government financing and stressed not only the growth of grant funding (from 0 at the turn of the 19th century to as much as 14% in 1890) but that there were political tensions between Westminster and councils which might be expressed in modern parlance in terms of the desire of councils to promote local accountability and locally sourced tax revenues versus the increasing use in the 20th century of general grant in aid (ie not just specific grants) to support issues of territorial equity by reducing inequalities caused by varying tax bases or different levels of need.

While, in the contemporary era business rates have been nationalised (and become a form of grant) and there is more reliance on fees and charges (and more recently on local council reserves) to balance books, the shift has clearly been towards the centre and away from local accountability. The share of revenues attributed to revenue supporting grant has fallen from its high water mark in the early 1890s but still unquestionably dominates the system.

A second theme is that the British disease, otherwise known as our political inability to enforce general revaluations, is actually a venerable tradition that has been with us for many decades. After revaluing in 1934, domestic rates were not revalued again till 1956 (and then only to 1939 prices – shades of the council tax). The 1963 revaluation became enmeshed in the controversy over the future of schedule A income tax (also based on rateable values). Prior to the council tax, the last English revaluation happened in 1973 and the last Scottish one, infamously, happened in 1985. So, the inability, Wales excepted, to carry out a council tax revaluation has a long backstory, often related to manifesto pledges to support the (home-owning) ratepayer. Without enforcement, a statutory pledge to revalue looks a little hollow.

Third, the memory of the poll tax is very long. This operates on several levels. First of all the council tax was grafted on to the poll tax finance system and also included important features of the poll tax such as the personal discount. Second, the poll tax catastrophe for central government, local government finance, accountability and credibility casts a long shadow and creates an inertia that, outside of Scotland, renders political classes largely unable to contemplate reform of the council tax because of the (well-grounded) fears that ‘there be dragons’. Until the inertia is offset by the palpable failings of the existing system causing real pain politically, it is less clear that meaningful reform can occur.

Perhaps Scotland therefore can be the beacon for the rest of Britain? Though one might also reasonably ask why the Scottish political system and its government is willing to go for reform now – though wide cross party consensus is clearly an important contributory factor.

A fourth theme, and one apparent from re-reading the many inquiries and green papers of the last 50 years (Allen through Layfield up to Lyons and Burt, as well as the many government papers) is that there is considerable risk in just looking at local taxes in isolation from their interaction with local services, the geography or functional bounded-ness of local authorities (and whether unitary or other structures are in place), as well as the underlying balance of central grant and local tax.

There have been reasoned external critiques of the Lyons Review that was commissioned by New Labour but it was surely right on one point. Making reforms in limited parts of the system only makes sense if the reforms offer a road map and enable further complementary reforms e.g. to the grant system or raising more local revenues later on (if that is the target). When we consider reform to Scottish local taxes we must ensure that we do not close the door to the second and third rounds of necessary reform to local government finance.

Finally, the mid-1970s Layfield Commission remains an absolute benchmark of sanity and systematic thinking about the subject. They focused on the long term, on the balance between centralizing and localizing forces. They offered a solution involving a reformed property tax and a local income tax as a way to improve fairness and accountability and to reduce revenue risk. This final point remains highly relevant to modern Scotland. For anyone getting in to the subject they could not do much better than returning to Frank Layfield’s excellent report.