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 regions
and territories
5000
Public Expenditure per head (£) (PUBEXP)
NI
4000
Scotland
Greater London
Wales
North East
3000
Yorkshire and Humber
West Midlands
South West
2000
9000
10000
UK
North West
11000
GDP per head (£)
East
East Midlands
12000
13000
South-east
14000
15000
16000
17000
Figure 2: Spending on devolved services in England, Scotland, Wales and Northern
Ireland 1986–2000 (UK spending = 100)
200200
200
180
180180
160
160160
140
England
Northern
Ireland
Northern
Ireland
Scotland
140140
Scotland
Wales Scotland
120
Northern
Ireland
Wales
Wales
120120
100
England
England
80
100100
60
80 80 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0
9
9
9
9
9
9
9
9
9
9
9
9
9
0
-1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -2
19
86
-1
98
1986-1987
7
19
88
1987-1988
-1
98
9
19
1988-1989
90
-1
1989-1990
99
1
1
99
1990-1991
219
1991-1992
93
19
94
1992-1993
-1
99
1993-1994
5
19
96
1994-1995
-1
99
7
1995-1996
19
98
-1
1996-1997
99
9
2
00
1997-1998
020
1998-1999
01
1999-2000
60 60
Source: PESA various years
2000-2001
86 87 88 89 90 91 92 93 94 95 96 97 98 99
19 19 19 19 19 19 19 19 19 19 19 19 19 19
Figure 4: Raw and PPP-adjusted residuals: actual regional government
expenditure per head minus simulated expenditure under inverse GDP
formula, £
1500
1500
1000
1000
500
500
Raw residual
Raw residual
Residual at PPP
Residual at PPP
0
NI
Scotland
Wales
North East
North West
Yorkshire and Humberside
East Midlands
West Midlands
South West
Greater London
East
South-east
NI
Scotland
W ales
North East
North W est
Yorkshire and Humberside
East Midlands
W est Midlands
-1000
South W est
-1000
G reater London
-500
East
-500
South-east
0
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