Osborne promised to match Council Tax rises of less than 2.5% with treasury funds, effectively freezing Council Tax for two years. This is a foolish policy: it will spell diaster for the coalition in two years time and lead to a Labour landslide in the 2014 local elections.
Council Tax has the dubious distinction of being Britain's most hated tax. Who can forget the pensioners - people like retired social workers and former vicars - who went to jail rather than pay Council Tax rises of 12.9% in 2005?
We may be heading for a 1980s-esque confrontation between local and central government and very serious Council Tax rebellions. I'm predicting extremely serious problems for the coalition in two years and a big swing to Labour in the 2014 local elections.
You don't have to be a genius to see that an end to the Treasury's matched funding is enough to cause large Council Tax rises in the fiscal year 2012-2013. Assuming that inflation averages out at 2.5%, that central grants and redistributed business rates keep pace with inflation and that local government's costs increase with inflation - all three generous assumptions - there will be a 7.7% increase in 2012-13.
However, that doesn't begin to take account of cuts. Local government spending is not a ring-fenced budget, and assuming that health/aid remain ring-fenced and that defence/education face cuts of 10%, it is likely to be cut by a third.
But how much scope is there for such large local cuts? I've spoken to Shire councillors who think they can do it - we will see. But metropolitan areas in particular are going to really struggle, and 60% of District councils think that relatively modest efficiency savings are not achievable.
Part of the reason is that local authorities have already made cuts. Local authorities were asked to make 3% of efficiency savings in 2008-09 and a further 4% during 2009-10, and were the only part of the public sector to meet the targets set in the Comprehensive Spending Reviews in the last few years of the last Labour government. Many of the inefficiencies that exist in other parts of the public sector no longer exist in most councils.
Tory-run Dorest council declared last week that “We are now starting to look at which of our statutory services can have any excess trimmed. We have virtually no discretionary services left to cut.". Discretionary services are anything that local authorities don't *have* to provide by law, including libraries, swimming pools, museums, parks, meals-on-wheels and the like. Even after pretty much getting rid of all those things, Dorset isn't anywhere near making the required cuts. I don't see how they can possibly do it - particularly as there are minimum standards for statutory services, those councils have to provide.
Compounding this is great public misunderstanding. Last year, only 16% of local authority income came from Council Tax, and the majority comes from grants. This leads to an effect called "gearing". If funding coming from the grant system is cut by 1%, this requires more than a 5% rise in Council Tax for local authorities to . Vice versa, if inflation causes the cost of providing services to rise by 2% p.a., and the grant stays static, this requires a 10% p.a. increase in Council Tax just for spending to keep pace with inflation. You can quickly see how any real-terms cut in the grant quickly causes massive Council Tax increases, AND councils are going to have to deal with relatively high inflation AND they are going to have to deal with demographic pressure as the number of elderly requiring social care increases AND they are facing Herr Pickles telling them to increase the frequency of rubbish collections. Councils who don't meet the unrealistic level of cuts expected over less than 2years are going to need absolutely thumping Council Tax rises in 2013-14, and I think this will be the majority of councils.
My crude modelling predicts that the average local authority which only manages to cut by 10% in real-terms will have to raise Council Tax by - wait for it - 169% in 2013-14. And I thought the 12.9% rises in 2004-05 were bad: Osborne is literally sleep-walking into a complete disaster.
(I'm making the following broadly accurate assumptions: it remains true that grants finance 50% of expenditure and Council Tax finances 16% giving a gearing ratio of 3.125, councils have no significant liquid capital reserves, inflation stays at 2.5%, matched funding ends in 2013-14, income from service charges and business rates stays static, grants are cut by 33% and there are no serious changes to the system).
Unfortunately for the coalition, the public are unlikely to appreciate the reasons for thumping Council Tax rises. Most of the public don't understand how local authorities are funded, assuming that Council Tax funds 70-80% of local authority expenditure. And, of course, when faced with these rises the public usually don't go to the council, they go straight to central government and ask them to cap Council Tax and set local authorities new budgets, exactly what happened in 2004-05.
Something is going to have to give. So, what can the coalition do about it?
The simplest solution would be to take use a more realistic target of 10% real-term cuts over 2years and instead make greater cuts in central government, which started cutting later and more shallowly than councils and has more slack. But Osborne has bottled this, instead pushing local government to one side and hoping it goes away. The other option would be to drop the Council Tax pledge, which was made in 2008 without thought of the consequences. In other words, get some large inflation-busting Council Tax increases out of the way now whilst cuts are popular and spread the pain. It would be sensible, but again the coalition has bottled it.
A more controversial option would be for local authorities to slash and burn to meet their targets any way they can. But as I've already argued, they've already cut and the scope simply isn't there. For a council like Dorset to meet its targets, it would quite literally have to close every park, library and pool it has; demand ridiculously large social care fees; cut high-way maintenance completely and move to monthly rubbish collections. That is the kind of cut we are talking about in some cases.
The final solution would be to fundamentally overhaul local government finance - as recommended by every councillor, every academic, every think-tank and every review of the area that I've ever come across. If councils are to be accountable to local people rather than Whitehall beauraucrats, then that has to come with a good degree of financial autonomy. Unfortunately, the general concensus seems to be that no national politician will ever risk touching Council Tax after the poll tax brought down Thatcher. Shame.
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