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Reality check: who benefits from frozen council tax?

Douglas Fraser | 21:20 UK time, Monday, 18 April 2011

It's a vote winner, for sure. Do you want to have your tax frozen at 2007 levels? Of course you do.

But at what price? It's a simple enough mechanism that has persuaded councils to freeze tax, as my colleague Jamie McIvor has explained.

They get offered a total of £70m each year, shared between them, on condition they don't increase council tax. If they refuse it, they lose out twice - first, their share of that money, and second, they have to charge more from local taxpayers.

But what is this costing central government? It's not simply £70m each year, because the costs of delivering services keep going up.

The second year of a freeze requires £140m, the third year £210m, and we're now in the fourth year of the freeze, so St Andrew's House has to hand over £280m to sustain services at 2007 levels.

All four main parties are committed to continuing the freeze for 2012-13, so that will require £350m that year, with Labour adding £10m extra to acknowledge extra cost pressures.

LibDems say they'll take the poorest pensioners out of council tax - those under £10,000 income per year, while Conservatives offer a £200 discount to all pensioner households.

The SNP is committed to going further into the next parliament, and continuing the freeze until 2015-16.

If that still means a £70m extra grant each year, that will come to £560m.

Passing the half billion pound mark is a reminder that this is becoming a sizeable chunk of Holyrood's budget - money that obviously won't be available for other priorities.

Unhealthy erosion

What we've heard today from the Convention of Scottish Local Authorities (Cosla) is an additional £70m each year isn't enough. Consumer inflation is now running at 4%, whereas the implied inflation rate within the £70m grant is about 2.75%.

That helps explain why Cosla say they would require more than £100m each year to keep up with their costs.

Behind it is an anguished cry about the relationship between councils and central government.

Financial autonomy is being eroded with each year of the freeze.

Only 25 years ago, councils looked to central government for roughly half their funding.

They now rely on central government for closer to 85%, and that share keeps growing the longer the freeze is retained.

None of the parties seems to be discussing whether this is healthy for local democracy, and at what point the share of local tax raised has become too small.

Moreover, none of them is willing to go near a revaluation of property.

We're still being taxed on the basis of what a house would be worth 20 years ago.

The top band starts at £212,000 in 1991 prices, for properties now worth somewhere north of three times that amount.

That wouldn't be a problem if all homes increased in value at the same rate, relative to each other.

But they don't, and they haven't.

Some people would lose out from a revaluation.

Welsh experience of it showed significant numbers moving up not one, but two bands, with bills to match.

And Scottish political memories look back with a shudder to 1985, when revaluation caused howls of protest in better-off areas, leading directly to the introduction of the notoriously unpopular community charge, or poll tax, as a means of getting Scottish Tories off the revaluation hook.

However, for all those who would lose out, roughly the same number of householders are being overcharged because the valuation of their home is now too high when compared with others.

It looks like they're being let down by political caution about alienating the losers from such a process.

Scarce cash

But let's return to the money, and ask who benefits from the council tax freeze.

There are two ways of looking at it. Scottish government figures, commissioned from officials by SNP ministers, found that a two-year freeze, this financial year and next, will save 1% of household income for the lowest-paid decile (10%) of Scottish households.

You may ask how many of those households pay anything, as poorer households often get council tax benefit.

I haven't been able to find out how council tax benefit is distributed across those deciles.

But put it this way: there are 2.4m households in Scotland liable for council tax, and 560,000 of them get council tax benefit.

It's a fair guess that they are loaded towards the cheaper end of the property range, and Band A for tax.

So for those who get council tax benefit, they don't see any benefit.

For those in the top-earning decile in Scotland, the benefit of the tax freeze will save 0.4% of household income.

So on that basis, it looks progressively fair.

But given this is a cash distribution, who saves most from the freeze? It's not the poorest, but those in the biggest houses who stood to have the largest increases without a freeze.

And as council tax is levied according to a fixed formula across the bands, the savings are substantially skewed towards those in the biggest houses.

If you're in Band A (and don't get benefit), let's assume you are avoiding 2.75% inflationary increases for each year of a five-year freeze.

That means you're still paying £733 on average, and you're saving £106.

If the same inflation rate is applied to a Band H home, you're still paying £2200 per year in council tax, and you're saving £319.

That seems an odd priority for scarce cash in a country biased towards progressive politics.


  • Comment number 1.

    It's not simply £70m each year, because the costs of delivering services keep going up.

    You really need to explain your figures here. "The second year of a freeze requires £140m, the third year £210m, and we're now in the fourth year of the freeze, so St Andrew's House has to hand over £280m to sustain services at 2007 levels".

    Are you claiming that council inflation will rise by 100% year on year? That would appear to be the only reason that if year one costs £70ml the next year will cost £140ml. Or maybe in the weird world of council finance the 2012 £70ml will have to be paid again in 2013 along with the £70ml from 2013.

    Time to look again at the figures and explain how these totals were arrived at.

  • Comment number 2.

    This comment has been referred for further consideration. Explain.

  • Comment number 3.

    Look, the fact is that people want to pay less council tax not more. We're fed up with lining the pockets of overpaid council managers in particular and many of us believe councils are involved in things they shouldn't be.

    Personally I'd like to see a complete reappraisal of what councils do because I think most people would agree many of them are out of control.

  • Comment number 4.

    New Labour were promising cuts and more cuts - deeper than Thatcher dreamt about - according to Gordon Brown's Darling.
    The reality is that Gordon Brown wrecked the economy whilst making himself a Millionaire. Not bad work for a guy who once claimed to be a socialist?
    We need more direct and progressive taxation - unfortunately, a fairer system will not be possible whilst Westminster run and drain Scotland.
    Slainte Mhor

  • Comment number 5.

    Why were councils salting money away in Icelandic banks Who if anyone has been held responsible for the loss of that money? Has any one of them ever given an explanation or said sorry for the loss of this money?Why do councils need to carry a surplus they should only be funded to the level of their needs

    I appreciate the council tax freeze if you fall between being well off where it is just another bill to be met or being on benefits where you do not pay it is a constant grind meeting this tax

  • Comment number 6.

    Councils have now become overgrown administrative monstrosities ; no longer fit for purpose , obsessed with expansion of their role in society and becoming more and more draconian and self serving. They have now lost sight of their purpose, to serve the public , and see themselves as something akin to the old Russian local soviets, controlling every aspect of local life. They spend money provided by the taxpayer on schemes , focus groups and social initiatives that are more politically self gratifying than useful to the community. They employ myriads of people in obscurely named posts engaged in meaningless tasks, and when called on to make cuts, reduce the size of the essential services yet find the finance to maintain what are commonly referred to as the "non jobs " because in the eyes of some bureaucrats, such jobs take precedence to services. Meanwhile at the top of the administrative ladder salaries are paid that are far in excess of anything the incumbents , generally in post by default or political suitability , could ever hope to earn in the private sector, if indeed they could find employment. Sadly apathy on the part of the electorate and the power of the large political parties mean that changing the attitudes and practices of local government and councils is only possible if it has the backing of government. This however will never happen since government is so either enmeshed with the unions or incapable of engaging either in dialogue with unions or indeed going into battle with them. At the end of the day, nothing changes and the taxpayer foots the bill.

  • Comment number 7.

    Holyrood is a law-making Parliament! aka GRC................glorified regional council the grown up equivilent of local whatever.............PS the last in first oot will apply, so you'll still have pretty much the core foundation in place........Personally want to know what happened to the captain of the south lanarkshire council that left this region short of £6.8m courtesy of iceland......Oh, I know! been moved to Director For Walking..............

  • Comment number 8.

    The £70m given to councils was to compensate them for the revenue they lost by increasing the council tax by inflation. In future years, you have to compensate them by the amount they would have raised if they had increased council tax in year 1 and in year 2. Hence £140m.

    Now £70m may have been enough in 2007. There are arguments on both sides to that - but it is certainly not enough in 2011, and definitely wont be enough in 2012.

  • Comment number 9.

    Regardless of who does it and for how long if the Council Tax can be frozen with no serious knock on effect the it's too high already.

  • Comment number 10.

    This post reminds me of a political theorem I have - Universally supported policies are very often, universally idiotic.

    This is a classic example of 'populism' leading into a political dead end that will benefit no-one. This whole debate is just bonkers. As you have cogently pointed out, property taxes are generally progressive and getting rid of them is just a completely silly idea if you wish to maintain a large public sector which requires a wide tax-base.

    There is certainly plenty of scope of being more imaginative about local taxation but the current policies are all decidedly poor efforts and as you point out none address the key issue of the long-term balance between central and local taxation. The Tory policy of pensioner discounts seems the most logical and in keeping with the worthy (Lib Dem supported!) objective of a flat rate pension and eliminating the frankly dismal legacy of means tested benefits for pensioners.

    At the risk of trying to stimulate a wider debate...

    I think a good option would be for a combination of a 'housing charge' AND local income tax. The housing charge would be set at a lower level than the existing council tax (half?) and could be either fixed or banded (perhaps with fewer bands?) and could be subject to a national cap or controls. Then a substantial local income tax element would allow the re-balancing back towards the 50:50 split between local and national taxation.

    Politically this should be a reasonably easy 'sell'. Qualitatively, the 'housing charge' bit covers the elements of local services provided to each household like refuge collection, street lighting, roads etc. and the local income tax bit is based on the ability to pay towards the wider local provision.

    Probably the biggest advantage is that in the long-term it does not handicap future Scottish Parliaments. They would have ability to vary the ratios between hosing and income without needing to legislate again or waste time and effort changing the entire system. Supporters of local income tax can ramp that up or if another party/coalition comes into power they could ramp up the housing charge up again.

    Thoughts appreciate...

    PS In reply to 1 - some of us actually paid attention to our maths lessons and can understand the rather simple concept of inflation, so the figures make absolutely prefect sense to all of us.

  • Comment number 11.

    So, 70 million extra each year is required by each council, but that extra must surely be collected in general taxation. Just as long as wages are increasing at the same rate. It gives a clue to the value held in our fiat currency - not a lot and less and less.

    People like the council tax freeze because previously council tax rates were rising much faster than inflation year on year. There was no control. Were they expanding their own little empires or just paying themselves, particularly their CEOs et al, higher and higher salaries? I believe it was the latter. They learned it from the bankers.

  • Comment number 12.


    Absolute rubbish. The £70ml paid in year 2012 will cover fully the shortfall for that year. What they will need the following year will be the £70ml plus inflation, which even allowing for the way that Labour destroyed the UK finances that will not be 100% as this article seems to suggest.

    "In future years, you have to compensate them by the amount they would have raised if they had increased council tax in year 1 and in year 2. Hence £140m". They have already been compensated for year one by the £70ml by these figures the financial year 2012 would be paid again every year until year five, with year two paid every year until year five and so on.

  • Comment number 13.

    12. At 15:40pm 19th Apr 2011, dubbieside

    Perhaps this will explain it.
    Take year 0 to be the last year of Council Tax rises, all figures are in millions.

    Year 0 – Total Council spending of 2550m pounds
    Year 1 – Total is 2550m plus 70m (inflation at 2.75%) equals 2620m
    Year 2 – Total is now 2620m plus 70m (inflation) equals 2690m
    Year 3 – Total is now 2690m plus 70m (inflation) equals 2760m
    And so on …

    Now subtract Year 0 from Year 3 and you get the amount required for Year 3 which is 210m.


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