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Lord Falconer of Thoroton: My Lords, in relation to the noble and learned Lord's first point, devolution issues were given to the Privy Council partly because people other than serving Law Lords could sit on it, especially those from Scotland or Northern Ireland—although New Zealand and other countries could also have been included. Also, perhaps more decisively, it
was thought to be inappropriate for the Westminster Parliament to have a committee of its own to decide issues that might well be between the Westminster Parliament and one of the devolved bodies. Plainly, once the Supreme Court is set up, there will no longer be a Westminster Parliament committee resolving disputes between the Westminster Parliament and the devolved bodies.I could not agree more with the noble and learned Lord's second point about the distinguished chairmanship by existing Law Lords of Sub-Committee E. Everyone speaks extraordinarily highly of the way in which it is chaired. However, I do not believe that, with all the talent in this House, one could not find people to chair the committee very effectively. The noble and learned Lord will know that until some time in the 19th century, the House of Commons always asked High Court judges to chair their Select Committees. I do not believe that that was a justification for having High Court judges in the House of Commons.
Local Income Tax
4.1 p.m.
Lord Newby rose to call attention to the case for replacing council tax with local income tax; and to move for Papers.
The noble Lord said: My Lords, this afternoon we are raising the case for local income tax, because of the importance and urgency of the need to reform local government finance, and, in particular, of the need to replace the failing council tax.
We start from the premise that decisions by government should be made as close to the people as possible. We believe that local decisions are most likely to reflect local circumstances and that decisions taken that are removed from those who are affected by them or have to be implemented by them are, in many cases, likely to be ineffective or inefficient.
This approach has been vindicated by the failure of many of the Government's centrally set targets—a failure now openly accepted both by the Cabinet Secretary and in the Prime Minister's new found enthusiasm for localism. However, if more decisions are to be made at local level, it is both logical and necessary that the funding to implement them should also be raised to the maximum possible extent at local level. That used to happen, but it is certainly not the case today. At present, about 75 per cent of the revenue of local councils comes from national government. A mere 25 per cent is raised and set locally. To make matters worse, the sole significant source of locally raised revenue is generated by the council tax; a tax introduced in panic by a Conservative government to rescue themselves from the greatest failure in taxation in our lifetimes—the poll tax. Council tax itself is now failing.
Council tax is failing partly because it is expected to bear too great a burden, but also because it is a thoroughly unfair tax. Paradoxically, it has to bear too
great a burden because it represents such a small proportion of total council spending—for every 1 per cent of expenditure increase by a local council, council tax has to rise by 4 per cent—and, because it is a stagnant rather than a buoyant tax, it has to be changed annually to secure additional council income. That inevitably means that, for some councils in some years, council tax has to rise by a very large percentage to deal with a relatively low percentage increase in local spending. In years such as this one, most local councils budget for increases several times that of inflation to meet modest additional expenditure needs. Indeed, for 2003–04, the average increase has been 13 per cent throughout the country and, on average, in double figures, irrespective of which party controls the council. Indeed, at 16 per cent, Conservative councils have had the highest average rise compared with Labour councils at just under 11 per cent and Liberal Democrat councils at just over 10 per cent. In total, since Labour came to power in 1997, council tax bills have gone up 70 per cent.For the forthcoming year, a survey published last week by the Local Government Chronicle, suggests that three quarters of unitary authorities and 70 per cent of county councils plan to increase council tax by more than 5 per cent. The response of the Government, like their Conservative predecessors, is one of outrage: "How dare these insolent councils propose increases which go beyond the arbitrary 5 per cent ceiling on tax increases that the Government have set?".
Also like their Conservative predecessors, their response is to threaten to cap such increases. Nick Raynsford sent out 56 letters to local councils last week saying that they must moderate their council tax increases or they would be capped. In some cases—Islington, for example—those letters went to councils that were planning to increase council tax by less than 7 per cent, which represents an expenditure increase of less than 2 per cent, which is hardly profligacy.
This year, the situation is exacerbated for many councils in the midlands and the south because the funding formula has changed. They do less well than before, but they are still expected to meet the same nationally set standards in social services and education, for example. That has led to many proposed double-digit council tax rises, and the threat of legal action against the Government. The council in south Gloucester, for example, proposes to initiate a judicial review of any capping decision against it on the basis that it is having to propose a high council tax increase only because of changes in the funding formula, not because of major changes in overall expenditure levels.
Council tax is creaking at the seams to generate the income that local councils need. However, it is fatally wounded because its unfairnesses have led to a collapse in its credibility amongst taxpayers the length and breadth of the country. Council tax is unfair because it is completely unrelated to income. It operates under a banding system that puts a ceiling on what the richest pay and a floor under what the
poorest pay. As a result, the poorest 10 per cent pay over four times more of their income in council tax than the richest 10 per cent.The poorest 20 per cent of pensioners pay nearly six times more as a proportion of their income than the richest 20 per cent of non-pensioners. In a year when state pensions rose by 2.6 per cent and council tax by 13 per cent, it is hardly surprising that pensioners have become the most vociferous opponents of council tax.
In order to mitigate the unfairness of the tax, we have a system of council tax credits for poorer households. However, some 2 million eligible households do not claim it, so many of the poorest end up still paying the tax. Liberal Democrats would scrap council tax and reinvigorate local government by introducing a local income tax as the principal means by which local people pay for local services. We would do so for several reasons. A local income tax is fair. It is quite simply related to ability to pay. It is also cheaper to administer and needs no special bureaucracy or benefits system. The council tax in the current year will cost some £569 million to administer. In comparison, a local income tax would save at least £300 million of that.
Local income tax is buoyant. Unlike council tax, revenue would rise automatically as the local economy grew. Local income tax helps decentralisation. Over time, it would allow national income tax to be cut, with tax power pushed down to local council level. Local income tax is also more accountable. As a general principle, raising tax close to people makes it easier for them to see how their taxes are spent. More people would pay local income tax than council tax, so more people would be aware of the cost of their councils. Finally, local income tax is tried and tested. It successfully operates across the developed world from America to Sweden to Japan.
How would our plans for local income tax work? That tax would work very much like national income tax. Local councils would set a rate for local income tax and that would be added to the national income tax rate. At the same time, council tax would be abolished, so the total tax burden across the population as a whole would be unaffected. It would be administered through the existing Inland Revenue PAYE system, so people need not fear that officials in their local town hall would know their earnings.
People would have the same tax-free allowances as they do for national income tax. They would then all pay the local income tax rate on all their incomes up to a limit of £100,000. We have set a cap of £100,000 on local income tax for two reasons. First, because we would also introduce a new 50 per cent tax rate on incomes above £100,000 and we wish to guarantee to high income earners that 50 per cent would be the maximum combined tax rate that they face. We also believe that without such a cap there could be too great an incentive for the highest earners to move from high tax authorities to low ones. That is a distortion we are keen to minimise.
Our system would produce a national average rate of local income tax of 3.75 per cent. We have calculated this using CIPFA figures and by assigning
to local government some £1.7 billion from the tax take for those who pay 50 per cent on their earnings over £100,000. I would be delighted to send any noble Lord who is interested in the details a full breakdown of our costing.The tax could be administered by the Revenue in broadly two ways, both of which would use the PAYE system. In the first, one would link different local income tax rates to tax codes; in the other, one would abolish the existing codes in favour of an end-of-year reconciliation process. Both are technically capable of producing the right answer, and we would consult taxpayers, employers and other stakeholders before deciding which of the two options to adopt.
It is inevitable that the scrapping of one tax and its replacement by another will lead to gainers and losers. How does local income tax fare? We estimate that approximately 70 per cent of households would be better off or unaffected by the switch to local income tax. Those who will be better off will be the less well-off households now. For example, for a household on median income, and currently living in an average band D council-tax property, local income tax would save them some £460 per year. An equivalent pensioner couple on an income of just over £14,000 would save £1,080. Losers would be high income earners and some dual or multiple income earning households, but this is inevitable if one replaces an unfair, regressive tax with a fairer, progressive one.
The Government have belatedly accepted that local government finance is in a mess and last summer established the Balance of Funding Review to examine the problem. The only suggestion that appears to be receiving much support is some form of "fairer" council tax, whatever that might mean. Indeed, in answer to a question from me last week, the noble Lord, Lord Rooker, was unusually Delphic in saying whether the Government were considering local income tax as one of their options under the Balance of Funding Review. Weekend press reports said that the Government have ruled out both local income tax and relocalisation of the business rates—another change incidentally which is long overdue from the review. I would be grateful if the Minister could lift the veil a little on government thinking in this area.
As for the Conservatives, Oliver Letwin, in an interview with the Independent on 10 December last year, indicated that he wanted to raise the share of council budgets raised locally from 25 to 50 per cent—a laudable aim—but he wanted to retain the council tax. The implication of this was that council taxes might have to double. This seems such an implausible proposal that I cannot really believe that it represents Conservative Party thinking. Perhaps the noble Lord the Conservative spokesman could be a bit more explicit today.
Given the problems facing council tax, it is hardly surprising that, outside Parliament, the interest in and support for local income tax is growing. For example, in its response to the Balance of Funding Review, the Local Government Association argued that moving towards local income tax should be considered as a
major new contributor to local government income. Opinion in the country is also showing a strong and increasing level of support for local income tax.
Local government funding is in a crisis. Council tax simply cannot bear the demands being placed on it. A local income tax would be fairer, easier to collect and more transparent than council tax. It is a buoyant source of funds. For these reasons it is commonly applied across the world. It is time that it was introduced here.
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