Where does our tax go?

An authority may be short of funding for
social services despite having increased its council tax. Jon
Glasby explains the funding structures of local authorities that
result in this seeming paradox.

I live in the area where I work. My council
tax has just gone up, but my social services department is still
very short of money. Why is this?

The situation you describe is common and can
be influenced by a range of factors: the way local government is
funded, the difficulty of budgeting for something as difficult to
predict as “need”, the way your department handles its finances,
and so on. However, a key factor is often “gearing”, whereby large
council tax rises can occur owing to perceived shortfalls in money
provided by central government.

Social services departments – and local
councils more generally – receive the bulk of their income from
five main sources:

– The revenue support grant – annual funding
provided by central government.

– The business rate – paid by local businesses
into a national fund which is distributed between local
authorities.

– Specific grants – central government money
to be set aside for particular purposes.

– The council tax – set by local government
with some central restrictions.

– Charges paid by service users – a relatively
small but expanding source of income.

Of these five sources, the bulk of money –
about 75-80 per cent of local government’s total income –
comes from central government. This money is divided in various
ways, but leaves local government with very little control over the
resources it receives. In recent years, this lack of control has
led to significant tensions as local government has been forced to
make cuts, often blaming the funding it receives from central
government.

This situation can leave service users and
other local residents unsure as to which authority is responsible
for the increased taxes they have to pay, and which to hold
accountable.

Overall, the only two areas in which local
authorities have any real discretion are the council tax and user
charges, although even here there are limitations.

User charges are often unpopular, and
councillors can be reluctant to raise them for fear of losing
votes. There are also restrictions on the level of charges that can
be levied, under legislation such as the Health and Social Services
and Social Security Adjudication Act 1983. Moreover, following the
findings of the Royal Commission on Long-Term Care, research by the
Audit Commission and new government guidance, a reaction against
charges is starting, and local authorities may be less able to
exploit this source of income in the future.

The council tax is the main source of local
funding for local government. Despite central restrictions, local
authorities have some discretion over the amount of tax they
charge, and sometimes use this to compensate for what they see as
the inadequacies of central funding. Since central funding
outweighs local funding, this process means any increase in
expenditure will disproportionately affect the council tax – an
effect known as gearing.

For instance, if a council is allocated
£500 million for the new financial year and receives £360
million of this from central sources, it will need to raise
£140 million of council tax. However, if it wants to increase
expenditure by £5 million – a rise of only 1 per cent – it
will have to raise its income from council tax to £145 million
– an increase of 3.6 per cent. Thus, a 1 per cent rise in
expenditure leads to a 3.6 per cent rise in council tax, and the
burden falls on the local tax payer.

Sometimes, as in the case you describe, this
council tax rise will still not suffice to allow the council to
fulfil all its duties. And some services, such as social services,
will face financial difficulties. This situation can be the worst
of all worlds, with the local authority criticised for raising
taxes and for funding restrictions.

All in all, a case of “damned if you do and
damned if you don’t”.