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Local fiscal autonomy is the way to better services – Herald

Geoff Mawdsley
\r\nHerald, 18.7.08
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\r\nThe Scottish Government’s consultation on a new local income tax to replace the council tax ends today. Unfortunately, simply exchanging one tax for another will not address the fundamental defect at the heart of local government finance in Scotland, namely a heavy dependence on central grant and a resulting lack of local autonomy and accountability. IN deed, a centrally set local income tax, as currently proposed, would reduce local authorities’ financial control further.
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\r\nThe debate over local government finance in Scotland has tended to focus on what is the most appropriate way to raise revenue. So we have gone from rates to poll tax to council tax and now the current debate on local income tax. At the same time, we have moved from a business rate set and raised locally to one set by the Scottish Government, but raised locally before being handed over for redistribution. This has resulted in a situation where the only tax revenues over which local authorities have total control are those arising from council tax.
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\r\nThese revenues account for only 9% of councils’ income and even when sales, fees and charges are taken into account this figure increases to only 19% – one of the lowest proportions in Europe. In Norway, 43% of the income of the country’s 434 municipalities comes from local taxes – even though half have fewer than 5,000 residents.
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\r\nThis heavy reliance on central grant undermines local accountability. It encourages a high degree of central interference through the so-called Best Value regime and other controls and directives, preventing local communities from deciding the level of taxation they are willing to pay for services, which has damaging consequences for local democracy.
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\r\nAt the same time, when the bulk of a local authority\’s revenue comes through grant, there is little incentive to improve efficiency and give better value. Indeed, incentives often work the other way, as efficient councils may find their cash allocation reduced when their needs are assessed against services provided.
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\r\nThis all leads to the conclusion that the principle underpinning reform of local government finance should be that councils need far greater power to levy taxes and collect revenue – the key to greater local autonomy.
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\r\nOur aim should be that Scottish councils raise at least 50% of their income from taxes where they set the level and keep the revenue. This would put them on a par with other local authorities in Europe. The best way to achieve this is to move away from the situation in which councils have discretion over only one form of taxation. Although this cannot be done overnight, councils should have a wider range of taxes from which to choose when it comes to raising revenue. Under the Scottish Parliament\’s current powers, the obvious starting point would be to return control of business rates to local government.
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\r\nThis would not only increase the proportion of council income which is locally determined, it would also restore the link between local economic development and higher revenues. Councils would have a real incentive to work with businesses to improve the local economy as authorities would benefit from the higher revenues generated.
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\r\nThe greatest benefit, however, from making local authorities more responsible for raising their own revenue is that it would help improve their performance. With greater financial control comes greater room for manoeuvre in the provision of services. This will create competition for revenue between local authorities as people vote with their feet and move to a better-run local authority.
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\r\nGreater local autonomy will also lead to much greater diversity in the provision of services. Councils would not only have a better idea of the public\’s preferences, they would also have more freedom to experiment with different ways of providing services so they can discover what works best. This could mean providing the service directly, entering into a contract with the voluntary or private sector, or leaving service provision to others. As authorities learned from each others\’ experience, standards would rise.
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\r\nSuch a shift from a system in which most council revenue comes in grant form to one of local taxation requires a change in culture. This would be helped if the Scottish Government was responsible for raising more of its own revenue. This would enable it to offset the increase in local taxation with a reduction in taxes levied at national level.
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\r\nThe SNP Government certainly accepts the principle that giving greater fiscal responsibility to Holyrood would lead to better government. It is high time that the same principle was applied to local government in Scotland.
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\r\nReform Scotland is an independent, non-party think tank that aims to set out a better way to deliver increased economic prosperity and more effective public services based on the traditional Scottish principles of limited government, diversity and personal responsibility.
\r\nGeoff Mawdsley is director of Reform Scotland
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\r\nView the Herald article here.