Council tax to rise?

Any Budget tax cut may bring an unpleasant surprise for homeowners. Pa ul Gosling reports

Council tax payers should brace themselves for uncomfortable news next week. The Budget may cut income tax, but part of the price is expected to be another harsh local government settlement that could lead to council tax bills rising by an average of 8 per cent.

Recent years have been financially bleak for local government. A raft of legislation has given councils extra duties, ranging from care in the community to paying the landfill tax, but not enough money to meet the costs. The result has been service reductions and council tax increases above the rate of inflation.

According to Jessica Remoy, project manager for the Local Government Associations' budget submission, an extra pounds 2.3bn is needed by councils, just to meet their additional legal responsibilities and extra demands on their services arising from demographic changes. But last year the Government indicated that it would impose a cash standstill on grants to councils for next year, forcing them to meet the cost of extra obligations either out of increases in council tax or in cuts to other services.

Included in what the councils are terming the inescapable increases in spending are their obligations to meet the teachers' pay award, additional contributions to staff pension schemes, the cost of changes to the housing benefit system, the full year introduction of the landfill tax and the new capital disregard for elderly people in residential homes.

Other spending increases are described by the councils as essential, including the bill for another 54,000 children going to school, which will cost pounds 136m to prevent an increase in pupil/teacher ratios. Councils also need to find another pounds 665m next year for extra social services spending, arising from the continued transfer of responsibilities to councils under care in the community, as well as recent legislation giving authorities new responsibilities with regard to child care, the mentally ill, young offenders, refugees, drug abuse, and carers.

"The spending increases needed in social services are almost as great as in education, but the constituency is not as vocal," points out Ms Remoy.

The local government associations were upset last year that the Government's autumn financial statement appeared to give councils more money for education and social services, when the allocations came out of other grant to councils. By the time the associations had seen the figures, it was too late to correct what they felt was a false impression. This year they are getting their retaliation in first.

"We want to establish what happened in last year's settlement because we feel the wool was pulled over people's eyes," says Phil Walker, finance policy officer at the Association of Metropolitan Authorities. "No extra cash was made available in real terms."

Whether the authorities' financial crisis is resolved through higher council taxes or by more cuts in services depends on what the Government does to council tax capping. Last year, caps limited council tax increases to between 0.5 per cent and 3 per cent, according to the type of council, and similar controls for next year would lead to major service cuts. The Government has intimated, though, that the cap limits will be relaxed, which will translate into council tax increases significantly higher than the rate of inflation.

Some councils will have particularly bad problems next year. These include authorities whose council tax this year was buffeted by collecting large debt arrears, including old unpaid poll tax. The collection of old debts has begun to tail off, which will mean an increase in council tax bills for some authorities.

Reductions in 1994 to the Standard Spending Assessment (the Government calculation of how much councils need to spend) for many of the most deprived London boroughs, which already have high council tax bills, will cause them further problems. The full effect of the SSA reductions has been cushioned by transitional grants, though these are being phased out.

But many of the most severe effects will be felt in areas where local government reorganisation has taken place. The transitional costs are being met by the councils, partially relieved through extra borrowing permissions, and smaller authorities lose economies of scale achieved by county councils. North East Lincolnshire unitary council's revenue budget has in effect been cut by 7.9 per cent, and shire counties that are to lose major conurbations may suffer even larger reductions to their continuing budgets.

Across Scotland, where reorganisation was completed in April this year, it is now known that 10,000 jobs were lost in local government when unitary councils were established. This included a 16 per cent reduction in central support services staff. Local government associations in England and the Audit Commission have warned that continued elimination of middle management and support service staff, while apparently painless, can be counter-productive and lead to efficiency losses.

Next week's financial statement might be seen as just another chapter in the continuing horror story of local government finance. It looks as if there may be a difference this year, though, as councils are set to make a much louder noise. Watch your back, Kenneth Clarke