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Replace council tax with local income tax as a matter of urgency, says report as local authorities face cash crisis

26 Oct 2023 5 minute read
Guto Ifan, of the Wales Fiscal Analysis Team

Martin Shipton

Scrapping council tax and replacing it with local income tax should be considered as a matter of urgency, it has been argued, following research which shows that local authorities in Wales face a funding gap of £744m by 2027.

The figure appears in a report from Cardiff University’s Wales Governance Centre, which argues that poorer people are disadvantaged by the current council tax system.

Use of reserves, higher than 5% council tax increases, and further funding from the Welsh Government could mitigate challenges in 2024-25, the analysis concludes. But beyond that, local authority finances appear to be on an “unsustainable path”, with the funding gap growing each year.

The findings also estimate that if the Welsh Government plans to increase health, schools and childcare spending, it will need to find cuts of £318m in cash terms by 2027-28 in all other areas.

Guto Ifan, of the Wales Fiscal Analysis Team said: “While local government services have been spared from the cuts announced for this year, the projections outlined in the briefing suggest a difficult medium-term outlook for Welsh local authority budgets. Inflation and pay rises are set to fall over coming years, but spending pressures are still likely to outstrip projected increases in funding. This could have a serious impact on the provision of local services.

“In the context of the deep slashes in spending since 2010, the feasibility of achieving these further cuts to services remains questionable. Any increases in local authority budgets are likely to come from higher levels of council tax, which takes proportionately more money from poorer households in Wales. This makes the case for council tax reform even more urgent and should again encourage policy makers to revisit the question of whether to instead use the more progressive lever of raising revenues, namely devolved income tax increases.”

Spending pressures

According to the findings, spending pressures have outstripped the growth in local government revenues over the last two years, despite significant increases in funding from the Welsh Government. A key driver has been substantial pay increases for local government staff and teachers, despite many workers still seeing real-terms pay cuts.

Local authorities have mitigated pressures by drawing significantly from their reserves – built up during the previous two years – and through council tax increases, which this year average 5.8%.

Researchers estimate that by 2027-28, over four-fifths of the increase in local government resource income will derive from increased council tax revenues.

Guto Ifan added: “Of course, as has been the case over recent years, the economic and fiscal context could radically change. The recent revisions in UK GDP shows the inherent uncertainty in fiscal plans and forecasts. Following a UK general election next year, a different government could set an alternative path for public spending. However, with the current government and opposition Labour party refusing to commit to additional spending on public services, the Welsh Government and local authorities must now weigh up the difficult choices that may lie ahead.”

The report takes as its starting point the UK’s fiscal outlook and the implications of the UK Government’s indicative spending plans for the years 2025-26 to 2027-28.

Slower growth

It states: “Over recent years, slower growth and higher interest rates have negatively affected the public finances. In the aftermath of the ‘mini budget’ of September 2022, the current

Chancellor, Jeremy Hunt, announced a package of fiscal consolidation measures at the Autumn Statement 2022. Indicative departmental spending plans were reined back from previous plans. However, most of the spending cuts were pencilled in for only the last three years of the five-year forecast period, and beyond the date of the next UK general election.

“Despite a relatively optimistic forecast from the Office for Budget Responsibility and plans to increase taxes to nearly 38% of GDP by 2027-28, the government’s fiscal rules are barely met on current plans. The very small fiscal ‘headroom’ against these targets could be wiped out by tiny changes in forecasts. Alternatively, the recent upward revisions to UK GDP could provide a fiscal boost for the Chancellor ahead of the Autumn Statement.

“Departmental spending is set to grow by just 1% a year in real terms from 2024-25 to 2027-28. We make several assumptions on the distribution of this spending to project the size of the Welsh block grant. We assume that:

* NHS spending increases in line with the historical average increase of 3.6% and in line with the implications of the NHS workforce plan;

* Schools spending is held flat in real terms;

* Childcare spending grows in line with the policy announcements at the Spring Budget 2023, growing by 12.2% per year in real terms;

* UK defence spending grows to 2.5% of GDP by 2030;

* Overseas aid spending is maintained at 0.5% of GDP.

“These assumptions have big implications for other ‘non-protected’ spending areas which would likely see real terms cuts – we assume these spending areas grow uniformly over the forecast period. From these assumed spending plans, we model the additional funding the Welsh Government would receive through the Barnett formula.”


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Richard Davies
Richard Davies
5 months ago

Local government (in england) suffered a 60%-90% cut in funding immediately after david cameron became prime minister in 2010, with knock-on consequences for the block grant to Wales.

I fully agree with the article title, a local income tax would be a far better method for local government funding. It is the method used in many European countries, along with Canada and USA.

Gerallt Williams
5 months ago

Some places rich some places poor. Nightmare for tax collecting. What about tax on savings because currently £1000 is tax free how would the local income tax work. What about shares and other none totally standard incomes. Pipe dream. Plaid ideal.

Padi Phillips
Padi Phillips
5 months ago

As at present, income is income is income, therefore any income over and above a threshold amount is subject to the local income tax.

Such a system would be much fairer than the current system, as even though it has been modified of recent years in Wales to add a higher tier, Council Tax still remains grossly unfair and over burdensome on the less well off and the much better off relatively lightly taxed.

Elen Wade
Elen Wade
5 months ago
Reply to  Padi Phillips

Be careful. If you tax talented individuals who do the most demanding and stressful jobs too highly, they will go elsewhere, taking their skills with them. And then the tax take used for paying benefits,pensions,council tax credit etc will shrink.

Elen Wade
Elen Wade
5 months ago

For people who work for a living, savings come from earnings that are already taxed. Imposing another tax on a couple of hundred quid of savings is udicrous.

hdavies15
hdavies15
5 months ago

Some parts of Wales would really suffer if such a tax was introduced. Why ? Simply because the general levels of taxable incomes across some communities is so low any attempt to apply tax would be the last straw. People are already struggling to pay their current council tax and the underlying message is that more needs to be gouged out of people’s pockets. Unless of course the intention might be to cross subsidise so that well off areas contributed to the funding of services in poorer areas. And what would they be paying for ? If it was “services”… Read more »

John Williams
John Williams
5 months ago

A change from council tax to income tax might distribute the burden of funding more fairly. It’s difficult to see, though, how it would help to even out inequalities between local authorities. E.g. Gwynedd combines a large area, making delivery of services more expensive, with high levels of poverty increasing the need for many of those services; relatively wealthy Cardiff is the opposite. To achieve equity between councils there would need to be some mechanism for transfer between them of funds generated by local income taxes.

Last edited 5 months ago by John Williams
NOT Grayham Jones
NOT Grayham Jones
5 months ago

The real issue here is that taxes are now at record amounts 38% of GDP- you cannot continually go on increasing the tax burden no matter which way you collect it. The UK and Welsh Govt need to really look at what they are spending the peoples taxes on and decide what is really necessary. Im sure we all have our own ideas and yes it would be controversal but will it only end when everyone pays 100% tax.

Elen Wade
Elen Wade
5 months ago

The tax burden generally is far too high. And this is before people are expected to shell out tens of thousands on heat pumps and electric vehicles. This in addition to paying much much higher prices for electricity as a result of Net Zero targets.

Andy
Andy
5 months ago

And then they’ll want 110%.

Alun Gerrard
Alun Gerrard
5 months ago
Reply to  Andy

The Labour Party record is 98% tax. When the money left the UK the owners went with it.

You can calculate the total tax you pay..

National insurance: 12% of gross pay plus employers contribution of 12% too.

Tax on gross pay.

VAT on petrol, power, insurances,
Petrol is 20% and fuel tax too.

Domestic rates.

Water and sewerage charges.

Depreciation on..

The car you buy.

Tax on holidays.

Tax on clothes.

Death duties…

Sad is it not…

Mr Walrus
Mr Walrus
5 months ago

If more money is needed, the first place to look should be the cancelling of the Senedd expansion. No need for an additional 32 members plus support staff salaries, expenses, pensions etc and no need for the additional infrastructure they would require.

Ernie The Smallholder
Ernie The Smallholder
5 months ago
Reply to  Mr Walrus

The biggest saving can be cutting Westminster UK central imperial bureaucracy. The UK has too many vanity projects, Dogma and centralisation of wealth and power. The UK parliament has 650 MPs elected by an unrepresentative electoral system (FPTP). How many members are there in the 2nd unelected house: 850 ? 1000? …more ? … And it still doesn’t have any real local, regional or nations input unlike the German system. De-centralisation is the answer. Wales needs the extra members so that it can take on the extra responsibilities of policing, justice, economic, energy, planning, industrial development, finance and constitution –… Read more »

Shifter
Shifter
5 months ago

The best thing they can do is to get rid of the assembly its just jobs for the boys with no sense of responsibility just in it for themselves and the money.

Vance Grffiths
Vance Grffiths
5 months ago

Before the Government of Wales, both ssenedd and council have the audacity to keep wanting more and more money from the people of Wales, wouldn’t it be more prudent if they sorted their own affairs out first.
Things like the ssenedd expansion, Cardiff airport, buying a farm for the green man festival, 20mph nonsense. There’s wellover 300 million of vanity spending there that could be saved. The people of Wales are already paying the highest taxes since the second world war. How much more do they want?

Andy
Andy
5 months ago

Wales was a beautiful place to visit, until the idiots in power decided to act for themselves and not the public interest. I will not visit any place that imposes a low emissions zone or a pathetic 20mph speed limit nor makes profits from a carrier bag tax. Greed has taken over from common sense, ever since That tyrant Thatcher began her rampage over the working person, every idiot who gets into power thinks they can do the same, and they’ll blame us for the country going bankrupt. It’s about time we had a people’s government in place for the… Read more »

John
John
5 months ago

Here we go, no mention of actually cutting costs! So much waste it’s unbelievable. 20mph road signs anyone?! The Socialists are driving Wales into the ground.

Mathew lennox
Mathew lennox
5 months ago

How about not wasting money on 20mph, labour does know how to throw money away

Alun Gerrard
Alun Gerrard
5 months ago

Business rates in Wales are collected by local councils who then transfer it all to the WG. Why ? The business rates should stay in the county and used for existing or new start ups. We know how residential rates are spent but not the business rates. Why? Businesses have the right to know where their money goes.

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