On Thursday, December 9^th, Finance Secretary Kate Forbes will present a budget to the Scottish Parliament. A couple of goodies have been trailed in Nicola Sturgeon’s speech to the SNP Conference in November, including a doubling of child benefit from £10 to £20 per week. Undoubtedly a boon to less-well-off families, like free prescriptions, personal care, tuition fees, etc. Nicola did not discuss where the additional funding to pay for this could be found.

It is unlikely that Kate will be any more specific, but the likelihood is that a squeeze on council budgets that has lasted a decade will continue. Despite John Swinney’s promise of “Parity of Esteem” made to CoSLA as Finance Secretary in 2007, devolution of powers to Holyrood did not been reflected in any devolution of powers to councils. This has been Devo-min.

The Background

The series of Ministers holding the Local Government brief included Derek Mackay and Kevin Stewart, both former Council Leaders—in Renfrewshire and Aberdeen City, respectively. But this made no discernable difference to the tight rein on which councils were kept.

This has been achieved through control of finance. All 32 councils in Scotland receive their revenue from two main sources: around 20% from council tax and around 80% from a Revenue Support Grant (RSG) direct from the Scottish Government (SG). Only a few per cent come from fees and charges. By offering to add or threatening to remove parts of the RSG, the SG persuades councils to implement their policies. For a decade, this was how Council Tax was frozen during austerity. Even when this stricture was relaxed, a 5% rise in Council Tax would still only raise 1% more in actual revenue. The SG still threatened a cap if much more was attempted.

Discussions about replacing Council Tax with another revenue source, such as local income tax, have gone nowhere. With all her other pressures, councils are not likely to see any relief from Kate’s budget. Indeed, North Lanarkshire has got its rebuttal in first, claiming they will be faced with a £70 million cut over three years from its annual budget of £854 million.  Whether realised or not, demands on major council services—like Education and Social Work, which together typically absorb three-quarters of council budgets will grow. Local options for raising funds to meet this are limited. The present Council Tax is regressive, with poor people paying proportionally more. The attempt to spread this fairly across eight ‘bands’ (A-H) has been skewed over 30 yeas as house prices have risen at rates well above inflation. It is now to the point that the “top” band at £212.000 is now over  £10,000 below the average house price.

If the present government want to win an independence referendum, they must show the vision and creativity needed to steer Scotland to prosperity beyond independence. Popular though such measures may be, £10 per week “bribes’ to voters do not fit the bill.

One Simple Solution

Without redrawing council boundaries or revaluing homes, there is a straightforward way to provide a significant funding boost to councils, empowering their ability to improve those services that directly affect people’s lives. It involves adjusting the existing banding system in use. The system allocates properties within value bands, with Band D used as the median. Bands above and below are rated in multiples of ninths. Taking East Lothian as an example, its eight bands, the number of homes in each band and the tax levied on them are shown in Table 1.

This shows a total of  £31.0 million collected from the 65% of properties in Bands A-D and £36.5 million from the 35% in E-H, for a total tax income of  £57.6 million. There are no bands above ‘H’, although many properties have much higher values in picturesque villages, affluent coastal towns and commuter developments. What is needed is an adjustment that burdens those with money rather than those without.

The simple approach is to split each of the four existing upper valuation bands in two, dividing properties equally between each. This creates eight upper bands. By applying the “ninths multiplier” as before, we arrive at a modified table, as shown in Table 2.

Although this looks similar to Table 1, the four additional bands bring the top tax payment up from £2,236 to £3,975. Although this is a steep 78% jump, it applies to only 431 properties—less than 1% of the total and worth far more than their out-dated £212,000 valuation. The tax increase would diminish as we go down the bands, so that those in E1 would be paying the same and the 65% of properties in A-D would be unaltered.

The net effect would be to boost Council Tax income in the East Lothian example from £58.6 m to £67.3 million, while making a regressive tax more equitable. This £8.7 million increment is equivalent to an unthinkable 15% rise in Council Tax and delivers a financial flexibility councils have not had in years.

The 35% of residents paying more might feel aggrieved. But consider this: given annual increase in house prices across East Lothian exceeds 3%, even a £400,000 home paying the £1,739 increment for Band H2 would recoup that in property value within two months.

More Complex Solutions

The above should be regarded as a temporary solution until a property revaluation is done to make location within the bands more fair. But there would be no need to adjust the bands, other than the range of property values applied to each.

This raises the question of particularly valuable properties. It would be unfair to allocate properties above, say £500,000 to band H2 when properties exist valued in the millions. If Band H1 were to run from £400k to £500k with a tax levy around £4,000, the introduction of a “Mansion Tax” of 1% on the value of all properties above that. Rather than being onerous, this would still leave 2/3rds of the 3% annual growth in the hands of the property owner.

As additional income, East Lothian has many holiday homes. These are typically rented in season at high rates through Air B&B or local agencies. Anyone owning a second home and able to do this cannot be poor. The density of holiday homes, though not as endemic as in Cornwall or the Highlands, has a detrimental effect on community, especially in older properties, town centres and picturesque locations.  If such properties were rated at 150%, this would effectively tax holiday lets,  yet leave the locals payment unaffected. The definition of local would be registered voters resident, which would have the added bonus of catching the rich who maintain a home in Scotland yet claim reduced council tax as non-residents. Estimating the number of local second homes (mostly above band D) at 1,000, such a scheme should add another £1.5m. This is equivalent to a further 2.5% rise in Council Tax, the difference being that it affects mostly non-residents of the council area.

As a party of government, the SNP has remained resiliently popular. If all it wished to do is maintain the status quo of devolution, this might be a shrewd tactic. But, by not frightening the horses with a timid fiscal policy based on populist political “bribes” they have neglected showing inspirational leadership and, more importantly, how they would deal with the 22% of GDP in government spending that would be the case on the first day of any independence. That Kate Forbes will empower our 1,200 councillors as partners on Thursday, instead of continuing to treat then as chattels, is unlikely. But a scheme like that above is the kind of radical thinking and willingness to take risks necessary to attain the future prosperity to which we all aspire.

#992: 1.298 words

This idea is neither new, nor original: see also:

Ma Faither’s Howff Has Many Mansions (March 2012)

Ma Faither’s Howff (Revisited) (September 2012)