Finance: Signs of business rate reform point to delay

Labour's election manifesto committed it to ending council-tax capping, reforming the system for giving grants to councils and returning the business rate to local control. But, Paul Gosling says, the signs are that councils will be given little extra money or freedom for at least the next two years.

The Government has announced a wide-ranging review of local government finance, and says the results will be announced in time to affect the 1999/2000 grant settlement. But in the absence of any early legislation, which is not realistic, only minor changes can be made even to that year's grant. For 1998/99, the current system, criticised by most Labour-controlled authorities, will remain in place.

The review will focus on the manifesto commitments, but will also examine how to make local authorities more efficient and how to attract more private finance, and councils' capital programmes. Each element raises more problems than solutions, and it could take several years before a permanent new system is in place.

A first step which would be relatively painless but would be well received by councils would be a relaxation of the capping system. "The Local Government Association is disappointed that the Government is going to retain something like the capping system it inherited," says Neil Kinghan, the association's director of local government finance. "A relaxation is worth doing because local authorities would have more flexibility and it gives an indication of change." The LGA believes that the Government will accept the case, perhaps even for the next financial year, for a less stringent approach to budget capping.

Some people close to the review, though, believe that there will be little change to the capping system in either of the next two years. One said that the Government was unlikely to relax capping until a stronger system of electoral accountability was in place, and councils were in a position to prove that they were using existing resources effectively.

One favoured form of improved accountability would be for councils to be subject to full annual elections, following the setting of the annual budget. An alternative would be that budgets exceeding the Government's cap could only be approved by a referendum of the electorate. Either proposal would need primary legislation which would delay implementation until 2000.

Introduce a new system of efficiency vetting would take equally long. The Government is abolishing compulsory competitive tendering, but the replacement system, "best value", is no soft option. It will require councils to illustrate improved efficiency each year, and show that partnerships with the private sector are in place. That same test may be included in the criteria for a council to exceed the Government's budget cap.

An influential Labour insider said: "There is no point in allowing councils to spend more if they are not using the money they have got efficiently." Another insider said: "Flexibility will be given, but only to councils that earn it."

There is, it seems, no enthusiasm to abolish council tax itself. That remains an option, but there is no obvious better alternative. What is likely, though, is a change to the existing bands, increasing charges for occupants of more expensive homes.

In the case of the business rate - the National Non-Domestic Rate - there is a conflict between pre-election commitments and what the business lobby wants. Currently the business rate is set by government, and distributed by it to councils. That system may stay until councils show they will not penalise commercial ratepayers, and that private-sector partnerships are working.

Even then, the business rate is likely to be subject to a large amount of equalisation, spreading income to where it is most needed. Where Westminster council could happily live on its business rate income, poor districts in the North collect very little in commercial rates.

With the current system only 20 per cent of a council's income is under its control - through the council tax - so that a comparatively small increase in expenditure leads to a very high proportionate increase in council tax.

"There is a need to broaden the local tax base, and the only way to do that, really, is to return the business rate to local control," says Rita Hale of Rita Hale and Associates, a local government finance expert.

Geoffrey Filkin, policy analyst and former secretary of the Association of District Councils, agrees. "Local government needs more local discretion over the level of its expenditure, and it therefore needs a broader local tax base," he says. "But the methods to achieve this undoubtedly depend on strengthening local democracy."

The most technically complex problem is devising a new system for distributing government money - revenue support grant - to councils. The level of RSG is determined by a council's standard spending assessment - the Government's calculation of how much money each council needs to spend, given its particular local problems, to deliver a common standard of service. Labour authorities and Frank Dobson, former shadow environment secretary, have complained that the current system is rigged in favour of Conservative authorities in the South-east, to the disadvantage of deprived councils, particularly in the North.

A simple solution would be to change the balance between the factors that make-up the SSA. That might, for instance, reduce the loading for visiting tourists, which assists Westminster, and place greater importance on the level of poverty in an area. Labour councils would be delighted, but it might go down badly in areas that voted Labour for the first time in the general election.

Another likely change is to the "area cost adjustment", which weights grant in favour of additional local costs. Some experts say that too much emphasis has been given to the ACA, as councils pay staff, with the exception of London, on a single pay structure which ignores differences in costs of living. A "specific cost" allowance, recognising only actual additional costs, such as London weighting, might replace it.

Whatever the review comes up with, ministers are unlikely to be thanked too warmly by local government. Expectations have been so high they can perhaps only be dashed.