By Dick Sorabji, Corporate Director of Policy & Public Affairs at London Councils
A crisis is brewing in the affordability of public services. British government has spent more than it receives in taxes almost every year since the 1974 oil crisis. Politicians have not taken more than 37% of GDP in taxes since the fall of the Callaghan government and the dawn of Thatcherism.
The question is why has this happened? After all, the solutions are simple; if not easy. Raise taxes, spend less, or do things better. The hard part is that this demands leadership in managing consent and retaining legitimacy. Looking back, it seems that the problem was not solved by the peace dividend when the Cold War ended; in fact, it became much worse.
While national spending has tended to exceed income decades, it is since 1990 that spending growth has concentrated on health, education and welfare. All other services have been squeezed. Government has balanced the books by betting on growth and productivity. With the banking crisis that happy option ended.
The story of local government services and their funding is an extreme case that shines a light on how and why government is not winning consent to balance public spending with the necessary taxation.
For London boroughs, government grants are being cut by 63% between 2010 and 2020. Using the government’s preferred measure of “spending power”, councils are enduring a decade long real terms cut of 23%. This far exceeds reductions in any other public service. That will be a £1.6 billion funding gap in London after a decade of austerity.
Public satisfaction has stayed high because local government has delivered remarkable transformations in services which have earned them respect across government. Many innovations, such as tapping the private sector to fund maintenance of public spaces, or using assets to create additional revenue streams, do things better without asking difficult questions of politicians, or public.
The problem is that some innovations are not sustainable. Adult care has been kept on the road, yet starving care services harms health care – and vice versa. The public are noticing and the politicians will not long be able to continue avoiding the choice between more tax, or less spend.
The problem is more acute, because funding is controlled from HM Treasury. Cash is handed out in grants, based on national judgements of local spending pressures and local preferences. London’s only local tax is council tax, raising 5% of funds. The London Finance Commission reported that for our one tax Tokyo had 17, New York 22 and Berlin 23.
Furthermore, grant funding breaks the link between political decisions on spending and public consent for spending. It forces local politicians to worry about Whitehall officials before voters. National bureaucrats can never respond to all the local variations in need. Sure enough grant funding has ignored the national minimum wage, which cost London boroughs over £100m. Two thirds of England’s temporary accommodation is in London; boroughs annually spend £170m above their grant allocation to find shelter for 50,000 families.
Of course, faced with politicians and public whose record is for spending above their means, the Treasury hopes that grant funding will keep them in control. Yet it is an illusion. The gain in short term control comes at the price of losing public consent for the necessary taxation.
Evidence is growing that the best conversations on balancing tax and spending are local. Scotland has changed income tax without triggering outcry. The London Finance Commission proposed the transfer and reform of property taxes raised in London to London government, balanced by an equal cut in grant funding. When the second Commission reported in 2017 it added the idea of retaining a slice of income tax, or VAT in return for further equal cuts London grant funding.
This approach transfers the task of winning public consent from Whitehall to an alliance of London’s elected borough leaders and the Mayor. This could be a model for alliances of council leaders and Metro Mayors across England. They are visible enough to be genuinely accountable. They are local enough to understand how people want to balance tax and spending.
Louis XIV’s Finance Minister Colbert, who restored royal finances for France’s greatest leader, said that raising tax was like plucking geese; the trick was to get the most feathers with the least hissing. If national government is losing that ability, maybe it is time for alliances of council leaders and city mayors to take the lead.