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Paying the piper

19 January 2004

The debate about the funding of local government will fail to make progress until politicians face up to the reality of who's calling the tune.

Local government is a confusing business. It's sold as a high ideal of democracy, bringing decision-making closer to the people. And when it comes to setting the date for the village flower show that's precisely what it is. But in weightier matters such as health and education services, democracy and local government part company. The local officials are administrators, not policy-makers, in this context. Their remit is not set by local voters but by central government, which is also paying their way.

The theoretical attraction of localism in politics lies in the notion that greater proximity offers better understanding of local conditions and local opinion and, consequently, more appropriate decision-making. As a principle it is frequently touted as a self-evident good - the sort of thing that no politician can afford not to be in favour of. At the root of this is a pure notion of democracy as a vehicle for the literal expression of the popular will.

The problem with this approach is that it relies to a great extent to people knowing what is good for them. This is more complicated that simply knowing what one wants, even though that is already difficult enough. "Wants" are one-sided, inconsequential things, which only become interesting when they stop being wants and become real possibilities. Knowing what is good for one implies that the possibilities are already there. Each possibility has its associated costs and compromises, and the decision-making process requires a balanced judgement to be made.

Given the required parameters, such as budget, technical feasibility, etc., it is perfectly possible to make political decisions at any level. People can work out, within a group, what is the best thing for them to do. It remains the case, though, that, in general terms, what is good for one is good for all. For a group to decide on what is best for them without regard to other groups with whom they are closely connected socially, geographically and economically will invariably lead to problems.

The standards for household rubbish collection and disposal that are appropriate for Blackpool are also good for Torquay. Planning policy, although necessarily responsive to local conditions, is similarly underpinned by a set of guiding principles with universal application. So when service standards, or policy, or rates of local taxation, are found to differ substantially from area to area, the people in the areas with poorer services, ineffective policy or higher taxes naturally cry foul. They want and expect as good a deal as anybody else who is within the body politic to which they relate.

In Britain that body politic does not reside at the local level. Many notionally local services such as hospitals are funded directly by central government, and three quarters of local authority spending also comes from a central source. So the idea that Council Tax payers "get what they pay for", with higher taxes funding better services, is largely a myth. They actually get what central government is prepared to pay for, which is precisely why everybody should expect to get the same deal.

The government is wise to this. It knows that it gets blamed when local services fail, so it uses the fact that it is paying for most of them to dictate substantially what these services should be. Central government sets service standards for pretty much everything that local government is involved in, and the job of local government is to administer the resources to meet those standards as best it can. Even then things come unstuck. If "administer" means, in the case of a health authority, deciding what prescription drugs to make available, then people are quick to complain about postcode prescribing. Allowing health authorities to set their own priorities naturally breeds disappointment among those whose personal priorities are not met. So the government wheels out a shiny new agency called the National Institute for Clinical Excellence. It has the job of making sure that, when it comes to treatments, health authorities are singing from the same song-sheet.

This is democracy in a different sense - the sense that seeks to eliminate differentiation and favouritism. It is one of the impulses for internationalism and the universality of human rights that all people should be treated the same. On a more pragmatic level it underpins the monumental effort of harmonisation that went into creating the European single market. Not only are common regulations and standards necessary for the operation of a seamless, cross-border marketplace, but since, for example, the safety of electrical appliances is as relevant in Athens as it is in Aberdeen, it is arguably more democratic to have one standard that applies to both.

These two versions of democracy are pushing the centre of gravity of politics in opposite directions and leaving the national level of government somewhat exposed. It is a process that can be expected to continue, for policy needs to be made at the level that commands the widest acceptance, while execution requires the ability to relate directly to the people concerned.

All of which has relevance to the debate about the Council Tax that was flaring up in the newspapers and studios of Britain last week. This tax provides that missing quarter of the cost of local authority expenditure while sustaining the principle of local accountability. The problem with it is that while central government is telling local authorities what they must do (what services they must provide, and to what standard, etc), the money it provides does not necessarily reflect the full extent of that obligation. The task of meeting the shortfall thus places a disproportionate burden on local tax raising powers.

For example, suppose a local authority with a budget of £100 million finds its costs rising five per cent. The income of £75 million from central government would normally leave £25 million to find from the local tax charge. But now that is £30 million, or a twenty per cent increase in local tax to fund a five per cent increase in spending. Unsurprisingly, everyone is unhappy - both the local tax payers who experience the increase and the politicians, both central and local, who will get the blame.

It is a good principle that taxation should be levied at the level within the body politic at which it is spent. And spent in this context must mean "decided to be spent". By this definition much "local" spending is actually the spending of national government, and on this basis the 75:25 split between central and local taxation might seem reasonable. The reason it doesn't work is the lack of transparent hypothecation. This means clearly identifying the connection between government money and government spending objectives, so that a shortfall in service provision can be clearly identified with the source of the money.

In practice this means the government directly funding all services, such as education and social services but including many others, to which a nationwide service standard is applied. Local government in these areas would then be clearly identified for what it is, which is an administration service for central government policy. The cost of this should logically be met out of general taxation. Where services or spending is subject to genuine local discretion, funding should come from local taxation.

This would leave only a small proportion of current activity within the authentically "local government" arena, but it would at least be genuine local democracy and the question of how it was funded would cease to be a matter of national political concern. It is an approach that acknowledges the logic of the polarisation of political power between the highest and the lowest levels. County and district councils have already felt the squeeze of this process. The challenge for national governments is about how to react constructively to the rise of supra-national institutions that will squeeze them in their turn.