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In his 2008 Conservative party conference speech, Shadow Chancellor George Osborne announced that an incoming Conservative government would freeze Council Tax in England for two years. IFS researchers estimated at the time that if this policy was implemented in 2009-10 and 2010-11 it would cost have £1 billion in its second year, in 2008-09 prices. Over the past month, the parties have been disputing how much it would cost if an incoming Conservative government was to implement it in 2011-12 and 2012-13.
In its New Year assault on the Conservatives' tax and spending policies, the Labour Party cited a Treasury estimate that the policy would cost £1,320 million a year in its second year in 2011-12 prices - more than we originally estimated. Now that we have a preliminary estimate from the Chartered Institute of Public Finance and Accountancy that council tax will rise by an average of 1.8% in England in 2010-11, we have been able to update our own original costing. It has increased a little, reflecting inflation between 2008 and 2011, but remains at £1.0 billion (in 2011-12 prices) to the nearest tenth of a billion pounds.
In our costings, both we and the Treasury assumed that council tax bills would rise by 2.5% a year in the absence of the policy. Our estimate of the year two cost comprises a £1.3 billion increase in grants to English local authorities to offset the revenue they would forego, partially offset by a reduction in expected spending on Council Tax Benefit of £0.3 billion. Figure 1, below, shows how we think families in England across the income distribution would benefit, ignoring the impact on households of the central government spending cuts required to pay for the policy (of which more below). The average gain is about 75p per week, or 0.17% of average net weekly income. The biggest beneficiaries in proportional terms are those in the middle of the income distribution and those at the very bottom. Many poorer people gain little or not at all, because council tax benefit would have largely or entirely insulated them from the impact of the council tax increase that would have occurred in the absence of this policy.
Figure 1. Distributional Impact of the 2-year Council Tax Freeze
At first glance, this suggests that our estimate of the cost of the policy is lower than the Treasury estimate cited by Labour. In fact that turns out not to be the case. At the time when Labour first cited the number, the Treasury said that it included the offsetting savings from lower council tax benefit. But they have now corrected this and said that the savings had not been included. So we and the Treasury probably both think that the net cost of the policy in England would be around £1 billion.
But the cost and impact of the policy in England is not the whole story. Under the infamous 'Barnett formula', a £1.3 billion increase in grants to English local authorities would be matched by a £0.3 billion increase in grants to the devolved administrations in Wales, Scotland and Northern Ireland. This increases our estimate of the total net cost of the policy to £1.4 billion after rounding - and would presumably increase the Treasury's estimate of the cost to roughly the same level if they were to net off the council tax benefit savings too.
The Conservative Party say that they would pay for the extra grants to English local authorities by cutting the 'consulting and advertising' budgets of central government (e.g. departments like the Department of Health) in England. If spending in England is reallocated from central departmental budgets to local government grants so that total spending in England remains unchanged, there would be no need to increase spending to increase grants to the devolved governments. So, these savings would need to amount to £1 billion (the net cost of the policy in England alone), right? Unfortunately, it's not that simple, again because of the intricacies of the Barnett formula. Because increased grants to local authorities are counted as additional "English" spending but savings on council tax benefit are counted as savings on the UK-wide benefits budget, the cuts would need to total £1.1 billion to pay for the cost of the policy in England plus a £60 million increase in grants to the devolved nations. These cuts would need to be genuinely additional to any currently planned by the government or any intended by the Conservatives as a way to reduce the deficit. Taking these spending cuts and the council tax pledge together means a net cut of spending by central government and the devolved national governments of £1.0 billion.
But, cuts in spending on advertising and consultancy could surely go ahead in the absence of any pledge on council tax with the savings instead used to reduce the deficit or cut other taxes. With this in mind we think the best way of thinking about the policy is as a rise in central government spending in England that needs to be matched by increased grants to the other nations in the UK giving a £1.4 billion total cost of the council tax pledge, once one takes account of the lower bill for council tax benefit.
But is the policy a good idea? It's easy to see the political attraction of freezing council tax given its apparent unpopularity. But it is noteworthy that the Conservative Party have not announced plans for long-term reform of Council Tax, whether that be scrapping it, or making it more proportional to house-prices, and they are also opposed to a revaluation, which would make the tax fairer by being more closely related to current house prices. The policy represents a small shift in the balance of funding away from local authorities and back towards the centre, which seems hard to reconcile with a desire for more localism in policy-making. The policy also adds yet more complexity to the English Local Government Finance system.
With a number of slightly different numbers floating around, you may be confused. Don't let that concern you. The answer to which party is right on the costing of the council tax pledge is quite subtle. Labour could rightly say that this pledge costs £1.4 billion (if we consider the pledge in isolation from the planned reductions in advertising and consultancy spending), whilst the Conservative Party can point to the £1.0 billion in net cuts in central government spending required to make the combined spending cuts and council tax pledge revenue-neutral. However, the couple of hundred million pounds involved is negligible compared to the multi-billion fiscal repair job needed over the next parliament (or two).
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.