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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).
View all Observations in the series
Does offering higher teacher salaries improve pupil attainment?
In new work published today, IFS researchers analyse the impact of offering higher teacher salaries on pupil attainment. We examine salary scales and pupil attainment in primary schools in and around London. For these schools, and for the salary differences of just under 5% that we observe, we do not find evidence that higher salary scales for teachers have much impact on pupil attainment. This suggests that if individual schools offered salary differentials on this scale across-the-board, they would not necessarily attract more effective teachers.
The next five years look better but tough fiscal choices remain for Scotland
The latest public finance forecasts published by the Office for Budget Responsibility (OBR) in December presented a better outlook for the UK than had been suggested by their March forecast. This is good news for the UK and Scotland in the short-term but much of the improved short-term outlook comes at the expense of reduced scope for economic recovery after 2018–19. Also the one area of greater weakness in the OBR’s latest forecast – revenues from oil and gas production – has substantially more adverse consequences for Scotland’s fiscal position than for the UK as a whole. In short, the new forecasts do little to diminish the tough choices that will face Scotland (and, to a lesser extent, the UK) if it is to achieve long-run fiscal sustainability.
50p tax – strolling across the summit of the Laffer curve?
Ed Balls and Ed Milliband have cited recent HMRC statistics which show those paying the 50% income tax rate are estimated to have paid some £10 billion more in tax over the three years 2010-11 to 2012-13 than was projected to be the case back in 2012 when HMRC analysed how much the tax was raising. Is that an indication that the 50p rate was more successful in raising revenue than HMRC concluded in their analysis?