12 October 2018

Cuts to council budgets are no bad thing if they make local authorities up their game


A newly released paper from the University of Cambridge makes interesting reading on fiscal devolution and the relationship between the state and local authorities.

The research makes clear that the local authorities which have made the biggest spending cuts have been those in the most deprived areas. This is roughly true, although it is worth taking into account that the largest cuts have come from wealthy Westminster, which reduced spending by 46 per cent  between 2009/10 and 2016/17, while nearby Kensington & Chelsea and Hammersmith & Fulham both cut 38 per cent from their budgets.

However, the whole narrative of the Cambridge paper is somewhat misleading insofar as it views cuts in spending as an inherently bad thing. Instead of taking such a pessimistic view, the data should be seen in a far more positive light. Local authorities get the bulk of their funding from central government and also money which they raise themselves. This money comes from taxpayers.

Instead of spending taxpayers’ money on expensive and unnecessary items, many local authorities are taking a sensible approach by introducing savings. That means taxpayers keeping more of their own money, while also ensuring councils focus their spending on essential services.

We need to go much further. Residents have been increasingly seen as cash cows by their local authorities, with council tax increasing by 57 per cent in real terms since 1997. Despite taxpayers being increasingly burdened and local authorities claiming to be overstretched, many still engage in extravagant spending.

For example, research by the TaxPayers’ Alliance found that in 2016-17 there were at least 2,306 local authority employees on annual salaries over £100,000 and 558 earning more than £150,000. Some senior staff were raking in over £250,000.

This is not to suggest that talented and motivated public servants should not be rewarded. But there are also too many examples of local authorities wasting taxpayers’ money, be it on throwing lavish award ceremonies for themselves, first class flights for staff, or even subsidising a cafe in south London which disseminates anti-neoliberal propaganda.

We also have examples of local authorities acting as property speculators, buying up shopping centres and business parks. Many of these purchases have been financed through loans, which means some councils are now dangerously over-leveraged. If the investments do not materialise as hoped for, or if there is a crash, then the authorities in question will face bankruptcy. And it will be taxpayers who are left to bail them out.

This is not only risky, but also drags down local economies. Some local authorities are buying almost a third of all regional property assets that come to market. This crowds out private investors who might otherwise have invested in these areas and provided the goods and services that local people want and need.

Further savings can also be made through adopting automation. Research has shown that up to 850,000 public sector jobs could be automated, bringing annual savings of £17 billion by 2030. Not only will automation save local authorities vast amounts of money, it will also ensure that public services are delivered in a more efficient way and to a higher standard.

And it’s high time we devolved more tax-raising powers to the local level. Despite the Cambridge paper’s negative view of fiscal decentralisation, there is a great deal of evidence in its favour.

Numerous studies have shown that devolution means money being spent more efficiently and services improving. For example, an econometric study of 21 OECD countries concluded that fiscal decentralisation leads to an increase in government efficiency. Competition between authorities also helps spur efficiency and improved service delivery.

The Cambridge paper raises commonly expressed concerns that such an approach would lead to a race to the bottom, or exacerbate the problems currently faced by the most deprived areas. This is simply not true. Indeed, research by the OECD explicitly concluded that: “A ‘race to the bottom’ cannot be observed. This tends to contradict the view that tax competition may result in taxation levels too low to sustain adequate public service levels”.

And far from making poorer areas even worse off, decentralisation can actually help them. By pursuing a low-tax and value-orientated fiscal policy, poorer areas can attract individuals and firms to their region. This is one reason why countries with a high degree of fiscal decentralisation have been much more successful at evening out difference in regional income levels than centralised states such as the UK. Such a move could therefore help to tackle regional inequality and produce economic growth in towns and cities which have become stagnant, leading to poverty and residents feeling left behind by a distant Whitehall bureaucracy.

Just as private companies battle to win customers, local authorities should compete to attract households and businesses. If they are to grow their tax base and prosper, then they will be forced to offer competitive tax rates and higher quality services. They should offer a bundle of public services to residents and prospective residents in exchange for a given rate of tax, and the residents would be free to choose between them.

Just like with supermarkets, each local authority can decide whether it wants to offer high tax and a premium service, or lower tax and a more value-orientated service.  Different people will choose different offers, and the onus will be on each local authority to offer value for money.

Tax rates will be essential to this competition. However, just like with supermarkets, businesses and households do not make their location decisions solely on the basis of price. They also consider a whole range of other factors, including the quality of infrastructure and public services. Therefore, local authorities will have to find ways to deliver services in a cost-effective way. They will have to scrap services that are not valued by their residents, and become far more efficient at providing those services that are.

It is true that spending by local authorities has fallen since 2010, but this is no bad thing. It means that local authorities are making savings by cutting wasteful and unnecessary spending. However, much more needs to be done.

Local authorities need to continue to cut spending on non-essential schemes and the exorbitant salaries of their senior staff. They also need to stop acting as property speculators with taxpayers’ money. All of which would be helped no end by central government giving councils much wider tax-raising powers, fostering competition and letting market mechanisms improve services for local people.

Ben Ramanauskas is a Researcher at the Taxpayer's Alliance.