Budgets are always strange affairs. Westminster politicians and the media talk endlessly about ‘giveaways’ or rabbits out of hats, hanging on every word from the chancellor of the day the second he stands up. But for most of us, what’s announced by Rishi Sunak won’t really seem relevant until it hits us in the pocket.
The same goes for Wednesday’s Budget. We all know the country is in a mess, and will probably have welcomed the extension of things like the business rates and VAT cuts as a lifeline for struggling sectors. It will take a while though before we realise the impact that other measures will have – like the freezing of income tax thresholds, which will cost taxpayers £8.2bn in four years time.
These are big decisions which will have a real impact on household finances. So why should these decisions be taken so far away, in Westminster? Council tax is a perfect example. In theory, this is one tax decision which is in the hands of local people. Previously, any excessive rises would trigger a local vote, giving communities a say over their tax rates. But Westminster decisions last autumn scrapped that 2 per cent lock and allowed social care authorities to increase the precept by an additional 3 per cent. Now official estimates predict that around two-thirds of councils will raise rates up to the new maximum of 4.99%, with no vote whatsoever. In Greater Manchester, the average council tax across all councils was £1,540 for a Band D property in 2020-21, up by more than £300 since 2011-12. Sadly, further rises are in sight.
Because of the complicated way the system of national grant funding works, councils can lump residents with huge rises which are never properly justified, and now require no local democratic consent either. This system needs to change.
The TaxPayers’ Alliance has long believed regular rate rises wouldn’t happen if our regions were given more power over how they found their funding. The UK has one of the most centralised tax systems in the developed world, with a staggering 95 per cent of all tax revenue raised centrally in 2016. Devolving taxes would encourage more responsible spending from local authorities. Taxpayers would be closer to the organisations deciding how their money is spent, making scrutiny easier and cutting back the constant council waste we all see.
How can that be done? To start with, local authorities should raise half of their spending power from local taxes. For example, Greater Manchester could be given the right to raise necessary revenue from a local income tax, local sales tax and de-centralisation of domestic rates.
We previously found that under 20 per cent of local authority revenue comes from taxes they raise for themselves locally. This means that local government is reliant on grants from Whitehall, making them less accountable as a result. Manchester city council spent almost £1.9 billion last year, with £777 million of this financed through grants and contributions by the central government. Council tax accounted for £162 million, while business rates provided around £330 million. How can Manchester make proper decisions about its fiscal future when so much of its money comes from Westminster? This situation needs to be flipped round. If local politicians had to raise a Manchester-only income tax to pay for promises, they might be more keen to finally get a handle on waste. What’s more, if they could cut a sales tax to make Manchester’s shops cheaper and better for visitors than say, Leeds, then residents might finally see their taxes start to come down!
This isn’t pie in the sky. The Welsh government has already done research on a form of local income tax, to replace the council tax system. The new freeports announced on Wednesday are a step in the right direction. Leading local figures, such as Clive Memmott from the Greater Manchester Chamber of Commerce, have called for more powers for mayors to set, raise and spend local taxes, which he rightly says would give the ‘necessary financial firepower, with real accountability, to effect real change and progress.’ There is a genuine appetite to try something new.
No wonder, given the boon this could bring to Greater Manchester and indeed the north. Given the impact the Budget’s business rates and VAT cuts will have, imagine a situation where Manchester could decide to continue those cuts unilaterally. By pursuing a lower tax and more responsible spending agenda, we could see firms flock to our regions. One reason why countries with a high degree of fiscal decentralisation have been much more successful at evening out differences in regional income levels is because they allow other areas to grow their tax base and prosper – not just their capital cities. Levelling up in action, if you like.
Big reforms like these could change the game when it comes to regional inequality. New tax powers and responsibilities might be the only sensible solution to the seemingly unsolvable problem of endless council tax hikes. In future, why shouldn’t Manchester deliver its own Budget?