Rt Hon Eric Pickles MP

Secretary of State

Department of Communities and Local Government

Eland House

Bressenden Place

London SW1E 5DU

 

6 February 2012

Urgent clarity on council tax referendums rules

 

I am writing to set out serious concerns about the rules for referendums on council tax rises, arising from the Report you laid before the House last week [Referendums Relating to Council Tax Increases (Principles)(England) 2012/13] under schedule 5 of the Localism Act 2011 which came into force in December.

 

The way council tax referendums will work in practice is very different to what you have said in public.

 

Councillors across the country are set to approve their council budgets and council tax levels this month, so full clarity on how the referendum rules work is urgently required from you.

 

You have said:

"Since 1997 people have seen their council tax more than double, pushing typical bills to £120 a month. We are getting to grips with this with another council tax freeze deal and by radically extending direct democracy over big bill increases with a new local tax lock.

 

"Councils have a moral obligation to help hard-working families and pensioners with the cost of living. If they want to hike taxes on their local residents above 3.5 per cent they'll now need to get a direct democratic mandate to do it." [DCLG press notice, 8.12.11]

You promise a simple policy so that council tax payers and councils alike are clear that council tax rises above 3.5% must get the backing of local residents in a referendum.


However, it is clear from the newly-published report to Parliament, this is a con.


As I explain below, in practice the trigger point for a referendum will not be 3.5%, it is likely to be lower and to be different in every local authority. The rules will be complex for local residents, uncertain for local councils trying to plan ahead and unfair to local authorities with a low council tax base or large reductions in levies for their area.

Most local authorities will look to avoid holding a local referendum, not least because of the extra cost to council taxpayers. Councils have taken at face value what you've said, so I fear some may unwittingly fall foul of the rules and find they have to run a referendum for council tax rises well under 3.5%.

 

This is critical to the financial planning for local authorities this year and next year, especially as the Government money for a council tax freeze this year is only a one-off grant and will leave any that take it with a shortfall in 2013/14.

 

Either a standard 3.5 % trigger point was never what you intended and you have not been straight with people about how the referendums will actually work, or this was your intention but you have not kept a grip on implementation.

 

Whatever the reason, the system your department has devised is at odds with what you promised. The new system is beset by confusion and uncertainty. This could cause eleventh-hour chaos in councils' budget-setting process and therefore a clear public statement of the way the system works is essential and urgent.

 

 

Why a 3.5% council tax rise is NOT the referendum trigger

 

1.It's not council tax bills that count

The amount charged by a council to its residents is the ‘basic amount of council tax'; it includes levies to other bodies – for instance for transport, flood defence, coroners etc – which councils don't control. However, the principles in your Department's new Report confirm that referendums will be required for any increase above 3.5% in the ‘relevant basic amount of council tax'; and this excludes any levies issued to the council.

 

This means the allowable increase for all local authorities with levies will be less than 3.5% of their council tax revenues.

 

An illustration shows the problem. If the basic amount of council tax of a local authority (which includes levies) is £100 million, and it decides to raise its council tax by what is understood as the maximum amount allowable without a referendum – 3.5% – then an extra £3.5 million of funds would result.

 

If the local authority bills for levies of £20 million, then the relevant amount of council tax stands at £80 million (which excludes levies) rather than £100 million, and the maximum rise allowed – 3.5% of £80 million – results in an extra £2.8 million rather than £3.5 million, and is a rise on the actual council tax bills of only 2.8%. In other words, any increase in the actual council tax bill above 2.8% would trigger a referendum.

 

2.Levy reductions change the trigger point too

In the illustration above, if levies were to reduce year-on-year by £2.8 million then the council would not be able to increase its actual council tax bill without triggering a referendum.

 

This will have a disproportionate adverse impact on those councils with levies that are a significant proportion of their council tax requirement. Barnsley MBC, for instance, has a council tax requirement this year of £83 million and levies of around £17.5 million.

 

Apart from problems of greater complexity and less clarity, the case for treating levies in this way is weak. Levies are part of a local authority's total spending, or budget requirement, and paid to another body to carry out functions on its behalf. They are not identified on council tax bills. Precepts are, and are different in that a local authority simply collects them and passes them directly to another statutory body with their own responsibilities.

 

3.Growth in the council tax base changes the trigger point too

When the number of properties on which council tax can be raised increases the council tax base, local authorities will need to be able to increase the amount of council tax raised to cover the increase in demand for services from the new homes.

 

However, the same problem arises in the new system because the relevant amount of council tax that can be raised excludes levies. So the increase in the council tax take allowed without triggering a referendum will be lower in those areas with larger levies, and below 3.5% in all areas with any levy.

 

4.Combined effect means a different trigger point for all councils, and a 3.5% trigger point for none

In practice, annual changes in levies and property numbers are likely to be less dramatic than in my illustrations above.

 

But the system you have set up means that:

·the allowed increase in the council tax bills people pay before triggering a referendum will be reduced below 3.5% in all areas with any levy, and be significantly lower than 3.5% for councils where levies are a larger part of their council tax total (or council tax requirement)

· this problem is exacerbated for all authorities with a year-on-year reduction in levies

·any increase in the council tax base also affects the percentage increase allowed before triggering a referendum, and works against local authorities with larger levies

·councils with a relatively low council tax base and/or relatively high levies will be more tightly limited by the referendum rules.

 

In practice it is the interaction between council tax base and levy changes that will determine the referendum trigger with those local authority areas with proportionately high levies suffering a double whammy in the new system. I have set out the way this will work in the attached table, which I am grateful to Barnsley MBC for assistance in producing.

 

Using figures your department has published, you can see the results of reasonable changes – 1% increase in council tax base and 1% decrease in levies – on the referendum trigger point for a selection of councils. Two points are striking:

1. the alarming low level of council tax increase that will force some councils to hold a referendum – many well below your public statements that this will be 3.5%.

2. In effect, the new system places a stranglehold on councils' control of their own finances which is more severe than council tax capping.

3. poorer areas with a relatively lower council tax base face a much tighter limit on their local council tax decisions than others, so their financial freedoms are unfairly more restricted.

 
Urgent public statement is essential
 

It is imperative that councillors discharge their legal obligation to set a budget and council tax with a full understanding of the new system, and therefore an urgent public statement to explain it is essential.

 

I look forward to your earliest response.

 

 

John Healey MP

 
The table below shows how a sample of Councils will be affected by a 1% increase in Council Tax Base and by a 1% decrease in Levy,followed by the combined effect and the correlation with the ratio of Levy to Council Tax.

 

Percentage increase in CT (including levy and precepts) allowed without referendum
   

 Combined
   

 
   

 
   

 
   

 

 
   

3.5%
   

No
   

1%
   

1%
   

Levy and
   

Percentage
   

Ratio of
   

 
   

 

Council
   

Increase
   

Increase
   

Reduction
   

Increase
   

 CT Base
   

below
   

CT base
   

CT Base
   

Levies

 
   

in Levy
   

in Levy
   

in Levy
   

in CT Base
   

effect
   

3.50%
   

to Levy
   

 
   

£'000

Brentwood
   

3.50%
   

3.50%
   

3.50%
   

3.50%
   

3.50%
   

0.00%
   

no levy
   

32,366
   

          - 

Rutland UA
   

3.50%
   

3.49%
   

3.49%
   

3.49%
   

3.49%
   

0.01%
   

    255.54
   

      14,566
   

       57.0

West Berkshire UA
   

3.50%
   

3.49%
   

3.49%
   

3.49%
   

3.48%
   

0.02%
   

    251.10
   

      64,030
   

     255.0

York UA
   

3.50%
   

3.48%
   

3.48%
   

3.48%
   

3.47%
   

0.03%
   

    194.32
   

      67,041
   

     345.0

Bromley
   

3.50%
   

3.47%
   

3.46%
   

3.47%
   

3.45%
   

0.05%
   

116.75
   

133,330
   

1,142.0

Halton UA
   

3.50%
   

3.48%
   

3.48%
   

3.48%
   

3.47%
   

0.03%
   

    169.78
   

      38,200
   

     225.0

Milton Keynes UA
   

3.50%
   

3.47%
   

3.46%
   

3.46%
   

3.45%
   

0.05%
   

    100.21
   

82,871
   

827.0

Central Bedfordshire UA
   

3.50%
   

3.47%
   

3.47%
   

3.47%
   

3.46%
   

0.04%
   

     99.33
   

      96,649
   

     973.0

Cornwall UA
   

3.50%
   

3.46%
   

3.45%
   

3.45%
   

3.44%
   

0.06%
   

     70.99
   

    193,656
   

   2,728.0

Kensington & Chelsea
   

3.50%
   

3.33%
   

3.29%
   

3.29%
   

3.24%
   

0.26%
   

     26.86
   

      99,526
   

   3,706.0

Hackney
   

3.50%
   

3.23%
   

3.16%
   

3.16%
   

3.08%
   

0.42%
   

     13.15
   

      76,093
   

   5,785.0

Leeds
   

3.50%
   

3.04%
   

2.91%
   

2.91%
   

2.78%
   

0.72%
   

       6.77
   

    238,247
   

 35,201.0

Wakefield
   

3.50%
   

3.02%
   

2.88%
   

2.89%
   

2.75%
   

0.75%
   

       6.64
   

    101,806
   

 15,342.0

Bradford
   

3.50%
   

3.00%
   

2.86%
   

2.86%
   

2.72%
   

0.78%
   

       6.42
   

    148,930
   

 23,213.0

Birmingham
   

3.50%
   

2.87%
   

2.68%
   

2.69%
   

2.51%
   

0.99%
   

       4.96
   

    298,292
   

 60,199.0

South Tyneside
   

3.50%
   

2.87%
   

2.69%
   

2.70%
   

2.52%
   

0.98%
   

       4.32
   

      44,912
   

 10,398.0

Barnsley
   

3.50%
   

2.76%
   

2.55%
   

2.55%
   

2.34%
   

1.16%
   

       3.95
   

      69,442
   

 17,572.0

Doncaster
   

3.50%
   

2.68%
   

2.45%
   

2.45%
   

2.22%
   

1.28%
   

       3.89
   

      85,424
   

 21,976.0

Sheffield
   

3.50%
   

2.76%
   

2.55%
   

2.55%
   

2.34%
   

1.16%
   

       3.68
   

    153,391
   

 41,730.0

Rotherham
   

3.50%
   

2.69%
   

2.45%
   

2.45%
   

2.22%
   

1.28%
   

3.49
   

75,312
   

 21,562.0

Knowsley
   

3.50%
   

2.54%
   

2.27%
   

2.27%
   

2.00%
   

1.50%
   

       2.94
   

      42,134
   

 14,344.0

St Helens
   

3.50%
   

2.10%
   

1.70%
   

1.70%
   

1.30%
   

2.20%
   

       2.17
   

      56,110
   

 25,840.0

Liverpool
   

3.50%
   

2.09%
   

1.68%
   

1.69%
   

1.29%
   

2.21%
   

       1.89
   

    124,396
   

65,673.0

 
   

 
   

 
   

 
   

 
   

 
   

 
   

 
   

 
   

 

 
   

 
   

 
   

 
   

 
   

 
   

 
   

 
   

 
   

 

Levy amounts are extracted from RA 2011-12 data for England and Wales as published by the DCLG. Levies Include Coroner Levy, ITA Levy, WDA Levy, other levies and environment and flood defence levy. Other levies may exist for some local authorities.