What to do about local government finance

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Shadow Local Government Secretary Eric Pickles made the headlines last weekend with his pledge to cut council tax for 400,000 families. Apparently that's how many households are paying more tax than they should after being put in the wrong council tax band. The Tories say £400m in rebates could be given back to taxpayers.

Pickles also indicated that a Conservative government would reform the system of central government grants to local authorities, depoliticizing it and using an Australian-style formula to distribute the cash. In basic terms, the Australian system works as follows:

The revenue of the national goods and services tax (GST) is divided up between the states and territories on a per capita basis, adjusted by formula for different expenditure needs (based on socio-demographic and geographical factors), special purpose payments (based on need), and different revenue raising capacities (some states can raise a lot more revenue themselves).

Well, I suppose that's good in as far as it goes – the current system is riddled with party political bias – but Pickles' suggestions don't add up to the radical overhaul local government finance needs. The problem with any system that places so much emphasis on central government grants is that it undermines both the independence of local authorities and their accountability to residents. Councils become agents of the centre, eroding the rationale (more scope for competition and innovation in policy, and more direct accountability) for localism.

Of course, the difficulty of reforming local government finance is well known. As Mrs Thatcher found to her cost, such reforms always create winners and losers. The winners will be ungrateful, the losers will be angry, and central government will bear the brunt.

Perhaps the solution lies in taking a localist approach to the reform itself. Rather than driving through a particular reform from the centre, empower local authorities to come up with their own solutions. Give them a range of potential taxes to choose from, and let them strike the balance. If people didn’t like what their council came up with, they could always vote them out or move.