The alternatives to a council tax rate rise

13 December 2022

In recent weeks, there have been various reports of councils struggling to balance their books and potentially facing financial ruin, with increases to interest rates on the debts they have accrued compounding the problem for some.

Examples include the joint plea made by Kent and Hampshire’s councils ahead of the Autumn Statement for more funding support and the freedom to raise funds. The issue has also been brought into sharp focus by the recent reports of Thurrock council losing hundreds of millions of pounds in failed investments. Those same reports outline that Thurrock council is set to refinance loans to the tune of £850m to repay other local authorities, incurring significantly higher interest costs, and is seemingly staring down the barrel of ‘bankruptcy’.

The strict position is that a council cannot actually become bankrupt. Instead, there are legal obligations for a ‘section 114 notice' to be issued by a local authority’s chief financial officer if they believe their income won’t cover their expenses. The issue of such a notice means no new expenditure is permitted beyond funding statutory services.

It is little wonder then that some local authorities, such as Cornwall in a recent update of their financial plan, are already revising their budgets upwards for 2023/24 to the new limits announced by the chancellor in the Autumn Statement of 5%, inclusive of a 2% adult social care precept. Others, however, are looking at more creative options to raise revenues, with Manchester reportedly considering a ‘tourist tax’ of £1 per person staying overnight in the city. So, what other options are available to councils?

The cautionary tale of Thurrock council highlights the dangers of chasing returns from potentially risky investments, in their case a number of solar farm projects. The issue is not a uniquely British one though as some cities in the US like Miami have sought to partner with cryptoasset businesses to launch their own coins. Miamicoin, which promised potential rewards to investors, as well as a 30% cut paid to the city of Miami itself, did apparently generate over $5 million for the city. However, it has since dropped in value by over 95% from its all-time-high price, which it reached shortly after the coin was launched. It seems fair to say that this is not a model that British councils should be in a rush to replicate.

More internationally tried-and-tested options include tourist taxes as mooted by Manchester council, with research suggesting such a measure could generate £135m if rolled out throughout England. That is a relatively modest amount in the grand scheme of the funding requirements of local authorities and the benefits would be weighted towards certain authorities like Cumbria and Cornwall where there are higher levels of tourism. Such a measure could make sense for these areas as they will likely have higher local costs as a result of visitors to the area.

More dramatic options rely on action at a national level, with some calling for more devolution of tax setting powers or to scrap council tax altogether and replace it with something else. One option may be to replace council tax with a proportionate property tax. Proponents of such an option suggest that this is a fairer approach as if a set percentage for the tax was set nationally, less affluent families such as those residing in the North of England are likely to pay less tax due to lower property prices.

Ultimately, whilst council tax rises are likely to be unpopular, the funding needs of local authorities seem unlikely to be fully addressed by the measures announced in the Autumn Statement. A more substantial reform of either the funding provided or services that local authorities provide may be needed to address the issue or we could see more authorities on the brink of a financial crisis.