Thursday, 28 March 2013

Local Sovereignty V - Finance

Someone has to pay for all this. Could there be alternative
ways to collect local taxes, or alternative local taxes themselves?
(Pic : The Telegraph)

Next, it's probably the dullest (ho! ho!), but most important issue – financing local government and issues around fiscal auditing and borrowing.

This is, admittedly, the trickiest part. I can't make any projections for the amounts of money involved (in most cases), I'm just coming up with possible starting points and estimates. It's for someone else with more experience to determine that.

Funding and phasing any reforms

Would reforms as extensive as ones I've outlined -
especially the creation of provinces/provincial
assemblies - require a referendum?
(Pic : BBC Wales)
When local government reforms are approached in the future, what we'll probably end up with are mergers of existing local authorities into 8-12 unitary authorities. So we're probably going to get reorganisation on the cheap without any real reforms to structures, elections and practices.

The cost of establishing everything I've outlined would likely run into tens of millions of pounds – especially the provinces. However, it might not be as bad as I'm making out, it could even lead to some cost savings on a department by department basis.

Everything – down to desk level – would need to be carefully planned and set in place several years before reforms came into effect. That's why I'm suggested setting things like constitutions nationally (Part VI), so it can all come into force at the same time, and all the new authorities would have a rough idea what was required beforehand.

Firstly, any local government reform on this scale would require extensive primary legislation – perhaps even requiring a referendum, as you would be massively altering the constitution. So, all these ideas are largely dependent upon independence or devolution of the correct powers.

In terms of getting things sorted on the ground, in order of precedence:

Making good use of existing buildings and estates should
help reduce the costs of splitting municipalities and creating
provincial governments & assemblies.
(Pic : BBC Wales)
Setting out a new management framework – This would include deciding how many management roles would be required in every department (more on this in Part VI) and where mayors and provincial governments would fit into this.

Transferring assets between cantrefi, municipalities & provinces – Deciding where the legislatures would be based, where provincial government departments would be based and what assets would fall under whose "jurisdiction". For example, if the existing Caerphilly Council split into Caerphilly and Islwyn – Caerphilly municipal council could be based at Ystrad Mynach, while Islwyn at the council offices in Pontllanfraith. There's no real need to go about building new HQs and offices, just making good use of existing property.

Financial and legal arrangements – Tax collection and administration, and formal transfers of things like property, indemnities and debts.

Non-executive staff – Transferring "front line" staff between authorities depending on who's in control of what. Social services staff would transfer to provinces, planning staff to municipalities etc. Where they would be based and who they would report to would be decided beforehand, as stated above. It's likely though that they would continue to be based wherever they are currently. For example, there would still be social services teams based in Bridgend I'd imagine, even if it were controlled by a provincial government based elsewhere. I presume it worked like that with the old county councils.

Democratic services – Preparing services for elected members, including sorting out office equipment, debating chambers, broadcasting equipment etc.

Abolishing associated public bodies – i.e Local Health Boards and transferring their powers to the relevant local authority (in the case of LHBs, Provincial Governments), to come into force following local elections.

First elections – Establishing cantrefi and appointing clerks; municipal, mayoral and provincial elections.

Rebranding, communications and online presence – Self-explanatory.

Maybe there's a few things in there I've missed out too, including sorting things out like Welsh language services. I'll come back to that next time.

The cantrefi would be simple to set up I'd imagine – perhaps via legislation – with costs for running existing community councils passed to them. It might prove cheaper than community councils if you only have to cover venue hire, certain equipment and paying clerks etc. The biggest upfront cost would be the process of getting people to register with the clerk to sort out voting cards.

Taxes & Precepts

Local Government should be responsible for raising some of its income. Now I'm going to go through some of the options that could be used to continue, improve or reform aspects of this.

Property Taxes

Council Tax – Kept how it is, with 9 bands (A-I) based on the value of property. You could have a single council tax rate, with the income split between provinces and municipalities.You would expect the provinces to take a larger chunk due to the increased responsibilities. You would probably expect council tax rates to be set province-wide too.

Here's an example of the sorts of figures you would be dealing with, depending on the split between provinces and municipalities. So if there were a 60:40 split in favour of the province in Glamorgan, based on 2011-12 tax take, the province would get £192.3million and the seven municipalities a combined £130.2million.

Projected Council Tax incomes based on various ratios between
municipalities and provinces.
(Click to enlarge)

Hybrid Council Tax rates for municipalities and provinces
– Provinces would set a rate for Band D, municipalities would set a Band D rate too. They would then combine to a single council tax bill. This would enable much greater flexibility, but without proper co-ordination, you could end up with some council tax bills going through the roof.

Stamp Duty Land Tax - This could be controlled and set at a local level, taking local property prices into consideration rather than catch-all national ones. I loath stamp duty though, and think it should be scrapped, ideally.

Land Value Tax (LVT) – A tax on the value of the land itself, not anything built on it. Health Minister Mark Drakeford (Lab, Cardiff West) is probably the most vocal proponent for it in Wales. He quotes a study from Scotland that suggests a LVT of 3.16p per £1 of land would generate enough money to replace both council tax and business rates.

Would a Land Value Tax enourage landowners to develop vacant
and dereleict sites, as well as prevent "land banking"?
(Pic : BBC Wales)

This would be eminently fairer, but I doubt LVT would raise a significant amount of revenues by itself in Wales though. However, it might encourage development of fallow land, effectively eliminate "land banking" and allow the public at large to take advantage of rises in land values as the result of infrastructure/"desirable" development.

Hybrid of LVT & a Property Tax – Would probably raise a similar level of income as council tax and business rates but ease some burdens. Some cities in Pennsylvania use this approach, with a higher rate on land, and a lower rate for whatever's built on it.

Business & Income Taxes

Non Domestic Rates – No change to the current system, with money raised and retained (by the provinces or the Welsh Government) then redistributed back, perhaps with a similar split between provinces and municipalities as I suggested for council tax.

Local Sales Tax
– Set VAT nationally at 15%, then allow provinces to raise and retain an additional rate on top of that, perhaps up to 5%. It might be fairer as it would be based on consumption and ability to pay rather than property values. This would require independence as VAT rates have to be the same within an EU member state.

Local Income Tax
- Long-term phasing out of council tax. The problem with this is that, as discovered in Scotland, it might not raise as much as council tax. Income taxes overall would likely have to be much higher to fill the shortfalls.


Policing and fire services precepts could continue to be set by the provinces. Specific/hypothecated precepts could be raised to fund specific services. For example, municipalities could raise a "leisure precept", provinces a "social services precept". This might give the public a better idea of how money is spent at a local level, but it would limit flexibility.

As I said in Part II, cantrefi could continue to raise funds through a dedicated precept as existing community councils do. The cantrefi treasurer would likely decide what level of precept was needed, as well as how that could be spent, and that would go to the meetings for debate and votes.

If the community decided they, for example, needed to raise £25,000 towards an improved road crossing, the treasurer could propose to raise the equivalent amount on the precept – net of any sort of grants or money carried over. It would be down to attendees to decide whether to approve that or not. The process of drawing up budgets at cantrefi level would likely be a year-round process as a result, which might keep people interested.

Fines and Charges

Could local authorities have much greater flexibility in
setting things like fines, as well as charges for services?
(Pic :
Depending on whose jurisdiction it falls under, I'm in favour of giving local authorities much greater flexibility in setting fines and charges. Municipalities should have the complete freedom to set things like parking fines, car park charges, dog fouling and fly-tipping fines. Provinces could set fines for things like smoking on hospital grounds or hospital car park charges (or even keep them free).

They could set the fines artificially low to generate income as much as discourage behaviour (but that would require more civil enforcement), or they could set them higher to discourage certain behaviours outright. I don't think this should extend to setting prison sentences, but the fines could be unlimited or have a high cap.

As these would count as byelaws or secondary legislation it would be down to the respective legislature to approve/amend and proposals, or even throw them out completely.

Of course, the Senedd could still pass primary legislation to cap charges for things like social care, or still set prescription fees/keep them free, even if health and social care were provincial responsibilities. It would be down to the Senedd to fund those things though, and make up any differences.

Borrowing Powers

Would something like Tax Increment Financing (TIF) enable
borrowing to pay for big developments, whist ensuring that
they remain commercially "deliverable"?
(Pic :
Local authorities already have borrowing powers, something the Welsh Government may not have for several years yet. Maybe now you'll see how small time and ridiculous the Silk Part I recommendations actually were.

I don't think there's any need for major alterations here. "Prudential (unsupported) borrowing" could continue as it is, but expanded to include both municipalities and provinces. "Supported borrowing" – usually led at national level – could also continue, but I would like to see the rules tightened so it can only be spent on significant capital projects.

Maybe there's an argument for giving local authorities a bit more freedom in borrowing – for example, tax increment finance (TIF), where the cost of borrowing is based on future tax revenues that could go up as the result of a capital investment.

For example, a municipality could borrow money to build a new multi-story car park next to a failing shopping centre, and pay off the borrowing through gains in business taxes brought about by extra trade.

Borrowing powers for cantrefi would likely be via "social interest/investment loans" – for example, to help maintain/improve a local business, social enterprise or to help cover the cost of a small capital outlay. It would be sensible to have a stringent cap on the amount of debt cantrefi can carry – probably a low six figure sum, based on the tax base and the population. Any businesses/assets the cantrefi owns would be at risk should they fail to keep up with repayments.

Local government should probably also have more flexibility in moving funds between revenue and capital expenditure.

A Welsh "Barnett Formula"

Only part of local government finance would be raised via taxation – even with the measures outlined above. Budgets for things like health services would need to be transferred from the Senedd as part of a settlement or block grant, which is effectively what happens now  with Local Health Boards.

It would be fair to base the block grants given to provinces on relative need – similar to the formula the Welsh Government already use to determine the annual settlements.

I think it's reasonable that provinces and municipalities also retain a set amount of tax income they raise, only putting up a certain amount for redistribution. That could be between 25-50% for something like business rates, which was one of the recommendations in the recent review.

It's also worth pointing out that the provinces would have multi-billion pound budgets, which might provide flexibility in itself to a certain extent. Glamorgan provinces' budget, for example, one you add finance/block grants for things like policing to health, social services and education could easily be £3-4billion+


Pay ratios linking the lowest paid to the highest paid have
been mooted for the public sector before - but at 14-20:1.
Is that way too high? Should elected members be included?
(Pic : South Wales Argus)
Pay caps

Pay for executives (including mayors and provincial government ministers) should be linked, by ratio, to the lowest paid. Hopefully this would discouraging the practice of executives trying to push through mega-bonuses and pay rises for themselves. It might also encourage the widespread introduction of a "living wage" (~£7 per hour).

In terms of what that ratio should be, you would probably need to base it on responsibilities. Those at national level would deserve to be paid more than those as local level due to the relative demands of the job. So I would suggest an 8:1 ratio for municipalities, 10:1 for provinces and 12:1 for national institutions like the Senedd.

So, for example, the lowest paid employee at a municipality could be earning the equivalent of 37 hours a week at (2012) minimum wage (£11,910). The mayor – as highest paid employee in municipal government – would earn at most £95,280 per annum. Officers working below them would probably be one or two steps down (£71,460-£83,370 per annum).

A provincial governor would probably earn around £119,000 per year, while the Prime Minister of an independent Wales would earn at most £142,920 per annum. (Carwyn Jones' current salary is ~£133,000 per year).

The total cost of executive pay, currently, amongst the 22 chief executives is at least £3.26million, based on an average £148,000 salary. 29 directly-elected mayors earning full whack on what I propose would cost £2.74million in comparison.

However, you also have to factor in that many executive and managerial posts could go through rationalisation of management arrangements. The cost of laying people off in higher-earning positions would likely wipe out any savings here.

Members' pay

Things like this should continue to be decided via a Remuneration Panel. However, with a new system there would be an opportunity to start with a clean slate.

Mayors would be a 24-hour, full-time role. They should be remunerated appropriately and should be the highest paid staff member in the municipalities (as outlined above). That puts their salary at at least £95,000 per year.

Municipal councillors could still be paid a salary. There might even be a case – if there were significantly fewer councillors – of the salary being higher than now, perhaps around the £16,000 mark citing Scotland. This might make being a councillor a more attractive option for younger politicians seeking to gain experience before moving "up the ladder". You could probably include cantrefi clerks in this too. However, there would be no more "senior salaries" as there would no longer be any "senior councillors" – only the mayor.

If there were a minimum of 774 municipal councillors, based on what I'm suggesting, the total cost of their salaries would be at least £12.4million per annum. The current cost of local councillors salaries (£13,175 x 1,264) is around £16.7million.

Provincial Government Commissioners, like mayors, would be a full time role. The Governor should be the highest paid member of provincial staff (earning around £119,000 as outlined above). Commissioners could be a step down – the same as a senior civil servant – and could earn around £83,300 per annum. Based on an average 8 cabinet members in four provinces, the total cost of "executive member" pay would be around £2.8million per year.

Provincial Assembly members, like municipal councillors, could be paid a salary, but it could be higher than a municipal councillor due to the extra responsibilities. They should probably earn at least twice the salary of the lowest paid employee, so around £23,820 per annum. Total cost - £4.2million per annum. So the total cost of the provincial elected members, based on this, would be at least £7million per annum.

It's worth pointing out that there would no longer be things like Local Health Board chairs, executives and independent members – as they would be supplanted by provincial AMs and the Provincial Health Commissioners. Executive/departmental directors would still exist, but there would be justifiably fewer of them (only 4 provinces v 7 regional LHBs).


Nope. Standard class only on the public purse?
(Pic :
Expenses for municipal councillors should be restricted to mileage and sustenance only, with varying rates depending on the size of the municipality (i.e. it's justified to pay councillors in Cardiff less mileage than Powys). However, the municipality could provide services (i.e. office equipment) as a privilege to elected members as long as it's provided to every councillor.

A similar system could operate for provincial AMs too. Provincial AMs shouldn't really need to run a constituency office, so they wouldn't be able to claim for things like support staff. Again, expenses should be restricted to mileage and sustenance.

Elected members with additional responsibilities (i.e chairing committees, presiding officer) should get a top-up to their salaries reflect that, but nothing too extravagant.

In terms of officers and senior elected officials, they should have a wider range of things to claim expenses for - including things like hospitality - but should be expected to be "prudent". That means an expectation to travel by standard class and stay in budget hotels, for example.

Like the Assembly, claimed expenses should be published as standard, with appropriate details provided – perhaps including brief details for the reason for claiming. Hopefully this would discourage...."extravagance."


I think where there are exceptional performances there should be some way to award bonuses. This refers to senior civil servants, not elected members. Those bonuses should be capped – perhaps at 5% of annual salary – and only awarded on the basis that "good things" verifiably happened as a result of their management.

That could be things like a very successful turnaround in poor departmental finances, significantly exceeding expectations in service delivery within their respective department etc. They should never be awarded because it's "expected" or to get around pay freezes. All bonuses should probably be run by the Remuneration Panel to see if they're merited.

For example, no senior civil servant in charge of the Welsh economy over the last 20-30 years should receive a bonus of any kind. However, those in charge of the environment – in particular things like recycling – probably would deserve one.

Local Government Pensions

Some local government jobs are physically demanding
and warrant a lower retirement age. But should early retirement
for office-based workers be scrapped?
(Pic : BBC Wales)
Local Government pensions in England, Wales and Scotland are currently managed by the Local Government Pension Scheme (LGPS). This included councillors as well as local government employees. It's currently said to have around 4.6million members.

It's "opt-in", and recent reforms to it announced by the UK Government are reported to be causing increasing "opt outs" by local government employees as employee and employer contributions are set to increase, making the scheme less attractive.

Currently you can retire at 60, or even 55 in some cases under the scheme. The obvious change here would be to raise it to the state retirement age (68 by 2046). However, you need to remember that some local government work – highways, school canteens, waste management – will be physically demanding and warrant an earlier retirement age (like fire fighters, military and police). So maybe you could allow early retirement – especially to encourage older, longer-serving councillors to move on - or taper payments so they increase with increasing longevity.

So there should be some leeway there, but admittedly I don't know enough to make a proper judgement. It should probably be left the way it is.

One thing I would say though, is that Welsh public sector pension funds in general should – ideally – be invested in Welsh communities. I don't mean white elephants, but things like stakes in growth businesses, energy schemes or investments in things like co-operative housing. Everyone wins – on paper.

The Collective Entrepreneur said that the 8 largest public sector pension funds had up to £6billion under its management. It suggested creating an "All Wales Pension Fund" (presumably public sector). That would have significant clout and could be used like other pension funds around the world to invest in big projects, along the lines of the Ontario Teachers' Pension Plan, for example.

Auditing Local Government Finance

I've said before, that one area of local government scrutiny that's generally at a high standard are budgets. I covered Bridgend's budget last month, and the information provided to councillors and committees to scrutinise was quite detailed. Sadly, that's not the same for the National Assembly (by and large).

One complaint raised by AMs recently is that, on things like the health budget – the largest area of public spending in devolved Wales - they only have one line in the budget documents to scrutinise ("Delivery of Core Services"). All of the micromanagement is done by the Local Health Boards, so you end up with 7-10 different budgets dealt with behind closed doors. AMs are left sucking their thumbs, while the Health Minister can say, "It's a matter for the Local Health Board."

If health services were provided by the provincial governments (Part IV), you would expect provincial AMs to go through health budgets line by line, taking over the role of the existing LHBs. It would all be done on the public record, with a democratic mandate behind it.

So, I don't think there's much of a problem at "municipal" level, the issue is in those unofficial tiers of government between the Senedd and unitary authorities.

Public bodies – including local authorities - already have to submit accounts to the Wales Audit Office (WAO) annually, and that's been strengthened/reformed by the Public Audit Act which is currently awaiting Royal Assent.

This could continue and include cantrefi too. The reduction in the number of public bodies by folding them into the provincial tier of government might make the whole process easier, but I don't think it would make that much of a difference to the structure or running of the WAO at all.

Almost there! The sixth and - you'll be pleased to hear – final part, will look at the constitutional framework, as well as "national standards" (i.e transparency, oversight, role of the Senedd) and what each level of local government would try to represent and engender.


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