Wednesday briefing: Is Rachel Reeves about to overhaul the dreaded council tax?

The Guardian

15 hours ago

Good morning. Britain's fiscal outlook is bleak. The chancellor, Rachel Reeves, faces the daunting task of closing a £40bn black hole in the public finances.
There is intense speculation over how she intends to, as runs that oft-used phrase, balance the books. This week, my colleagues have reported that the chancellor is considering a new 'proportional' property tax. It would mark a radical overhaul of stamp duty and council tax.
While there has been a good deal of focus on stamp duty, changes to council tax in England have the potential to be the most transformative – and explosive.
Almost all political parties agree that the council tax system – which replaced the deeply unpopular poll tax in 1991 and has remained unchanged since – is unfair and must be reformed. But just how to do so is notoriously complex and politically tricky – especially when so many local councils are strapped for cash.
To better understand how England's council tax system exacerbates inequalities and why it has proven so difficult to change, I spoke with Richard Partington, the Guardian's senior economics correspondent. That's after the headlines.
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When you move into a new home, one of the first letters that comes through your letterbox is the amount of council tax you owe to the local authority. This local form of taxation is paid by every household living in the area, whether renting or owning. The funds are used to pay for services from rubbish collection to meals on wheels. It is a tax that people can see and feel in their daily lives.
Just how council tax came to be goes some way to explain why there has been such a reluctance to try to change it. Before council tax, a system called rates used to fund local councils. In the 1980s, Margret Thatcher's Conservative government tried to introduce a flat tax, payable no matter the value of the property you lived in, or the income you were on. This became widely known as the poll tax.
'It was controversial. The poll tax was first introduced in Scotland as a sort of pilot scheme and there was a big uproar. When it was coming to England in the late 1980s, there were huge riots, which coincided with the massive unpopularity of the tail end of the Thatcher administration,' Richard Partington tells me. 'It was one of the factors that brought down her premiership. And to replace it, they went back to this compromised, fudged system between the old rates system and the poll tax, and it was called council tax.'
The system was devised in 1991 and came into effect in 1993. The problem, however, is that the amount someone pays in council tax is still based on what property prices were in 1991. Which would work, if only we hadn't built any homes since then and prices had never changed.
'There's something like 4.5m new homes or more that have been built since 1991, and then countless more conversions of factory buildings, of barns, and other non-residential properties, like shops, to homes. And you've got this army of experts trying to guess how much it would have been worth in 1991,' Richard says.
It's not just those on the left who think the system, as it stands, is absurd. Richard points to criticism by David Willetts, the chair of the Resolution Foundation, who was advising on tax policy in Margaret Thatcher's policy unit in the 1980s. 'He actually thinks that council tax has become as regressive as the poll tax.'
Fundamentally unfair system
It is worth spelling out just how ridiculous the council tax system is. Several taxation bands dictate how much a household will have to pay to a local authority. But a resident in Blackpool living in a band B property, where the average house price is £130,000, will pay £1,860; while in Kensington and Chelsea, where the average house is worth £2.2m, the same band B bill would be £1,220.
'It hasn't taken account of the huge booming property valuations that have taken place over the past 30-odd years. And that means that you've got people living in hugely expensive homes that are paying relatively low rates of council tax. And that is sort of fundamentally unfair,' Richard says.
Of course, the question of how to fix a situation where the numbers are so out of touch with reality brings its own problems – but we'll get to that later.
A worsening funding crisis
Council tax is not the only way local authorities get money. They also receive grants from central government. But due to austerity measures under Conservative governments, spending power funded by these grants fell in real terms by more than 50% between 2010 and 2021.
This is coupled with local councils' ballooning budgets trying to cater to the growing needs of the population. Councils are in charge of a lot more than just littering and local libraries; for example, they front the costs for social care for vulnerable adults and children.
'A large part of what councils do, most people won't see on a day-to-day basis. But adult and children's social care service spending has increased so much because we've got an older and increasingly unwell population, and the cost of delivery has increased. To pay for that, there have been cuts to other areas of spending like road cleaning and libraries,' Richard says.
Several councils have declared bankruptcy as a result in recent years and they won't be alone in feeling the pinch. Almost half of councils in England risk falling into bankruptcy without action to address a £4.6bn deficit amassed under Conservative-era policies, according to the government's spending watchdog.
'Most people who wouldn't come into contact with adult social or children's services think that they're paying more to their local authority and not getting much for it. They don't understand why and that's a huge issue.'
Winners and losers
The problem with the council tax system is that the longer we wait, the harder it becomes to fix, Richard says. With the local council funding crisis coming to a head, the Labour government cannot choose to look away like its predecessors.
But the solutions floated come with their own headaches.
The deputy prime minister, Angela Rayner, is spearheading the 'fair funding review', to figure out a new way of distributing central government grant funding to councils. That is due to come in from April next year and is under consultation.
'Among the things they're looking at is rebalancing the amount of funding for councils in more deprived areas so that they receive more money in central government funding than wealthier areas. Largely that is going to help councils in the north of England and the Midlands, where they have historically been underfunded by central government grants. And the losers will be in London and the south and the home counties,' Richard says.
But a study by the Institute for Fiscal Studies shows that some of the biggest losers will be inner London boroughs where property valuations might be high but there are pockets of deep deprivation and child poverty.
'It highlights that while reforming the system that is so broken, there are going to be all kinds of issues that pop up in the process. You might think that you're addressing one problem, but another one will arise as a consequence,' Richard says.
More fundamental reforms
Reeves is reportedly considering overhauling stamp duty and council tax in a bid to raise desperately needed revenue. This was an idea put forward last year by Dr Tim Leunig, who was a government adviser in Rishi Sunak's Treasury, in a report for the centre-right thinktank Onwards.
'His idea was to replace council tax and stamp duty in one go with a proportional property tax that would take more accurate account of current property valuations on a national level, and a local version that would fund local services that would over time replace council tax,' Richard explains.
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The reporting suggests any changes to council tax will probably not take place until Labour wins a second term. Is this Labour kicking the can down the line? Richard doesn't think so.
'It's a slow process because there are all these issues to consider. One of the problems is that the scale of the house price changes since the 90s means that if you were to institute a council tax that was actually reflective of current property values, you'd probably crash the London property market and lots of other places where house prices have boomed since the 90s,' Richard says.
He adds that there are many people across the country who might live in what are now hugely valuable properties, but it doesn't mean they bought them for those prices. And, perhaps most importantly, it doesn't mean they have high incomes to pay for a regular council tax charge that reflects the modern-day value of the home.
'People hate council tax, and the idea that your council tax would significantly rise would be politically toxic for Labour,' Richard says. 'So they've been very careful with it.'
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