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Written Statement - Reforming the Finance System for Local Government

Mark Drakeford, Cabinet Secretary for Finance and Local Government

Today, in our White Paper, Reforming Local Government: Resilient and Renewed, we set out how we intend to build resilient and renewed local government in Wales.  A greater focus on regional delivery means we must take a fresh look at the present finance arrangements. In Taking Wales Forward, we committed to supporting local government to become more sustainable and self sufficient, giving it the space to lead, taking greater responsibility and accepting greater ownership.  The Welsh Government has delivered a fair financial settlement for 2017-18.  But, the outlook is for greater difficulty with anticipated future funding cuts for Wales. Local government has also called for greater autonomy and flexibility in its finance arrangements.  At a time when there will be less money each year for public services, change is a necessity, not a choice.  

The local government finance system is a multi-billion pound framework underpinning all forms of local government in Wales: councils, police and fire services and other bodies. It is an interconnected system of central government grants, locally raised revenues including local taxes, capital funding, borrowing and investment.  

My statement on the fiscal framework earlier this month set out the changes to our wider system of funding public services in Wales.  It protects us from any undue risks associated with the devolution of tax powers paving the way for the devolution of Welsh rates of income tax in 2019.  This will bring greater financial responsibility and additional opportunities to make choices about fiscal levers.

In this context, I want to set out a framework for the Welsh Government’s future consideration of the local government finance system. I intend to consider a range of short, medium and long term changes to meet our Taking Wales Forward commitments to enable local government to become more sustainable and self-sufficient, to make council tax fairer and to provide rates relief.  A phased approach will allow us to work with partners and ensure that we develop a sustainable and robust approach to meet future needs.

There have been a number of wide-ranging reviews of how local government should be funded.  Most recently, the Scottish Commission on Local Tax Reform and commissions on local government finance in Wales and England have explored current and possible approaches to local government finance.  I do not see a need to repeat this conceptual work.  Instead, we will use this evidence to explore, in an applied and practical manner, whether or how such changes could make our systems fairer and whether there would be any benefits for citizens, Welsh public services and the wider economy.  
My priorities for any reforms to the Local Government finance system are greater resilience for local authorities, fairness for citizens and businesses, and sustainable funding for vital local services.  It is important that people can understand and engage with how and where decisions are made about the funding and delivery of their local services.  Our reforms should therefore seek to make the finance system more transparent and easier to understand.

The distribution of revenue support grant to local councils equalises funding across Wales while maintaining the ability of locally elected members to make decisions on services, on local taxation and on other revenues.  The formula is developed and agreed with local government.  Over time, however, the formula has become complex and can be difficult to understand.   I intend therefore to explore some simplification of this formula with local government through our standing consultative arrangements.  I am mindful that changes to the distribution formula may be needed as a result of other developments.

Much of the debate around local government funding tends to focus on the local taxes – council tax and non-domestic rates.  While these form only part of the system for funding local services, it is an important part and it is the part which has the most direct impact on the finances of households and ratepayers.  Taxation is the entry fee to a civilised society.  We pay taxes because we all receive the collective benefits - services which educate our children, care for our elderly, dispose of our waste, light our streets and protect our communities.  To maintain these services, it is right that those who are able to should contribute their fair share - the greatest burden falling on the broadest shoulders, while ensuring those less able to contribute are treated fairly and with dignity.

I have previously set out some key principles for taxation in Wales: taxation should raise revenue to support public services as fairly as possible.  It should help deliver wider fiscal and policy objectives, including jobs and economic growth.  It should be simple, clear and stable, so legislative and administrative clarity and efficiency is important.  Finally, given the core role of taxation in funding public services, it will be critical to engage with taxpayers on the general and specific elements of Welsh taxes.  I will set out my approach to taxation in Wales in further detail later in the spring.  

Our existing responsibilities for local taxes will be exercised within this approach.  We will need to consider how we develop local taxes alongside the newly devolved taxes and in the context of the UK taxes which people in Wales will continue to pay.  This will involve considering broad questions such as what proportion of our tax revenue is based on property, on income, on transactions or on other factors.  We will consider whether different approaches to property valuation are viable, whether they might be fairer and whether there would be any benefits for public services and the economy in Wales.  I have already indicated my willingness to look at options such as land value tax as an alternative way of raising tax revenue in the longer term.  As such approaches would require substantial primary legislation and could have significant implications for taxpayers and services, they are inevitably matters which will be for consideration and development over more than one Assembly term.  I also want to be confident that, in making shorter term changes, we do not limit or rule out our options for longer term developments where these would better meet the needs and objectives for Wales.  

In the interim, supporting businesses through the extension of our Small Business Rates Relief Scheme in 2017-18 is an immediate priority for this Government.  We have undertaken to review the scheme in 2017-18 and to put a new permanent scheme in place from April 2018.  We are also implementing temporary schemes to provide non domestic rates relief for our high streets and transitional relief to help mitigate the impact of the 2017 revaluation exercise conducted by the Valuation Office Agency.  Our short-term plans also include improvements to the administration of local taxes, for example better data-sharing between organisations, including the new Welsh Revenue Authority and improvements to the non-domestic rates appeals process.  If there is a suitable legislative vehicle, I also intend to take the opportunity to tackle avoidance of non-domestic rates.

While there have been some calls to move to the full retention of non-domestic rates by individual local authorities, the economic and policy context in Wales mean that rates retention would benefit very few local authorities and would result in significant cuts to the resources available to the remaining majority.  At present, this is an area where local authorities are ‘better together’, continuing our strong public service traditions of cooperation and equalisation for the benefit of all of Wales.  Where there is evidence that additional growth could be delivered as a result of local government action, I will look to discuss a share-gain approach that sees local government receiving a share of the financial benefit.  

Our Council Tax Reduction Scheme is a key tool for tackling poverty in Wales.  It ensures that financial support for council tax bills is targeted at those who need it most, making the basis of the council tax system much less regressive than it would otherwise be.  We will build in improvements to the current scheme to ensure it continues to achieve our objectives within the constraints of the UK welfare benefits regime.  As detailed legislation underpins the operation of council tax, relatively little change could be brought about without primary legislation; the opportunities for short term change are limited.  Within those limitations however, I want to explore how we could make our council tax system fairer.  I intend to set out the options and make initial changes within the course of this Assembly term.

In taking this work forward, the Welsh Government will take advice from experts in a range of fields and work with local government through our established consultative networks.  I want to engage openly and comprehensively with citizens on proposals as they are developed and, in particular, on any proposals which may have financial implications for households and ratepayers.   I intend to provide an update in the autumn and I look forward to engaging constructively with the Assembly as this work progresses.  

The White Paper Consultation can be accessed via the Welsh Government website

https://consultations.gov.wales/consultations/reforming-local-government-resilient-and-renewed