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Last Updated: Wednesday, 21 March 2007, 01:41 GMT
The taxing issues faced by Lyons
By John Andrew
Local government correspondent, BBC News

When Sir Michael Lyons embarked on his marathon review of local government he made it plain he did not want to produce a report which would end up gathering dust on some Whitehall shelf.

In other words, he was keen to come up with options that were politically do-able.

Council Tax notice
Sir Michael has been reviewing council tax since 2004

Even his relatively modest set of reforms, however, will need some political courage to adopt.

That's because changes to local taxation - however small - give politicians the jitters.

They remember what the poll tax did for Margaret Thatcher.

It has made them reluctant to consider changes which create significant numbers of losers, especially when many of those facing higher bills will be middle class and living in the sort of seats that can largely determine the outcome of general elections.

We saw evidence of that nervousness when, out of the blue, the government cancelled the revaluation of all homes in England, the early stages of which had already begun.

The question now is whether a Brown-led government will be any braver - not just about a revaluation - but in tackling the deep-rooted problems that afflict local government finance.

Gearing

Take the balance - or more accurately - the imbalance of funding between central and local government.

On average, council tax raises only a quarter of the money councils need - the rest comes from or via the government. This produces the dreaded "gearing effect".

Put simply, it means that once a council has got all its grant, any additional spending must be funded almost entirely by the council tax.

Sir Michael Lyons
Sir Michael's report is keenly awaited by local councils

So, a 1% rise in spending overall needs a 4% increase in council tax, a 2% rise an increase of 8% and so on. Even without capping this gearing effect provides a real disincentive to spend too much.

One way to reduce the imbalance of funding would be to return the business rate to local control - a long-running demand by local government.

But Sir Michael has backed off from that, suggesting instead the idea of a supplementary rate to fund specific projects.

This will be a huge disappointment for the Local Government Association which has lobbied hard over many years for full re-localisation of the business rates.

Capping

Where they will be happier is over his recommendation that government capping of budgets should end.

To all true "localists", the principle of capping - first introduced during the 1980s - is anathema, because it prevents true local accountability where councils are free to charge what they say they need and to answer for it at the ballot box.

I'd be very surprised though if the government, which has successfully used the threat of capping to keep council tax rises down, will risk removing the control.

As for worries about a new top band for council tax, property millionaires can relax for the moment since revaluation - which Sir Michael says must precede any reform - will not take place for the foreseeable future.


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