Why Osborne is wrong to reject property tax reform

The Chancellor has missed another opportunity to make our tax system fairer and more economically efficient.

Ahead of Wednesday’s Autumn Statement, the Chancellor is eager to show that the wealthy will contribute to the on-going process of deficit reduction. Although the Liberal Democrats have repeatedly called for a ‘mansion tax’, this will almost certainly be achieved by further restricting the tax-free amount that individuals can pay into private pension pots. Opposition to raising taxes on property-owners from within the Conservative Party has been too great, indicating that the coalition will fail to deliver serious reform of property and wealth taxes in this Parliament. 

This is a missed opportunity given the endemic weakness of the current system. Inheritance tax is deeply unpopular and raises little money, while the ‘wealthy and healthy’ can avoid it with judicious tax planning. Stamp duty is easy to collect but lacks any economic justification and unnecessarily distorts people’s decisions about moving house. Council tax raises the most revenue among the three, around £26bn a year, but is regressive and levies the same amount of tax on properties of hugely different value. This is the result of the unwillingness of successive governments to revalue domestic properties since the introduction of council tax in 1993.

Properly designed property (and land) taxes make economic and fiscal sense according to the OECD, particularly if levied annually on regularly updated property values. These taxes tend to have the smallest negative impact on incentives to work or invest, provide a relatively stable tax base and could improve the use of land and property. This suggests that reforms to council tax could seek to increase the amount of revenue raised over the long-term, as well as increasing fairness and efficiency in the tax system. This could help to pay for the extra public services we want as we get older and richer, or offset cuts in business or labour taxes that might help boost jobs and growth.

There is no shortage of ideas about how Britain’s property taxes could be reformed, with sensible solutions put forward by the authoritative Mirrlees Review, the Joseph Rowntree Foundation and Shelter. For example, a flat rate tax of 0.6 per cent on current property values would raise roughly the same revenue as council tax but with lower bills for people living in homes worth less than £250,000. In the long-term, stamp duty could be scrapped entirely and the revenue found elsewhere, but reformed in the medium-term to lessen its impact on house prices at particular price points. More radical would be a land value tax, popular with economists but operated in relatively few countries. As a first step, the economic and fiscal impacts of a tax on high-value but undeveloped land should be assessed. This could help free up underused land for house-building.

The biggest block to reforming property taxes is the fear that large numbers of middle class families will end up paying more tax. However, the UK’s devolved administrations have shown that these political constraints can be overcome. The Welsh Assembly Government re-valued properties in 2003 and added an extra council tax band, while in Northern Ireland, which runs a system of domestic rates rather than council tax, the administration successfully updated the valuation base in 2007. An initial revaluation would probably be controversial but this would lessen over time if properties were regularly re-valued, which many countries do every one or two years without much fuss. And let’s not forget the removal of mortgage interest tax relief, a massive subsidy to middle class homeowners, which was gradually phased out by 2000 with little public outcry. Incremental change coupled with some off-setting of losses among those paying more seems to have been important. We can’t expect new proposals on property and wealth taxes in the Autumn Statement, so learning the political lessons from these reforms will be crucial to making further progress in the next Parliament.

Kayte Lawton is senior research fellow at IPPR.

Chancellor George Osborne and Danny Alexander, the Chief Secretary to the Treasury leave 11 Downing Street on 4 December, 2012 in London. Photograph: Getty Images.

Kayte Lawton is senior research fellow at IPPR.

Photo: Getty Images
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The future of policing is still at risk even after George Osborne's U-Turn

The police have avoided the worst, but crime is changing and they cannot stand still. 

We will have to wait for the unofficial briefings and the ministerial memoirs to understand what role the tragic events in Paris had on the Chancellor’s decision to sustain the police budget in cash terms and increase it overall by the end of the parliament.  Higher projected tax revenues gave the Chancellor a surprising degree of fiscal flexibility, but the atrocities in Paris certainly pushed questions of policing and security to the top of the political agenda. For a police service expecting anything from a 20 to a 30 per cent cut in funding, fears reinforced by the apparent hard line the Chancellor took over the weekend, this reprieve is an almighty relief.  

So, what was announced?  The overall police budget will be protected in real terms (£900 million more in cash terms) up to 2019/20 with the following important caveats.  First, central government grant to forces will be reduced in cash terms by 2019/20, but forces will be able to bid into a new transformation fund designed to finance moves such as greater collaboration between forces.  In other words there is a cash frozen budget (given important assumptions about council tax) eaten away by inflation and therefore requiring further efficiencies and service redesign.

Second, the flat cash budget for forces assumes increases in the police element of the council tax. Here, there is an interesting new flexibility for Police and Crime Commissioners.  One interpretation is that instead of precept increases being capped at 2%, they will be capped at £12 million, although we need further detail to be certain.  This may mean that forces which currently raise relatively small cash amounts from their precept will be able to raise considerably more if Police and Crime Commissioners have the courage to put up taxes.  

With those caveats, however, this is clearly a much better deal for policing than most commentators (myself included) predicted.  There will be less pressure to reduce officer numbers. Neighbourhood policing, previously under real threat, is likely to remain an important component of the policing model in England and Wales.  This is good news.

However, the police service should not use this financial reprieve as an excuse to duck important reforms.  The reforms that the police have already planned should continue, with any savings reinvested in an improved and more effective service.

It would be a retrograde step for candidates in the 2016 PCC elections to start pledging (as I am certain many will) to ‘protect officer numbers’.  We still need to rebalance the police workforce.   We need more staff with the kind of digital skills required to tackle cybercrime.  We need more crime analysts to help deploy police resources more effectively.  Blanket commitments to maintain officer numbers will get in the way of important reforms.

The argument for inter-force collaboration and, indeed, force mergers does not go away. The new top sliced transformation fund is designed in part to facilitate collaboration, but the fact remains that a 43 force structure no longer makes sense in operational or financial terms.

The police still have to adapt to a changing world. Falling levels of traditional crime and the explosion in online crime, particularly fraud and hacking, means we need an entirely different kind of police service.  Many of the pressures the police experience from non-crime demand will not go away. Big cuts to local government funding and the wider criminal justice system mean we need to reorganise the public service frontline to deal with problems such as high reoffending rates, child safeguarding and rising levels of mental illness.

Before yesterday I thought policing faced an existential moment and I stand by that. While the service has now secured significant financial breathing space, it still needs to adapt to an increasingly complex world. 

Rick Muir is director of the Police Foundation