Hampshire Liberal Democrats proposed a one-year freeze in County Council Tax (27th May, 2009)

In the budget debate this spring, the Liberal Democrats proposed that we freeze Council Tax for a year. The Conservatives voted against the proposals, arguing that the Council could not afford it and that most of the Councils reserves were earmarked.

It was a disappointing debate because the Liberal Democrats had gone to a lot of trouble to set out clearly which of our proposals could be done on a one-off basis, and those that would create a revenue committment. The proposal to freeze Council Tax was strictly for one year but many Conservative speakers completly ignored that.

The Lib Dem Budget Proposals

As the figure shows, Hampshires ruling Conservatives have managed to reduce tax increases in election years. But where has the money come from? In the last three years, the Conservatives have increased council tax by 4.5%, 4.7% and 4.9%, all well above inflation. This year, they have reduced the increase to 1.9%, just in time for the elections.

The Lib Dems proposed a tax freeze, for one year only, but the Hampshire’s Conservatives voted us down.

I will show below that our proposals were completely affordable.

LIB DEMS TAX PLEDGE : -

Is there a four-year cycle in Hampshires council tax?

The Conservaties argued that it was dangerous to raid reserves which were “already committed”. The Figure shows that the Conservatives have been raiding reserves, shamelessly, every election year.

This is a particularly mean deception of the voters because they have raised taxes faster than inflation between elections and then posed as cautions guardians of the treasure chests each election year.

They are not treasure chests, but war chests and, over the last four years, the Conservatives have increased council tax by 4.5%, 4.7% and 4.9%, all well above inflation. This year, they have reduced the increase to 1.9%, just in time for the elections.

The figure shows how the war chest has been filled up and then used in a regular and shameless cycle. There was no mention of comitted reserves.

Election war chest

However, this year they should have done better. Since April 2006 the Tories have doubled HCCs reserves to 180m. This is extra tax collected from us with no immediate plans for its use! One of the earmarked reserves was set up in case there are large fluctuations in government grant. Lib Dems would use that money now on services, including: much needed highway repairs, more youth facilities, freezing charges for school meals, improving libraries, bus services etc. Lib Dems also say that the council’s reserves are greater than 10% of annual expenditure. That is more than we need and the council should freeze its Council Tax, instead of raising it by 1.9%. Unlike East Hants District Council, the County Council can afford it!

How much should we keep in reserves?

I argue, in one of my Focus leaflets, that the council has about 180 million in reserves, and that leaves enough to pay for a total freeze on council tax for just one year (about 9.6 million).

The Conservative leader of the County Council, Ken Thornber, takes the view that these reserves are already committed, but I show below that there are good grounds, in a recession, for adjusting our priorities.

In the next sections, I discuss the role of earmarked reserves and their management.

Earmarked reserves

Ken Thornber, the leader of the County Council, argues that HCC has 180 million in reserves but that most of this is earmarked (154 million). That is true, but earmarking reserves is a subjective decision. It is certainly not written in stone.

Earmarking reserves allows you to separate out very different kinds of risk. For example, you may need to have a reserve which would cover the cost of making redundancy payments. You would expect redundancies to be fairly rare and when they come in larger quantities it is usually because of a slow-down in the economy. So estimating the amount needed for a redundancy reserve will involve some gazing into a crystal ball to predict the world and national economy.

In another case, your spend (or sales) might depend on the weather. So a soft-drinks factory would need earmarked reserves to cover typical variations in the weather.

In other cases, there may be little risk: you might be setting aside money for a building scheme and you need to save for it.

Finally, your reserves may be a substitute for good financial control. Suppose that historical records show that a particular department is not good at coming in on budget. The senior management may decide to hive-off money into reserves so that they can top-up the budgets of sections that have overspent.

The beauty of earmarked reserves is that you can review them when you have a bit of leisure and you can model the risk upto any level of detail.

But there is a cost. Too much in reserves means that you have unnecessarily high amounts of tax-payers’ money in your coffers. The opposition parties will be glad to point this out.

There is no right answer

There is no right answer when it comes to deciding what levels of reserves are appropriate. This is because the context is ever-changing. With hindsight, one level of reserves might have been appropriate for, say, five years while another might be appropriate for the next five.

One easily-missed point is that the proportion of a company’s revenue which should be held in reserves gets smaller as the company gets larger.

The larger the company, the more different ear-marked reserves there are likely to be and, while it is quite likely that the company will have to draw down some of its reserves, it is very unlikely to have to draw down all of them. This effect reduces the amount needed and the year to year variation.

HCC is big and I would be surprised if we needed over 10% of our annual spend to be stored in reserves.

I understand Ken’s attitude, but it seems unlikely that his is the best strategy.

Which reserve should it come from?

Sadly, we didn’t have the foresight to set up an earmarked reserve called “The world’s worst recession reserve”. But when the recession struck, the best economists, such as Vince Cable, recommended rapid injections of funds to minimise the damage caused by rhe recession.

In fact, we did set up a “Grant equalisation” reserve several years ago. The aim was to smooth the impact of fluctuations in government grants. It seems to me, entirely logical to rename it: “The major turbulence fund” and withdraw funds from it when funding fluctuates, substantially and outside our control.

Graph of Reserves

Plotting the reserves against time shows that there has been no clear policy in managing the reserves. They have gone up steadily over the last few years, roughly doubling since 2006 but, under the Conservative proposals, they are to be reduced by 18 million this year, and should then stay level at 160 million for the next three years.

There is nothing sacred about the figure of 160 million. Applying the Liberal Democrat proposals, we would reduce the reserves to about 150 million, but we would reduce revenue spending on publicity by half. At the moment 4.5 million per year is spent largely on promoting Hampshire County Council. The Liberal Democrats think the money could and should be better spent in delivering services rather than describing them.

Ken has seen the light

Even Ken agrees with me in part, because, miraculously, Ken is now able to hold his 1.9% increase for 2 years, which costs about the same as our proposal of having a freeze for only one year. So the offers of both parties cost about the same.

The advantages of our offer are that:

I have no doubt that they will find ways of improving the appearance of their offer.

Calculating the cost of freezin g council tax in Hampshire County Council (27th May, 2009)

In one of my Focus leaflets, I promised to put the calculations on the web. This section fulfills that promise, but it contains mathematical symbols which don’t look good on all web browsers. Instead, I have put them in a .pdf file so that you can inspect them more easily.

Click here to Calculations of cost