Tax facts

Just when you thought you’d seen the last of him, up pops Jamie Adams on the front page of the Herald attacking the proposed 12.5% council tax hike which he claims “will put the squeeze on hard-working Pembrokeshire families.”

Inside the paper the former leader blames the proposed increase on the current cabinet’s failure to bite on the bullet regarding cuts in services.

“Cabinet need to have the balls to make the tough decisions” he tells the Herald, which seems rather harsh on the two female members.

On pages 10 and 11 the Herald has a two-page spread in which Bob Kilmister, Cabinet member with budget responsibility, explains why such a whopping increase is being considered.

He blames Cllr Adams’ “lowest council tax in Wales” policy which has left the council playing catch-up with the other 21 authorities.

Indeed, I have even heard a 30% hike mentioned as being necessary to allow the council to claw its way out of the fiscal trap in which it is ensnared.

The starting point is the authority’s SSA (Standard Spending Assessment) – the amount of money that the Welsh Government calculates an authority of Pembrokeshire’s size and nature should spend each year.

Central government also calculates how much council tax Pembrokeshire should reasonably be expected to raise and this is subtracted from the SSA to give the amount of central government grant.

As can be seen from the table below, Pembrokeshire’s SSA for 2017-2018 was £219.6 million, but it only budgeted to spend £204.8 million.

This £14.7 million difference largely accounts for Pembrokeshire’s ability to boast of “the lowest council tax in Wales”.

Indeed, if you take the £262 difference between the Band D rates for Carmarthenshire (£1,145) and Pembrokeshire (£883) and multiply it by Pembrokeshire’s tax base (50,000 approx) you are within spitting distance of the £14.7 million gap between SSA and actual budget.

You will also notice that £262 is 29% of £883 hence the talk of a 30% increase.

For some years there has been an assumption that the maximum allowable rise in council tax is 5% per annum.

So far as I know this is not a legal requirement, but is the result of heavy hints from Welsh Government that it would frown on anything larger.

However, any such cap puts Pembrokeshire at a huge disadvantage because, with the passage of time, the iron rules of compounding make the gap between Pembrokeshire and other higher charging authorities even wider.

For instance, Carmarthenshire’s current Band D rate of £1145 increased at 5% for five years would grow to £1461 while Pembrokeshire’s £883 would become £1126 i.e the gap would increase from £262 to £335 – plus £73.

And the longer it goes on, the wider the chasm becomes.

It is understandable that, faced with the prospect of making ever more cuts to services or increases in fees and charges, the cabinet is contemplating drastic action rather than struggling along with an ever deteriorating financial position.

Another factor which must be taken into account when discussing rises in council tax is the “gearing” effect that comes into play because local authorities rely on central government for a large proportion of their income.

Suppose for instance an authority’s budget is financed 20% from council tax and 80% from central government grant then any percentage decrease in the latter will require a fourfold percentage increase in council tax to compensate.

So a 2% cut in government support will require an 8% rise in council tax to make up the shortfall.

And, for an authority like Pembrokeshire that raises a smaller proportion of its budget from council tax, this gearing effect is even more severe.

For instance, an authority that raised only 15% of its revenue from council tax, would require an 11% increase in council tax to compensate for a 2% reduction in government grant.

And to make balancing the books even more difficult there is another form of gearing that comes into play when certain budgets are protected.

In Pembrokeshire’s case, education and social services take up 70% of the budget so, if levels of spending on these two items are maintained, cuts in other departments (roads for instance) have to be doubly severe.

So, while I don’t think it is correct to lay the blame for PCC’s present difficulties at the door of the lowest council tax in Wales, it seems clear that, during a period when central government is cutting support to local authorities, having a low council tax makes it very tricky to make up any shortfall.