It is quite interesting to note that there is quite widespread anger that Kensington and Chelsea council has reserves available for it to use of £274 million according to its last accounts.
As a matter of fact local authorities need reserves. They are solely dependent upon revenues they can raise from local taxes, central government and the supply of services. They can borrow, but only with difficulty in most cases. And the reality is that they face unpredictable demand for their services and central government has a poor record of responding to their needs in times of crisis. So, they have reserves. These are, literally, a contingency fund for the unforeseen.
Kensington and Chelsea has made this fact visible and it seems that people do not like it. What they resent is that they have paid tax without a purpose. But let me put this in context. All that the council is doing is what George Osborne wanted to do with government and which the Tory right still wants. It is living within its means. It is balancing books. It is building the roof for the rainy day whilst the sun shines. It is being a good householder. This is prudence at work. And people resent it.
And the answer is that they are right to do so. Why, they ask, should government save for us? The sentiment that has been hit upon is the feeling that this is government taking people's money and putting it out of action. And that is right. That is exactly what running a government surplus, at any level, does. It takes money out of the economy and enforces saving and the result is less economic activity than there should be.
So what to do about it? At local level it is hard to know what to do, especially as the government is determined to cut the central government lifeline on which local authorities have been able to rely on occasion. Only having access to emergency support funding would remove the need for reserves.
At central government level the answer is to take note, and realise that not only is there no need to run a surplus, but that people would be offended if the government did that. Or to put it another way, Osborne was always wrong and austerity now needs to be put to bed forever. Government is not a household and should not be run as one. The lesson needs to be learned.
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Unlike Central Government, Local Government is a user of currency, rather than a creator of it.
As such, I think it’s misleading to refer to “Council Tax” as a tax. It’s a shame that the term “Community Charge” has been discredited by its incarnation as the so-called “Poll Tax”, because that’s effectively what Council Tax is.
“Council Tax” is not a tax, as it does not withdraw money from circulation to be destroyed, neither is it used to give confidence to the currency. Worse, it allows people to conclude that their ‘taxes’ fund public services. (Which indeed “Council Taxes” do, but I would maintain that it isn’t actually a tax.)
Council Tax is effectively just a utility bill for local services, albeit slightly weighted at the top end in a half-arsed attempt at re-distribution to appease the Poll Tax protestors.
If we see it as just another bill, then K&C are guilty of massive overcharging at the very least; fraud and theft at worst.
The council tax system is really flawed.
Poor regions have higher demand for services but less ability to generate income.
K&C actually have a relatively low council tax but still have a big surplus. Up where I live council tax is much higher but councils still need a subsidy.
The only way to deal with intra and interregional inequality is via central taxation.
Absolutely agree
The Tories have, of course,moved in the other direction
I think the K&C accounts show interest earned on their savings that were leant out by their bank. So, contrary to your assertion, the money is not “taken out of the economy”, but circulates in the economy to fund whatever it was leant for – investment or consumption. The money – or a proportion of it – may even have been lent to businesses and individuals in Kensington or elsewhere in London.
Oh dear
You think banks lend out deposits?
They don’t and have not done for decades
The BoE agree
Please read the Joy of Tax
You hacve to get your facts right and savings are just what I say they are: money taken out of the economy
Jonathan,
Where Richard says “the BoE agree” he was generally referring to this advice:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
You should find that to be quite helpful.
Thanks
I did not have time to pull it out
You are debating the realm of the number of angels on a pinhead when addressing the possibility of GOVTS. running a surplus in the foreseeable present days.
Given the derelict state o most major national government coffers I venture we will all be long dead as will our heirs before national administrations will be called upon to wrestle with that particular problem.
Indeed you should be happy to note that the majority of sovreigns with the possible exception of some of the Emirates plus the Sultanate of Brunei are revelling contentedly in your philosophy of eternal debt
management fuelled by QE and selective taxation to control inflation (?) …. only in their case they have so much money by dint of good fortune they can live with inflation and are mostly low tax or tax free.
And in passing glancing at the ” United States” of America ( which is not in the conventional sense a country but a confederation of ” independent” states although admittedly more advanced along the path of integration than our own cherished EU) , let s see the outcome of states like Illinois and Michigan when they go to DC with a begging bowl to ask for cash after running out of the folding stuff. . Will commercially prudent states like Vermont /New Hampshire etc be hapoy to hand over their surpluses…….. and how many times?