New council income tax is best way to plug multi-billion pound gap in social care, says IFS

A local income tax could be introduced by councils to plug the multi-billion pound gap in funding for social care, the Institute for Fiscal Studies (IFS) has suggested.

New analysis by the economic think-tank warned that if council tax continues to rise with inflation - currently at 2 per cent a year - there will be a countrywide shortfall of £4 billion by the end of the next parliament.

And the growing elderly population means the deficit will rise to £18 billion a year by the 2030s, the IFS warns.

A new report published today (MON) suggests that councils should be allowed to raise additional funding through a local income tax of 1p on the £1, as an addition to national income tax. The move would raise £6 billion a year for councils, the IFS calculates.

Councils would then have a choice on whether to raise taxes or cut services, the think tank said.

Report author David Phillips, Associate Director at the IFS said: “Councils will rely on council tax and business rates for more of their funding going forwards.

“And those revenues just don’t look like they will keep pace with the rising costs of services like adult social care – even with council tax bills going up at 4 per cert a year, which is double the rate of inflation.

“That means finding billions more in funding to top up existing local tax revenues, even before thinking about new initiatives like free personal care.”

The report also warns that raising extra revenue locally could bring huge disparities across the country, and said that national redistribution of some of the money raised is likely to be needed.

Calculations suggest that revenues per person in richer parts of West London and Surrey, would be more than twice the national average, while in places such as Blackpool, Blackburn and Hull they would likely be less than half the average.

And because there is currently no statutory duty for people to tell HM Revenue and Customs (HMRC) where they live, meaning they could avoid local taxation.

However the IFS report concludes that a local income tax ‘is the most sensible option.’