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Analysis

Why England is facing hefty council tax rises

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In last month’s spending review, UK chancellor Rishi Sunak appeared to make an attractive offer to English local authorities.

He promised “extra flexibility” on raising funds for adult social care via council taxes “which together with £300m of new grant funding gives them access to extra billions of pounds to fund social care”.

But while this suggested the chancellor was being generous with central government funds, in fact it was simply a suggestion to local authorities that they raise council tax rates much faster than inflation — something they have been doing since 2016.

This suggests Mr Sunak is imposing austerity by stealth. According to the independent Office for Budget Responsibility, “replacing some grant funding for local authorities with increased local funding via council tax increases”, will leave taxpayers paying an extra £1bn a year from 2021.

The onus on local authorities to fund more of their services from council tax revenues rather than central government grants will exacerbate a continuous squeeze on local budgets since 2010 that left councils shouldering a hefty chunk of the austerity that followed the financial crisis.

The Institute for Fiscal Studies calculates that councils received 77 per cent less in real central government grants per person in 2019-20 than a decade earlier. Social care bore much of the brunt.

From April, local authorities will be allowed to raise 2021-22 council tax bills by 5 per cent if the area has social care responsibilities, without having to hold a local referendum as required by the government since 2012 — although no council has ever held one. Of that increase, 3 percentage points would need to be reserved for funding adult social care — the so-called adult social care precept.

Mr Sunak is not the first chancellor to have sought to rein in central government expenditure by putting the onus on local authorities to increase council tax and take the blame for the hit to voters’ pockets.

Since council tax was introduced in 1993, the average annual increase of each tax band has been more than double the rate of inflation. This has left council tax bills increasing on average by 4.4 per cent a year, compared with an average annual CPI inflation rate of just under 2 per cent. This includes the period from 2011-12 when increases were frozen for two years then capped at 1 per cent for the following three.

Column chart of annual change (%) showing council tax bills have generally risen far faster than inflation

This means that the original average council tax Band D rate of £568 in 1993-94 would have risen to £977 if it had kept pace with inflation; instead it is likely to hit £1,908 in 2021-22, a 5 per cent increase on the average Band D bill of £1,818 this year.

Charges also differ according to the type of local authority. The average Band D council tax bill in inner London boroughs, including payments to the Greater London Authority, was £1,306 in 2020-21, while in other English metropolitan districts it was £1,809, and in Shire districts it was £1,895.

There are more properties in higher tax bands in London, so overall bills are similar across England, and there is now little link between council tax paid and the value of property because the tax bands are still based on 1991 property values.

Bar chart of average Band D rate 2020-21 (£) showing Council tax rates  across England

Stuart Adam, senior economist at the IFS, in a recent research paper, described council tax as “out of date, regressive and distortionary”.

The levy was designed as a temporary fix after Margaret Thatcher’s controversial 1990 attempt to impose a poll tax in which each householder paid the same, whatever their wealth.

Thatcher’s successor, John Major, replaced the poll tax with council tax, promising to revalue homes every decade. But no government has carried out a revaluation, fearing the reaction if it resulted in dramatic tax rises.

“It is a political atomic bomb and no one wants to touch it,” said Victoria Honeyman, professor of politics at Leeds university, who added that replacing the levy with a local income tax or other measure could prove even more unpopular. “Council tax is the least worst option,” she said.

The Local Government Association, which represents local authorities, said council tax represented 45 per cent of members’ core spending in 2010-11 but by 2020-21 it had risen to 60 per cent.

“Council tax rises — particularly the adult social care precept — have never been the answer to the long-term pressures faced by councils. They raise different amounts of money in different parts of the country, unrelated to need, and add an extra financial burden on households,” the LGA said.

“Councils will still have to find savings to already stretched budgets in order to plug funding gaps and meet their legal duty to set a balanced budget in 2021/22. This means residents may see their council forced to increase bills next year . . . but still have to make cutbacks to local services, including social care.”



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Analysis

Austria puts its faith in Covid testing above immunisations

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As lockdowns across Europe drag on into spring, the Austrian government says it has a strategy to get life back to normal in weeks rather than months — not with vaccines, but tests.

The country of 8.8m people will from Monday make 3.5m Covid tests available free to its citizens each week. The plan could allow restaurants and bars to start welcoming customers back by mid-March. Non-essential shops and schools are already open and many Austrians have returned to their workplaces.

“We are on the way to becoming the testing world champion,” said chancellor Sebastian Kurz. “Our goal is to be able to control the incidence of infection, or at least mitigate any growth in infection numbers, as best we can, by testing as much as possible.”

As Covid cases climb, Austria has grown frustrated with the EU’s slow vaccine rollout. The bloc’s performance particularly rankles because last May — in deference to EU solidarity — Kurz turned down a tentative offer from Benjamin Netanyahu to partner with Israel in its vaccination drive with Pfizer, two Austrian officials told the Financial Times.

Kurz has a close working relationship with the Israeli leader and the two regularly discuss the pandemic.

The missed opportunity for the kind of swift vaccination programme pioneered by Israel underscored the importance for smaller countries such as Austria to be flexible in their approach to the virus, a political adviser close to the chancellor said. 

Austria’s faith in testing has put it at odds with other European countries where the Covid policy is almost solely focused on immunisation as a means of escaping another wave of the pandemic.

That has left much of the continent languishing under stricter lockdown conditions than those enforced when the pandemic first hit a year ago.

Britain is Europe’s vaccine leader, with more than 28 doses of vaccine delivered per 100 residents. Austria has managed just 6 — slightly less than the 6.3 EU average. But last week the UK government said it still expected to impose four more months of restrictions to control the virus.

For critics, Vienna is walking a tightrope: cases in Austria have ticked up from the low of 14.9 per 100,000 residents a fortnight ago to a rolling seven-day average of 19.2. The next two weeks will be crucial: if numbers continue to rise Austria’s strategy will unravel.

But the focus on testing will also be closely watched. Chancellor Angela Merkel told lawmakers in her party last week she believed mass testing would be a critical in helping Germany ease its way back to normality.

A hairdresser and her customer in Vienna wear FFP2 protective face masks. © Alex Halada/AFP/Getty

Thomas Czypionka, head of health policy at the Institute of Higher Studies in Vienna, said “a tight net of testing” would provide the opportunity to reopen businesses and schools by controlling transmission of the virus. “This is a different kind of strategy. It’s not perfect, but its worth a try.”

The Austrian initiative should in part be understood in the context of the government’s poor handling of the second wave, according to Czypionka.

Feted for his nimble handling of the crisis last spring, Kurz has since faced criticism as the number of cases soars. In November, Austria recorded the highest number of new infections per million inhabitants in western Europe.

Testing is crucial, according to Czypionka, because people’s willingness to tolerate restrictions and their disastrous economic consequences had reached its limit. “People have lost faith. This is the real reason the government is having to open up.”

© Ronald Zak/AP

He was nevertheless confident that the testing strategy was a good one: “It’s cheaper than keeping a country in lockdown.”

While Austria’s first experiment with mass-testing began in December, with limited success, the latest drive is markedly different. Testing will be linked to the phased emergence from lockdown itself — using reliable PCR tests for entry into venues, and quick result lateral flow tests for home use. Officials at the chancellery said they believed this “nudge” approach — where even small incentives can prove powerful motivators for social change — has been highly successful.

Hair salons have been open in Austria since February 8. But their use is conditional on testing: customers must present proof of a negative test no later than 48 hours before an appointment.

The idea is now being thrashed out for the hospitality sector. An announcement is expected to be made this week, but the government is hopeful that entry tests at restaurants, bars and cafés could allow for a reopening of some — with strict hygiene measures also in place — as early as March 14.

“My heart bleeds because tens of thousands of businesses have not been allowed to open for months. We will do everything we can to ensure that the catering and hotel industry can welcome guests again soon. I’m on the side of the industry,” tourism minister Elisabeth Köstinger said last week.

Capacity for tests has been increased dramatically. There are now 800 pharmacies across Austria offering tests, and a further 650 specialist testing stations. From Monday, the government hopes to make up to five postal tests — which can be ordered by telephone hotline or online — available to every Austrian each week.

Schools are testing pupils twice a week and workplaces have been brought onboard. The government is subsidising more than 1,000 Austrian companies — representing a workforce of just under 500,000 — to provide them with free regular tests for those who want to return to the workplace.

Testing was the best way to avoid an “indefinite lockdown”, Kurz declared last week, as he promised Austrians the government would do whatever it could to safely reopen public life.



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Analysis

Rising interest rates cool sizzling rally in emerging markets

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The rush into emerging market assets since the depths of the coronavirus crisis a year ago is facing its first serious test as rising US interest rates revive memories of the “taper tantrum” of 2013.

Emerging market stocks sailed almost 90 per cent higher in US dollar terms from the nadir in March to a historic peak last week, according to MSCI’s broad index of equities in 27 countries. The surge stemmed in part from a ferocious hunt for returns after central bank stimulus depressed interest rates in developed markets to record lows.

But a sharp drop in developed-market government bond prices since the start of 2021 has sent borrowing costs sharply higher, and started to ripple into emerging markets. MSCI’s EM stock barometer has slipped about 5 per cent from last week’s high, reflecting drops in countries stretching from China to Turkey and Brazil.

“There’s no doubt that yield curve steepening worldwide is starting to spill over into other asset markets and the last thing we need right now is a full-blown bond and equity market sell-off,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

Line chart of % change in dollar terms showing EM stocks have slipped after a soaring start to 2021

To some analysts, the set-up this time around is similar to 2013, when investors fled EM assets as the US Federal Reserve signalled an end to the ultra-loose monetary policies that had given them such a boost.

Thin at BBH notes that the Fed will probably seek this time to reassure markets it will only slowly withdraw the extraordinary stimulus measures it deployed during the depths of the Covid-19 crisis.

Nevertheless, some sectors are feeling the pressure. Chinese markets, which have been among the best performers due to the country’s rapid recovery from coronavirus, have dropped over the past week.

The CSI 300 index of Chinese equities has fallen about 6 per cent on a dollar basis from its February high, while Shenzhen’s technology-focused ChiNext market is down 13 per cent. Turkey, another large EM, has endured a roughly 8 per cent decline since February 15, according to an MSCI index.

Meanwhile, Brazilian markets have faced serious ructions after Jair Bolsonaro, the populist rightwing president, fired the boss of state oil company Petrobras for failing to keep pump prices low.

Still, some analysts and investors argue that expectations for a brighter economic outlook in many countries will help dull the risk posed by rising global interest rates.

With vaccines coming into sight, says Tom Clarke, partner and portfolio manager at William Blair Investment Management, “you can argue about how many quarters there will be of lost or much reduced income but it’s the kind of thing you can look through, even if it’s a long way into the future. That has caused a sea change in EM equities and currencies.”

This, he says, is part of a more fundamental change. Before the pandemic, several factors were weighing against emerging markets: protectionism in the US and elsewhere, rising tensions between the US and China, the uncertainty over Brexit — all of which have been resolved, to a greater or lesser extent. 

“There have been worries about a hard landing in China for several years and, lo and behold, it delivered positive growth, last year of all years,” Clarke said.

Not all EMs will come out of the pandemic in equally good shape, however. One factor crucial to their prospects will be their ability to deliver productive investment.

As recent FT analysis shows, foreign direct investment slumped around the world last year but held up remarkably well across Asia. In China and India, it grew in 2020 by 4 per cent and 13 per cent, respectively. In contrast, Africa and Latin America registered the largest contractions of any regions for many components of FDI including mergers and acquisitions, project finance and greenfield investment — the kind that generates new jobs.

Line chart of % change in dollar terms showing Growth potential has lifted India from pandemic lows, while Brazil still flounders

Investors have also welcomed domestic spending. Part of India’s response to the pandemic has been to increase public spending on infrastructure by 50 per cent over its 10-year average. Brazil, where such investment has been squeezed for decades, has concentrated its pandemic response on subsidies for consumption — popular in political terms but less good for building growth.

Paul Korngiebel, emerging markets portfolio manager at Boston Partners, describes coronavirus as “the massively distorting event that creates winners and losers by [country and] industry sector as policy differs in response to Covid”.

Just as in advanced economies, the focus of many EM investors has been on tech. Over the past 12 months, shares in electric vehicle maker Tesla are up 350 per cent in New York. Shares in Nio, its Chinese rival, also listed in New York, are up more than 1,000 per cent.

Korngiebel worries that, in some sectors, investors may have brought too much future growth into the present and that some valuations are getting stretched. Conversely, he sees opportunities in sectors, such as regional airlines, that have been crushed, as investors have perhaps prematurely written them off.

“We are really dealing with the aftershock of Covid right now,” he says. “It’s not over from an investor point of view — the pig in the python is only half digested.”



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Analysis

The UK mental health crisis coming in Covid’s wake

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Owen O’Kane grew up well-acquainted with the psychological damage that bombs and bullets inflict on communities long after their immediate impact, having witnessed first-hand the troubles in Northern Ireland.

Now a psychotherapist and author based in London, he is convinced that Covid-19 risks leaving similar long-term distress in its wake. In anticipation, he has given the phenomenon a name: “Post pandemic stress disorder.”

“A lot of people have been affected by trauma. Whether its PTSD (post-traumatic stress disorder) or PPSD you won’t see the full impact at the time. You only see it a few months later. If we don’t take this seriously we are going to have a very unwell group in the population for years to come,” said O’Kane, who was formerly mental health lead for the NHS in west London.

With Boris Johnson, UK prime minister, setting out England’s gradual and cautious exit from lockdown earlier this week and the rollout of the country’s vaccination programme still going well, there are some causes for optimism.

But O’Kane and his peers worry about the long term toll the pandemic is taking on the nation’s mental health.

Owen O’Kane: ‘If we don’t take this seriously we are going to have a very unwell group in the population for years to come’

By the middle of 2020, one in five people in the UK was suffering from depression, twice the number in 2019, according to the most recent data released by the Office for National Statistics.

The Centre for Mental Health, an independent UK charity, has predicted that this will translate into up to 10m people needing new or additional mental health support as a direct consequence of the pandemic. But that may be a conservative estimate given that these figures predate the latest and deadliest wave of the virus as well as a winter of intensified lockdown.

“Why I am on my soap box at the moment is that I feel all of the energy is still on getting the R (the disease’s rate of reproduction) down when we have this other pandemic brewing,” O’Kane said.

Part of the answer, he and other specialists argued, will be in allocating sufficient resources to deal with rising demands on services. Another part, argues O’Kane, will be clinical.

“A pandemic is invisible. It’s not like bombs dropping,” he said. But cumulatively its effects are no less traumatic. “If you don’t address the underlying trauma [in patients], they will relapse,” he said.

The stress associated with home-schooling children while sustaining work, of indebtedness, loneliness, or of being forced to confront at close quarters relationships that are fatally cracked, alongside the continuous threat of the virus itself, for many people has taken a grim toll.

“When you have 120,000 families who have lost someone, many of whom have not been able to say farewell; hundreds of thousands of doctors and nurses who have struggled . . . why would you not expect there to be a large number of people with psychological problems?” said Alastair Campbell, the writer and former director of communications to Britain’s former prime minister Tony Blair. “It would be very weird if you didn’t.”

Campbell, who published a book last year on his own experience of severe depression, is frustrated at the lack of preparation for this crisis in the making.

“It’s not just that services are terrible in some parts of the country. It is also that the government is missing a massive opportunity,” he said, arguing that the shock of the pandemic has brought mental wellbeing to the forefront of everybody’s minds except, apparently, those in government. “They still think that if you talk about mental health it makes it worse,” he said.

The government has pledged £500m of extra spending on mental health services this year to address waiting times for specialists, which can stretch to months and more, and to invest in the workforce.

“As part of the long-term plan we have committed an additional £2.3bn a year,” said Nadine Dorries, the minister for health, suicide prevention and patient safety.

Dr Adrian James, president of the Royal College of Psychiatrists, said that it was vital this funding sustained increases in trained psychiatrists, and other specialists while addressing a hangover from years in which mental health has been treated as the poor cousin to its physical relative.

“There is a huge backlog of investment in the mental health estate,” he said, adding: “We need to be on the front foot around mental health in relation to Covid rather than reactive.”

That means taking into account what’s to come. While Johnson’s plan for lifting lockdown aims to remove all restrictions by the end of June, the end of economic support for workers and businesses will cause fresh anxiety.

“As some of the measures that have protected employment security and finances of those in unemployment come to an end, we are facing a cliff edge,” said Catherine Seymour from the Mental Health Foundation, the think-tank. It is calling for temporary £20 weekly increases in welfare payments to be made permanent in next week’s Budget and for a ban on evictions to be extended.

The Samaritans, often the last resort charity for people in distress, has been making similar pleas, pointing to the proven link between recession and increased suicides,

Jacqui Morrissey, the charity’s assistant director of research, said 1.7m people had called on the Samaritans for emotional support between March and December last year, a period, she said, when many people had been deprived of their usual coping mechanisms.

It was imperative, she said, that the voluntary sector, which provides an essential supporting role to the state when it comes to mental health, remains afloat. “We need to make sure that there is a fully funded mental health renewal plan as we come out of that pandemic and that this is at the top of priorities with government working in collaboration with the sector to deliver it,” she said.





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