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Local Government Finance

Volume 531: debated on Monday 18 July 2011

With permission, Mr Speaker, I should like to update the House on the Government’s review of local government finance.

The past year has seen the beginning of a long-awaited and much needed shift in power—from national to local, and from Whitehall to the town hall—but if localism is to reach its potential, new legal freedoms must be matched by freedom over finance. That, of course, is not a new idea. Reviews, from Layfield in the 1970s and onwards, have emphasised that increasing local financial control is the key to strengthening local democracy.

Strangely, the previous Government did nothing to reform the system, despite a local government finance Green Paper, a local government White Paper, the balance of funding report, and, of course, the Lyons inquiry. Amazingly, they did not even bother to issue a formal response to Lyons’s 400-page report.

By contrast, the coalition Government are delivering radical change. Over the past year, we have begun the phasing out of ring-fencing, freed up £2.1 billion from restrictions and simplified more than 90 separate funding streams to fewer than 10. That is real progress, but today we are committed to going further still: to restoring councils’ financial autonomy while ensuring a fair deal for all communities, whether in the north or in the south.

In the first phase of our review of local government resources, we have focused on local retention of business rates. As the House will know, the Government have already taken action on business rates. We have introduced a more generous small business rate relief scheme, we are making it easier to get that relief without filling in paperwork, and we have scrapped the unfair and regressive ports tax.

We are now looking at what business rates mean to local councils. Councils in England collect some £19 billion in business rates each year. No sooner does the cash come in than it is gathered up by the Treasury and then redistributed to councils according to a complex formula. That approach has major shortcomings: it denies councils control over locally raised resources; it deprives them of the certainty they need to plan their finances for the longer term; and it creates a disconnection between the success of local businesses and the state of a council’s finances.

Surely it is common sense for the system to encourage councils to boost local jobs and growth. Radical change is needed, and councils themselves agree. In a major step for transparency, my Department is today publishing every representation made in the recent local government financial settlement. There is a common theme. Councils believe that the current system is complex and opaque. They must talk down their successes and talk up their difficulties in order to secure the best possible deal from Whitehall.

To address that, mere tinkering—adjusting the formula here, amending the area cost adjustment there—will not be enough. This Government are determined to repatriate the business rates. Today, I am publishing a consultation outlining our proposals. No more will proud cities or historic counties be forced to come to the national Government with a begging bowl. Councils will have a greater control over cash, helping them to plan for the longer term. Tax increment financing will let them borrow against anticipated increases in rates, giving them a new way to invest in infrastructure, from transport projects to regenerating town centres. Councils should see a direct link between the success of local businesses and their own cash flow. That will create the right incentives for them to work closely with local businesses.

I am determined that the transition to a new scheme will be both responsible and fair. The Government’s overriding priority continues to be deficit reduction. In the spending review, we set out the level of resources available for local government for the next four years. In the interests of financial stability, for the first two years of the retention scheme, we will continue to stick to those spending plans, but we will allow local authorities to benefit from any growth in business rates above forecast levels. Beyond this spending review period, we will look to align more closely local authority functions and total business rate income.

It is also of paramount importance to ensure that our proposals on local government finance are balanced, fair and equitable, creating the right incentives for all areas to grow while protecting the most vulnerable. We propose a number of measures to safeguard them and to achieve that. First, poorer places will share the increase in growth with more prosperous areas. Those places with the greatest dependency should, and will, continue to receive support, while being allowed to keep the products of enterprise, and those places that raise the greatest sums through business rates should expect to make a contribution. A new system of tariffs and top-ups will ensure that we start from a fair base. As my right hon. Friend the Deputy Prime Minister told the Local Government Association last month, we will ensure that no one will be worse off when the new system is introduced than they would have been under the old system.

Secondly, as the House will well know, some areas have strong natural economic advantages, such as high-value industries or concentrations of skilled workers. There will be no cap on the amount of business growth from which such councils can benefit. A council will be better off as a result of growth, but if an area benefits disproportionately from a growth in business rates, we propose to introduce a special local levy to capture a share of that benefit. The money raised should be used in the first instance to fund a safety net, which would protect authorities that experience exceptional shocks to their business rate take.

Thirdly, our proposals include the option of resetting the whole system. If councils no longer had enough resources to meet local needs, the Government could recalculate the level of tariffs and top-ups across the whole system.

Fourthly, support for mandatory and discretionary rate relief will continue. Rate relief to the needy will be unaffected. National discounts and rate relief will continue to be supported, meaning no adverse change for such groups as charities, amateur sports clubs, voluntary groups, those in hardship and those who are eligible for rural or small firms relief.

Finally, we have reflected carefully on what our new system means to business. Businesses—the creators of local jobs and wealth—need stability in this process. They need certainty to plan for the long term, so let me spell this out in no uncertain terms: local firms will see no difference in the way in which they pay tax, or the way in which the tax is set, as a result of these changes.

I am placing in the Library a plain English guide so that hon. Members’ constituents can understand what our proposals will mean for them. We intend that business rates should be repatriated in 2013. We will bring forward a local government finance Bill to give our proposals legal effect. The publication of this consultation begins a debate that I hope will be wide-ranging and constructive. I want to work with all local authorities, representative groups and political parties to build a consensus for lasting change. That consensus will be built on putting power back in the hands of local councils and communities; supporting local jobs and local firms; and creating the conditions for renewed, sustainable economic growth. I commend the statement to the House.

I thank the Secretary of State for advance sight of the statement. Obviously, we will look closely at the detail of the Government’s announcement today, because on many policy areas under this Government the devil is in the detail.

Let me make it clear at the outset that we would back a funding system for local authorities that supports jobs and growth and encourages enterprise. In government, we introduced measures such as the small business rate relief to support small businesses and, in consideration of the Localism Bill, we are pushing the Government to go further in devolving powers to cities and councils to enable them to drive economic development. Our amendment is due to be debated in the other place on Wednesday, and I hope that the Secretary of State will confirm today that he will tell his colleagues to support our proposals.

We have been clear that any funding system for local government must be fair. It has to ensure that every authority has the resources it needs to meet the needs of its communities, but today I am afraid that—plain English or not—the Government have failed to spell that out. How does the Secretary of State plan to localise business rates without taking funding from the pockets of our poorest communities? The Secretary of State may just want to talk about year one, but we want to talk about year two and year three, and all the years after that. What will the funding system look like then? And will the Secretary of State be able to guarantee today that no council will be worse off in five years’ time as a result of the reforms that he has announced this afternoon?

It is telling that whenever the Government have been challenged on the long-term effects of their reforms to business rates, they have said that it is up to local councils. What that really means is that, after the first year, the Government are washing their hands of the problem—cutting funding and leaving councils to fend for themselves. We all know how incredibly important this is to local communities up and down the country because, as the Secretary of State knows, business rates make up 76% of the formula grant. Vague, empty assurances just will not cut it. No sleight of hand, temporary transition grants or safety nets can hide the consequences of these reforms. If the wealthiest councils are not giving up the rate they collect locally for redistribution, where will funding for those who rely on redistribution to survive come from?

The Secretary of State referred, very briefly, to the fact that areas that raise the greatest sums through business rates will still, at least in year one, make some sort of contribution to less well-off areas, but a report in this morning’s Times said that councils with large yields would only be required to contribute to a safety net in the form of a regional pot. Will the Secretary of State confirm whether the redistribution that takes place in year one—or beyond—will be on a national or regional basis? If it is on a regional basis, and given the size of the business rates yield in Westminster and the City of London alone, many areas outside London and the south-east will be considerably worse off.

Until the Secretary of State clarifies those points, we will continue to press him on what these reforms might mean. We have heard his assurances before. He assured us that the finance settlement was fair. Then we found out that while places such as Richmond and Surrey Heath were losing less than £10 a head, areas such as Hackney and Liverpool, serving some of the most deprived communities in our country, were losing nearly twenty times as much. He assured us that the cuts to local government funding did not have to mean cuts to services, but even his own councillors do not believe that one. The cuts that we are seeing now, right across the country—to home helps, care services, street cleaning and, yes, to bin collections too—are the consequences of his cuts.

Today, the Secretary of State still seems to expect us to be satisfied by his assurances—to believe that no council will be worse off. If we do not believe what he says, the Deputy Prime Minister told the same Local Government Association conference:

“The new system will start on a level playing field. How far you progress from there is entirely up to you.”

That was backed up by comments by the Under-Secretary of State for Communities and Local Government, the hon. Member for Hazel Grove (Andrew Stunell) in response to an Adjournment debate last week. I paraphrase slightly, but he basically said, in answer to a concerned question about what would happen after year one, “You’ll be okay for the first year, but I really couldn’t specify beyond that.” Are those the sort of assurances to give us hope that there will be fair redistribution in the future for those communities in the greatest need?

This proposal just does not add up. The amount of funding going to local authorities over the next four years has already been laid out in the comprehensive spending review. Unless the Secretary of State wants to announce today that he is planning to revisit the level of grant he intends to provide to local authorities, will he confirm that, with a fixed pot of money for any council to gain, other councils must lose? If not, will the Secretary of State tell us where the additional revenue will come from? We know which areas will lose out as a result of these changes. It will be the poorest areas, with the most deprived communities and smallest business base, who will be hit with a triple whammy. First, they saw their area-based grants cut and then they had to deal with the finance settlement, which singled them out for the heaviest cuts; and now, to add insult to injury, the Government want to cut their funding to boost the coffers of the better-off councils by localising business rates in a way that is unfair and that will benefit the best-off at the expense of the most deprived.

However, it will not just be our poorest communities that lose out. Many rural areas and seaside towns—from Southend-on-Sea to Blackpool; in Devon, Somerset and Northumberland—and even Harrow and Enfield in Greater London and Redditch in the midlands will see a loss from these changes.

In government, we were examining the case for tax increment financing, and we will look closely at the details of the Government’s announcement, but however much the Government spin it, it will not be lost on local authorities that the introduction of tax increment financing comes after this Government have already cut local authority capital funding by 45%, and when they have raised the interest rate at which local authorities can borrow. The Government may couch these reforms in the language of localism, but today’s announcement betrays their real intent. Cutting funding to areas with the highest need does not free councils from central control or empower them: it stops them from doing the things their communities need of them.

Yes, we want a funding system that supports jobs and encourages enterprise, but not every area has the same ability to attract investment and new businesses. Not everywhere can be Westminster or the City of London. We will look to support incentives to boost enterprise and put councils and communities in control, but fairness must be at the heart of the system.

Order. Please could Members resume their seats? There is a lot of interest in this statement, so I ask Members to make their questions brief and ask only one question. I also ask Members to rise only if they were in the Chamber for the entirety of the statement. I call Mr Heald—

You can be forgiven for that mistake, Mr Deputy Speaker, as I do not recall a single question in the tirade from the right hon. Member for Don Valley (Caroline Flint).

I am grateful for the right hon. Lady’s welcome, but it seems that it was a pointless gesture to supply her with the statement so far in advance—well in advance compared to what Labour used to do—if she just reads out something that had clearly been typed long before she received it. She should not rely on The Times. She needs to understand what will happen after the first year. The tariff and a levy will continue.

Perhaps we can look at the issue in these terms. If the system is designed to punish our enemies and reward our friends, what will it mean for Doncaster, which includes the constituency of the Leader of the Opposition, the Opposition Chief Whip and the right hon. Lady? Under this system, Doncaster will do particularly well. It will do better under this system than it has for the last five years. Instead of the right hon. Member for Don Valley trying to invent reasons why things will go wrong, she should recognise that this is a way for her to stand up for the people of Doncaster and explain that it is a wonderful place to invest, with a great market and a wonderful rail link. She should get on the side of the people of Doncaster and stop opposing a system that will benefit them.

I welcome the message that councils should roll up their sleeves and help their local businesses to create jobs and growth, but can the Secretary of State assure me that the guide and scout hut—I am a guiding ambassador for my area—and all the voluntary bodies that currently get rate relief will continue to do so?

I can absolutely give that assurance. My hon. Friend can continue his good work with the guides and scouts safe in the knowledge that the rate relief will remain.

I share the concerns of my right hon. Friend the Member for Don Valley (Caroline Flint) that this system will be used to redistribute wealth from the least affluent areas to the more affluent areas—not necessarily in year one but in subsequent years. I listened for an answer to her question but we did not get one.

The answer is that roughly £2.5 billion will be transferred from the south to the north of England, and I do not anticipate a significant change to that amount. I was not just picking out Doncaster; places such as Liverpool and Sheffield also do well out of this system—because we are looking at relative growth. The poorer areas will continue to benefit from the levy. Under the present system, any growth or enterprise is immediately siphoned away from the centre. The new system will give places such as Coventry, Liverpool and Doncaster a real incentive by allowing them to keep the extra growth that they generate.

I declare an interest as a serving member of Kettering borough council. In two-tier authority areas, will it be the borough council that sets the repatriated business rate, and will it be required to give a percentage to the upper tier authority?

The rating authority—the district authority —will continue to collect, but the county council and district councils will receive a sum of money equivalent to the existing formula grant and will continue to share in the growth. That means that counties and districts will be able to work in partnership with business, and determine between them a proper relationship. There will be no problem with their ability to determine where the money falls.

I do not think that even the Secretary of State could describe this as a simplification. I am a long-term supporter of the localisation of business rates, but is not the problem that the cut in Government funding to local authorities will mean that by 2013 the totality of that funding will just about equal the business rates, and that if each local authority keeps its own business rate there will be nothing left for redistribution to the authorities with the greatest need, and the least ability to raise money? Is not the fundamental problem the fact that he cannot deliver localisation and fairness in the same agenda?

The hon. Gentleman, who is distinguished in these matters—I am rather hoping that the Communities and Local Government Committee, which he chairs, might consider holding a special hearing on it—is entirely wrong. The levy system is there to pick up various authorities that will enjoy extra growth. [Interruption.] If the hon. Member for Worsley and Eccles South (Barbara Keeley) will contain herself, I shall explain. Different parts of the country will enjoy economic growth at different rates. We will ensure that if areas of the country see disproportionate growth—Kensington and Chelsea, the City of London or the authorities next to Lakeside or Bluewater, for example—the money will be distributed. If we did not do that everybody would go and live there, because the pavements would be covered in gold. It is a natural process. Rather than people being on their bended knees, we will ensure that poorer parts of the country not only enjoy the benefits of economic growth through what they themselves achieve, but benefit from prosperity in the wider community.

Will the Secretary of State confirm that the increase in the business rate will still be set nationally, in order to reassure business people?

My right hon. Friend raises an important point. In order to ensure that the system works, business needs to have certainty and predictability, and because we want growth to be generated, we cannot allow businesses to be used as some kind of favourite cash machine for councils. The rate will continue to be set by formula and from the centre. However, local authorities can work closely with business to bring in new businesses.

If this is good news, it is certainly a bad day to bury it. There is no doubt that the Secretary of State failed to answer the question asked by my hon. Friend the Member for Sheffield South East (Mr Betts). He has already confirmed that the national business rate will be set by the Government, that growth will be held by the authorities that have encouraged it, and that, somehow, it will also be distributed to authorities that do not get growth. Given that last week the Department answered a question from me saying that it did not know what the spend would be as a comparator between Westminster and Sheffield, how does he think that he can answer this question this afternoon?

It would be horrible if businesses had to take the roofs off their factories in order to escape local authorities—as I believe the right hon. Gentleman will recall from his time in office. Sheffield does remarkably well out of this process. Over the past five years it has had above-average growth in its rate base, and I see no reason why it should not benefit from this. Basically, this is about ensuring that local authorities can benefit from growth in their business rates and can be encouraged to work with business. Frankly, it is no good being in favour of repatriating business rates unless we are also prepared to put in place something that is fair and equitable and will look after the vulnerable. I am very sorry that the two hon. Members from Sheffield do not seem to realise that.

I welcome the principles behind this proposal—equalisation and incentivisation—but I am concerned about year two. The percentages for how the levy operates and how it is redistributed will be critical. What forms of consultation will the Secretary of State engage in, and what scrutiny of the proposals does he envisage?

My hon. Friend raises an important point. She will find waiting for her in the Vote Office a consultation document dealing exactly and precisely with the questions that she raises. It is important to understand that there will be no cliff edge in year two. We need to get away from the idea of dependency and the continuous search for the bottom—whereby local authorities try to outdo each other in saying how bad things are. We should be able to celebrate the places we live in, show things off with pride and give local communities the benefits of growth.

The Secretary of State will know that the current system of business rates ensures fairness by redistributing income, taking into account levels of need and the differing abilities of local authorities to raise council tax. Will he assure the House this afternoon that authorities such as County Durham that have high levels of need will not lose out under this proposals, beyond year one, to the tune of about £100 million?

I am delighted to report to the hon. Lady that County Durham and the north-east have enjoyed rates of growth in business rates above the English average. From what she said, one might think that somehow councils were in general agreement, but if she looks at some of the submissions that we have received she will see—I will take two as examples—that the Association of North East Councils argues that the north-east received a worse deal than the south-east and that deprivation had risen more in the north-east than in London, whereas Brighton and Hove city council disagrees with the area-cost adjustment for Cumbria, Wolverhampton, Wigan, Liverpool and Oldham, but not for its own area. We cannot have a situation where one part of the country is saying, “Give me more money, and take it from them.” What we need is a system of equality that rewards entrepreneurialism and gets local authorities off their knees.

I welcome this statement, not least because it dispels many of the myths that have been pedalled by the Opposition. The Secretary of State mentioned in his statement that we would bring in a local government finance Bill. Can he say when it is likely to come to the House?

That, of course, is a matter for the Leader of the House and the usual channels. However, my hon. Friend is a perceptive Member, and he will have noticed that we are hoping to introduce the system by 2013, so we are not talking about the long term.

The American novelist John Updike once said:

“Government is either organised benevolence or organised madness; its peculiar magnitude permits no shading.”

Given that the Government show no benevolence towards Liverpool—perhaps people can fill the in blanks for themselves—can the Secretary of State specifically guarantee that Liverpool will not see a real-terms cut in its funding after the first two years?

It is a wonderful thing to be quoting John Updike—but listening to the hon. Gentleman, I sometimes think that he might consider himself to be Master of the Universe, from another novel, “The Bonfire of the Vanities”. Let us be clear: which authority would have benefited the most from this scheme? It is Liverpool, which would have done exceptionally well. If the hon. Gentleman had been paying the slightest attention to what I have been saying, rather than working up some smart quotation, he would have realised that Liverpool does well out of this system, because it—

Yes, it is going to do better out of this system, and I hope that the hon. Gentleman will get those on his Front Bench behind the process, because the system is designed to ensure that proud cities such as Liverpool no longer have to rattle the begging bowl. They can bring more money and resources in, and the people of Liverpool are the ones who will benefit.

Today’s announcement has been long awaited. I commend my right hon. Friend on the steps that he is taking, but will he answer one question? If councils or local authorities want to encourage start-up businesses, will they be able to develop their own schemes to allow payment holidays on business rates, to enable them to encourage growth and enterprise in their areas?

The answer is yes—[Interruption]—although, as the Under-Secretary of State for Communities and Local Government, my hon. Friend the Member for Hazel Grove (Andrew Stunell) says from a sedentary position, they will have to pay for it. My hon. Friend and I have long talked about how to regenerate local authorities, moving them forward and giving them some pride. This is a day to celebrate, and the Localism Bill enables such reform to take place. Indeed, such reform is the clearest example of the other side of the Localism Bill: giving people independence through finance. That is something that we should celebrate.

The Secretary of State has made great play of linking the fortunes of local businesses to the revenue of local councils. The previous Labour Government had a scheme—the local authority business growth initiative—which did exactly that. Why was one of his first actions in government to get rid of it?

The hon. Lady needs to try to remember what LABGI was actually like: it was an absolute disaster. Even the Lyons commission said that it was complex, unpredictable and not transparent. Let us remember that under Labour LABGI was chopped and changed. It was a three-year scheme that was stopped after one year, with the second year payments cancelled, and then it ran for two more years, following two consultations. LABGI totally failed to provide for business growth. The hon. Lady should therefore be rejoicing at the scheme that I have announced, because it does all the things that LABGI promised, without being complex, overbearing and, ultimately, a failure.

Businesses in Rugby will welcome the news that their payments to the local authority will be used directly to develop local services and attract new businesses. However, will the Minister confirm that provisions will be in place to ensure that other councils do not raise rates too high and drive firms away or out of business?

I am pleased to be able to give my hon. Friend that assurance, because for precisely the reasons that he suggested, we are retaining the existing formula, to ensure that councils benefit with real economic growth not increased taxation.

On 20 June I raised with the Secretary of State the potential impact of localising business rates on Tameside, which could see a drop in its funding of 35.7% a year. He tried to assure me that that would not happen—at least not in year one—but can he explain how the system of tariffs and top-ups will work, at no cost to central Government, if prosperous areas are to keep the proceeds but poorer areas are to be fully reimbursed? The maths just does not add up.

I suspect that the hon. Gentleman might not have given my initial statement the attention that he perhaps should have, because we made it absolutely clear that no council would lose out in year one—that funding continues—and local councils such as his will be able to enjoy the benefits of growth. Under the current system his local council might get a “Thank you” from the Secretary of State for showing initiative and bringing in new business, but the Government then immediately take the money back. We think that that money should stay with his local authority.

I remember the hon. Gentleman’s previous question, and I said then that I thought he should defect to us. I still think that he should defect to us, but when he has an opportunity to read the submission document, I suspect that we might be able to arrive at a consensus, because what we are doing is not intended to punish his authority; rather, it is intended to unshackle his authority, for all the potential that it has. If you do not mind my saying so, Mr Deputy Speaker, I really do not think that the counsels of despair from the other side of the Chamber are reflective of the dynamism and entrepreneurialism that exist in local authorities.

I welcome the fact that the Secretary of State has included a significant redistributive element in his proposals. However, may I remind him that it remains the case that those authorities that have to do most to secure more business investment in the way of infrastructure development still have the least money with which to do it? The local government system really needs to take better account of that fact.

The local government system ensures considerable redistribution from more prosperous areas to less prosperous areas. One thing that will very much warm the cockles of the Deputy Prime Minister’s heart is TIF—tax increment financing—which will give predictable incomes from business rates, ensuring that local authorities will be able sensibly and prudently to borrow against that.

I am concerned that my constituency will lose out by something in the region of £20 million each year, which obviously comes on top of the £5 million following the end of the working neighbourhoods fund, the slashing of council budgets by a quarter and the abrupt cancellation of the housing market renewal initiative. Will the Secretary of State guarantee that funds will flow back into Hartlepool after year two, and that the Government will invest for the long term in my town, rather than embedding poverty and deprivation?

The hon. Gentleman should speak up for Hartlepool. [Hon. Members: “He is!”] That is, he should speak up in a way that he did not—or his predecessor did not—when the Labour Government took away area-based grants. When they did that, there was not a whimper from the Labour Benches. It is because of the good services of the coalition that we are able to introduce some kind of transition. The short answer to the hon. Gentleman’s question is yes.

My right hon. Friend referred in his statement to port rates. The Valuation Office Agency is now going round rating certain berths in Goole as sole-use berths, which means that businesses in my area are going to be significantly affected vis-à-vis other ports on the Humber. Is he going to review the role of the VOA as we move forward on local government finance?

Fortunately for the fate of the VOA, it is not accountable to me. It is a constant source of amazement and entertainment, but I hope that it will see reason so far as my hon. Friend’s constituency is concerned.

Can the Secretary of State tell us what local authorities will be doing to generate growth under the new scheme that they are not doing now?

God help us if the hon. Gentleman does not understand that. Local authorities work hard to bring new things into their areas and to ensure that there is a balance. The difference between this system and the existing system is that, at the moment, despite everything that the local authorities do, we take the money away from them and it goes back into a central pool. In future, they will keep that money, which will give them an incentive—[Interruption.] The hon. Gentleman clearly does not seem terribly familiar with the entrepreneurial system that exists. His counsel of despair is that we cannot do anything and should not do anything but continue to stand here with our hands out. That is not really a policy; it is a surrender.

I very much welcome my right hon. Friend’s statement. Will he confirm that, contrary to the call from the Labour party, business rates will not be raised for small firms in my constituency or elsewhere in the country?

My hon. Friend makes a reasonable point. He will recall that we have introduced a simplified system for small businesses, to ensure that in the long term they will not have to fill in forms continuously in order to get the necessary rebate. Another important difference is that, unlike what was promised in the Labour manifesto, we are committed to keeping the formula. We are not going to increase the level of taxation, because to do so would have a disastrous effect for firms across the country and for the small firms in my hon. Friend’s constituency.

Business rates from retail and commercial developments are at least five times higher than those from manufacturing in the north-east, but manufacturing is worth £7.5 billion to our economy. Is there a danger that manufacturing could lose out as retail and commercial developments are favoured as a better business rate bet?

I have obtained the briefing from the Association of North East Councils that the hon. Lady has just cited. It takes no account whatever of the fact that there is a tariff and a top-up. Opposition Members seem to think that we are dealing with some kind of Monopoly board on which local authorities can decide between retail and other developments. The truth is that the market will decide these things. Where the local authorities fit in is by not getting in the way of the market but working with it and deciding to go for growth. Opposition Members cannot honestly believe that local authorities can just sit there and say, “We’ll have a supermarket on every corner.” They cannot seriously believe that that is what the real world is like. Our proposals will remove a lot of the obstacles to growth.

My borough of Thurrock currently collects £92 million a year in business rates, but keeps only £52 million. Much of that contribution is generated by two areas, West Thurrock and Tilbury, which also happen to be the least affluent parts of my constituency. Does my right hon. Friend agree that it is much fairer if those communities benefit from the business rates that are generated in their area?

My hon. Friend makes a reasonable point. It has been said many times at this Dispatch Box that the problem with the existing system is that it does not take into consideration the difference between poverty and sparsity. There are whole sections of Essex and the Thames corridor where poverty exists but is simply not recognised by the formula. Our system will react very quickly, because the business rate value can show, in year, where things are going right and where they are going wrong. Many elements of the existing formula are rather outdated and very unreliable.

I am reminded of Garrison Keillor, the American humorist, who describes Lake Woebegone as a place where

“all the children are above average.”

Does the Secretary of State intend to have a year zero in order to achieve the outcome he has described, perhaps in 2013, whereby the present arrangements for business rates would be frozen and the change would start thereafter? Or is he proposing a change before that date? If he is proposing a change after that date, what does he mean by an area that “benefits disproportionately” from growth? Will he define “disproportionate” for us?

Of course I would be happy to do that. I am sorry that the hon. Gentleman’s joke fell rather flat, but it was funny in retrospect. We will be adjusting the figures in 2013, assuming that we have leave to bring in the Bill, and we will provide an update on the latest figures because there are certain problems, particularly with regard to population. Members should understand that the figures will be based on the fact that relative need was increased to 83% so this is a very progressive settlement in terms of proportion, particularly for areas of relatively low income. Once the figures have been arrived at, we will continue with the new system.

I welcome the Secretary of State’s announcements; anything that can be done to incentivise local authorities will obviously be beneficial. May I just query the section of his statement in which he talked about “a special local levy to capture a share of that benefit”? Local levies can of course sometimes be set at such a level as to create a disincentive. Will he elaborate on the level that he is considering?

I shall continue to answer the previous question as well, as I forgot to answer the point about disproportion. We need to understand that business rates grow in different parts of the country at different rates. If we did not have a levy, places such as Westminster, and Hammersmith and Fulham, would grow very quickly, and the amount of money coming in would be in the teens and twenties, although we would normally expect growth to be in single figures. We would therefore need to ensure that a levy was taken off, and we would use a sliding scale to achieve that. I always want to be in a position to ensure that, no matter how fast the growth—and even if it was only a tiny few pence in the pound—local authorities would continue to benefit. The more they grow, the more levy they will contribute to other parts of the country.

Taken to their logical conclusion, the Secretary of State’s proposals will mean that County Durham will lose £130 million while the City of London and Westminster will gain £1.5 billion at the end of the process. Does not that demonstrate not only that the system is unfair but that the Secretary of State is further rewarding financial services while kicking manufacturing in the teeth?

I want to be absolutely clear: that is simply not going to happen. There will be no movement of millions of pounds from one part of the country to another, except in this sense: the north of England will continue to see money moved from the south—not out of charity—to ensure that, as part of England, it enjoys the growth in national wealth. The idea put about by Opposition Members that this means that County Durham is going to lose £x million is risible. Labour Members need to get themselves a policy, because that kind of opposition is simply pathetic.

I warmly welcome this proposal, particularly the plain English guide attached to it—would that more Secretaries of State did the same! Is my right hon. Friend aware that the Labour-run Nuneaton and Bedworth borough council in my constituency owns many empty shops in the town of Bedworth? That drags down the town, but the council appears to make no effort to try to fill these shops, get them off the books and get them generating income. Will my right hon. Friend confirm that the measure he has announced today will give the council the incentive to do that and get those shops filled?

They will now. The folks of Nuneaton are about to see a lot more shops being filled. This is not unusual for any council anywhere in the world—except for England. Only in England do we have an incentive for our areas to get worse. If we were to look at councils in France, Germany and America, we would see the councillors sit down at the beginning of the year and then at regular intervals to say, “We’ve got empty shops; what can we do to fill them? How can we attract national names to come to Nuneaton to make the difference?” I guarantee my hon. Friend that that is exactly what will happen with his local council very soon.

I have listened very carefully to what the Secretary of State has said this afternoon, most of which I found to be gobbledegook. The thrust seems to be that everyone is a winner in this process. Let me tell the right hon. Gentleman that, barring an economic miracle in Hull, we will lose about £45 million by 2014-15. That is based on the figures produced in today’s proposal. How is that going to help economic regeneration and lift people in my constituency out of poverty?

The hon. Lady should know better. Frankly, there is no point in just hurling vulgar abuse across the Chamber. She knows, and we know, that under this system a proud city like Hull has a better chance of being able to enjoy the fruits of its labour in bringing in investment. The hon. Lady should start speaking up for the city of Hull rather than decrying it. It is a fine city in the mouth of the Humber; it is time that she spoke up for Humber.

I welcome my right hon. Friend’s announcement. The people of South Derbyshire, with their go-ahead South Derbyshire district council, will be at the forefront of bringing this forward. For four years, we have been saying that we are open for business. This is absolutely excellent; this is what we need in the midlands today.

I am grateful for my hon. Friend’s comments. This system was designed for the go-getter that she undoubtedly is, and it will do a lot of good for her council. We will ensure that this system releases local authorities from the shackles of failure.

Every time the right hon. Gentleman utters the words “fair” and “equitable”, we become much more sceptical on this side of the House as we realise what is happening under this scheme. While Westminster will roar ahead over the next few years, councils like mine in Enfield in the outer boroughs of London will do very badly, yet many of the people who live in Enfield work in Westminster, and many of the businesses in Westminster are run by people from Enfield so there is an interdependence. What recognition will there be in the system that although many people contribute to the so-called growth in local authority areas, not all of them live there?

The hon. Gentleman raises a very important point. Already the London councils are working on a pooling system for the receipts of the business rate, and are fairly well advanced in their planning. The advantage of having pooling across London is that any growth in Westminster—the hon. Gentleman is right to say that it will indeed be great—will be shared with the people of Enfield. I urge him to look at the part of the consultation paper that deals with pooling. He makes a very reasonable point and something clearly has to be done about it. I would expect other parts of the country also to pool so that rich authorities and poor authorities can both enjoy the benefits of growth.

Does the Secretary of State agree that one of the most exciting parts of his statement is the opportunity opened up for local authorities through their freedom so that areas like Great Yarmouth, working with the county council and local businesses, might finally be able to invest in infrastructure and see the development of projects like the third river crossing, which were never possible under the previous Government?

That is certainly true, given the ability to have tax increment financing schemes in the projected Bill. That would certainly help my hon. Friend’s constituency, which has not done particularly well out of the current grant system. I think that, with the help of the distribution, this has the potential to provide the good people of Great Yarmouth with an opportunity to develop the front and to look to that additional crossing.

One of the advantages of enterprise zones is that businesses based on them will gain from business rates. Will my right hon. Friend confirm that local authorities with enterprise zones in them will not lose out as a result of this proposal?

My hon. Friend makes a very reasonable point. It is important for maintaining the advantages brought by enterprise zones that we do not count that money at all so that they get that sum absolutely free of any changes to top-up or tariff.

Can my right hon. Friend clear up some of the confusion of Opposition Members by confirming that the authorities that will benefit relatively from what he has announced today are not those with a large business rate base or those in particularly affluent areas, but those that will enjoy relatively high economic growth in future? At a time when our country is crying out for economic recovery, surely this is a strong and sensible piece of public policy.

My hon. Friend absolutely sums up the case for this change. It will ensure that local authorities enjoy the benefits of growth and that they will be in a position to generate more income directly by their actions.

Does the Secretary of State agree that linking increased yield of business rates to the activities and performance of councils really will help economic growth, particularly when localism too is thrown into the mix?

My hon. Friend makes an interesting point. By itself, this change to the way in which the business rate is collected and distributed would not bring about the necessary change. It is only when it is combined with the full effect of the Localism Bill, particularly the power of general competence, that its full importance can be felt.

Under my right hon. Friend’s proposals, will councils be given the autonomy to encourage growth within our town centres—for example, by being able to offer incentives on non-domestic rates to fill our empty shops?

My hon. Friend raises an important point. The Localism Bill enables local authorities to be able to offer those kind of discounts, clearly demonstrating how the Bill and the reform of local government finance combine. I repeat that, despite the hot air and anger, it is our intention as far as possible to move forward on the basis of consensus. I hope that, when Members reflect and look at the consultation document, our proposals will receive enthusiastic support on both sides of the House.