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Local Government Finance

Volume 552: debated on Monday 29 October 2012

Motion made, and Question proposed, That this House do now adjourn.—(Greg Hands.)

I wish to raise the issue of 12 district councils that face substantial reductions in the overall funding they receive as a consequence of the proposed reforms to local government finance. The councils affected are Great Yarmouth, Bolsover, Barrow-in-Furness, Hastings, Pendle, Preston, Chesterfield, Copeland, Thanet, Breckland, my own constituency of Hyndburn, and that of my neighbour, the hon. Member for Burnley (Gordon Birtwistle).

I welcome the Minister to his place and congratulate him on his promotion; I hope it is successful. However, its great irony in the context of this debate is that he is now the Minister responsible for making the decision on funding. To add to the irony, his council is the one most affected, with a reduction of £3.167 million—equivalent to a 29.3% reduction in core spending. Another irony is that because my researcher took ill last week, I have had the assistance of a researcher who works for my hon. Friend the Member for Luton South (Gavin Shuker), Lara Norris, who is hoping to be Labour’s prospective parliamentary candidate in the Minister’s seat, Great Yarmouth. I thank her for her out-of-hours commitment.

The nub of the issue is that most of these 12 councils face a reduction in Government support of over 22% despite the Chancellor’s suggestion in the autumn statement of 2010 that no authority will suffer cuts greater than 8.8%. In 2012-13, the transition grant was provided to authorities whose spending power would have decreased by that figure. All 12 authorities are shire districts, and 10 of them are among the most deprived districts in England, according to the English indices of deprivation. Tonight’s debate is intended to make the case that the Government’s proposals on creating a new funding baseline should include the historical amounts that councils have previously received but apparently may now lose.

Local government finance is an area of deep complexity that central Government have struggled with for decades. Numerous weighty tomes have been produced on suggested reforms. This Government and the previous Government have taken steps to try to ensure that the system is fair and flexible, and, most importantly, meets the needs of the vast majority of the citizens of the UK. Over many years, the basis of Government funding to local authorities has been a national needs assessment that attempts to determine how much central funding should go to each local council.

The hon. Gentleman is making a very strong case on behalf of the 12 district councils. Without the funding, our cuts in Burnley will be 28.7%. This situation arises from a history of make-up money that the previous Administration gave us over a few years and that has now been rolled up and is needed by the authorities. Does the hon. Gentleman agree that the authorities have done everything they can to balance their books and make themselves more efficient, but they would never be able to manage without that money?

I am grateful to the hon. Gentleman for his comments, which I will address as I go along.

The system deals with more than £20 billion each year and funds more than 400 local councils, police and fire authorities. It is based on a vast array of data capture, statistical calculations, needs assessments, local taxation and an overall limit of the funding available. The Department for Communities and Local Government does its very best to produce a workable and fair system, and by and large the system is able to do that for the majority of councils. I believe that all Members accept that basis for local government financial settlement.

Successive Governments have recognised, however, that this imperfect system does not deliver the money needed at a local level in particular cases, especially those relatively small and few in number district councils that face severe depravation issues. District councils such as mine in Hyndburn and neighbouring councils such as Pendle and the hon. Gentleman’s in Burnley, as well as others further south, such as Great Yarmouth and Hastings on the south coast, are all disadvantaged by the complexities of the current system, which is not able to place the money collected centrally through taxation into local people’s hands in a systematic way.

All Governments have recognised the additional challenges faced by the most economically disadvantaged district councils and have provided specific additional funding to them over many decades in order to correct those deficiencies. This has been done by a series of extra Government grants under a variety of names, most recently by the current Government through the transition grant. This money recognises the additional challenges that these councils face and that the overall national system of sharing funds between all councils is simply not sophisticated enough to deliver what is needed and what is fair to the handful of district councils that face the same challenges as some of the most deprived urban areas in our metropolitan areas.

I do not believe that this is a race to the bottom or a party political issue. My own constituency, Hyndburn, was Conservative-run for 12 years until last year, yet made the empirical case for extra funding repeatedly. Similarly, Great Yarmouth was Conservative-run for 11 years until last year and has been predominantly Conservative since 1973. Pendle has nearly always had a Lib Dem or Conservative-led council. Hastings has had a Labour-run council for only six of the past 40 years and Burnley has been Liberal Democrat-run for 10 of the past 13 years. Pendle, Burnley, Great Yarmouth, Thanet, Breckland and Hastings all have Conservative or Liberal Democrat MPs. Those constituencies are deprived—they range from 11th to 58th out of the 350 or so local authorities—and it is the economic disadvantages that they face that create the depravation.

I know that there is some concern that the previous methodology of providing additional funding through a series of non-mainstream grants year after year to the most deprived areas appears to be a perverse incentive. However, I cannot accept that Liberal Democrat and Conservative councils and councillors have the ambition of creating greater deprivation or that their vision is simply cash handouts from the Treasury. Hyndburn council has an ambition—and this funding will help it to achieve it—to lift Hyndburn out of the 100 most deprived constituencies in the country and to be in a position whereby local circumstances are conducive to a better local economy that will result in greater prosperity for the people it represents. An 8.8% cut in funding is a serious enough financial blow to the ability of these authorities to meet their ambitions for their residents without it being escalated unfairly and, I would add, cruelly to a 20% to 30% cut.

The Government now have the opportunity, through the changes they are making to local government finance, to embody the transitional funding that those councils have previously received into their baseline funding. By taking that simple step of adding the previous transitional grant to the baseline funding for the 12 most deprived councils, the Government can permanently ensure that the previous practice of local government funding based on evidence and need remains. Without that simple step, there is a danger that those councils, which deal with some of the most economically challenged areas of the country, will, because of the quirks of the distribution methodology and the inability to achieve precision, have significantly less resources to deal with their challenges.

The overall level of funding needed to help solve the problem is very small, at about £20 million, but it would make a vast difference to what the councils in question can achieve, as it would represent a significant proportion of what they can spend. In the case of my council, Hyndburn, the money that the public face losing through general taxation—for it is their money, their council—is the equivalent of almost 24% of its net budget.

I worry that the sheer scale of cuts facing the councils in question may force them to make obscene decisions. I am sure the Minister will argue that Conservative and Liberal Democrat councils did not waste money when they were running the authorities I have mentioned. There is no fat to cut from them and there are no efficiencies to be made. They have already made efficiencies for several years, and most notably for the past two years. It is worth adding that as district councils they have very small overheads.

The 20% to 30% cuts to the core funding of those councils cannot be made simply through efficiencies. They can be made only through large cuts and the axing of services. In a survey of readers of the Eastern Daily Press, which covers Great Yarmouth, nearly half the 750 residents asked stated that they would want council tax to be increased by the maximum possible should transitional relief be lost. Some 41% wanted to introduce car parking charges, and when it came to cuts the arts and sports came top of the list. I would not be shocked if obscene decisions were made to meet the cuts, such as collecting rubbish every four weeks or selling off parks that do not have a protective covenant.

It is not perverse to ensure that the 12 district councils in question have the funds that they need to deliver the economic regeneration required in their areas. Adding to their funding the amounts that were previously allocated to them through the transitional relief grant is necessary and fair. That £20 million should be rolled into their baseline funding on a permanent basis under the new arrangements, to ensure that they do not receive a disproportionate cut above the 8.8% ceiling. Let us remember that some councils received no cut at all, or only a small reduction, in the 2010 autumn statement. The councils in question face the maximum reduction in funding and the loss of transitional relief, and asking them to shoulder unfair cuts will have a dramatic impact in areas that remain some of the most challenging in the country.

I congratulate my hon. Friend on raising the matter. His argument on behalf of the towns in question is very important. In Bolsover, every single pit was closed within a space of 10 years following the 1984-85 strike, and every single textile mill was closed at the same time. That thrust Bolsover into the few most deprived councils, which is why, like he says, it needs help.

I am grateful to my hon. Friend. His council faces cuts of £1.93 million, the equivalent of 25.9% of its core funding. In Hyndburn, similarly, devastating economic impacts over the decades have made it hard for the constituency to compete economically. The loss of the cotton industry was the start of that. There now needs to be infrastructure investment in such areas, so that they can compete economically with others.

The figure involved is small—£20 million in the context of an overall budget in excess of £20 billion. Finding the £20 million needed from that £20 billion so that we can continue to have a fair settlement for the 12 district councils in question would require an adjustment of only one hundredth of 1%.

I congratulate the hon. Member for Hyndburn (Graham Jones) on securing this debate. He has comprehensively set out the pressures that many of us recognise are facing the 12 local authorities in receipt of the 2012-13 transitional relief, as well as highlighting the potential consequences of removing that funding.

The transition grant was paid in 2011-12 and 2012-13 to local authorities that would otherwise have seen a reduction in revenue spending power of more than 8.8% in either year, based on spending power figures as set out in the provisional 2011-12 settlement. The hon. Gentleman will know from the consultation undertaken last summer, following the local government resource review, that the transition grant was not included in the establishment of the baseline for 2013-14. That is because the grant was only ever intended as a one-off, temporary funding stream. Councils will have realised that from the fact it was referred to as a transition grant.

The hon. Member for Burnley (Gordon Birtwistle) made a strong case for those councils that have done excellent work to reduce their overheads, but that is not the case for all councils. The hon. Member for Hyndburn name-checked and promoted my constituency of Great Yarmouth a number of times in his speech, and I am grateful for that. However, that is a good example of an authority that did a lot of work towards shared services and management structures, right up until this year when the Labour council came in and put an end to that. The council is now trying to find the money that it had pledged not to spend, and it realises that it should have gone ahead with the shared services deal that it stopped, thereby saving itself a huge amount of money. The council now has a transition grant that it has not used for any transitional work. At the moment, it is looking at large potential payoffs for chief executives, which it argues is for the purposes of efficiency. That is not the kind of good work to cut back on costs that the hon. Gentleman highlighted and that has taken place in some local authorities.

I appreciate the Minister giving way given that I took some time for my speech, but this is not a party-political issue. Most of the authorities involved were controlled by the Liberal Democrat or Conservatives over the period in question—as the Minister accepted—and the problem to which he refers in his constituency is perhaps a legacy issue with the chief executive. I would not like to make this a party-political issue. It is much broader and longer than that, and membership of these councils has come from parties on both sides of the Chamber.

The hon. Gentleman makes a fair point, but we must be clear that his party stood in an election this year saying that it would not do shared services. It won that election and got the political mandate to do that, but it cannot now expect the taxpayer to cover that political vanity. It has to find those savings; it was a transition grant. If they were doing the right thing, councils will have used those grants to find savings and prepare themselves for when the grant ends, as it was always intended to do.

I am aware of the concerns about possible financial pressures raised by local authorities such as Hyndburn. A number of responses to the Department’s technical consultation on the business rate retention scheme raised queries relating to the funding of a transition grant. Those queries deserve full consideration, and I am sure the hon. Gentleman will understand it when I say that the Government will consider carefully all the responses that the consultation received before finalising the design of any scheme. I have also received a number of letters directly, and met people and heard direct representations from councils. I am meeting another group of councillors —including from Great Yarmouth—over the next few weeks.

Let me be clear about why we are introducing changes to the funding of local government from next April, as that will clearly have a knock-on effect and have an impact on the situation. Allowing local authorities to keep a share of business rates will deliver a radical reform of local government funding. It will put a strong financial incentive for economic growth at the heart of the local government funding system. Currently, councils that succeed in attracting new businesses bear burdens—for example, a bigger bill for street cleaning in order to look after busier roads. Under the current funding system, councils do not see any direct financial benefit from those successes. That is why we are introducing proposals that will enable local authorities to keep a proportion of locally collected rates to help fund the services that they provide. That will create direct links between rates collected and local authority income, thereby increasing the financial incentive for local authorities to drive economic growth.

The Minister makes a good point, but it is almost as if he is re-reading a speech about the new homes bonus. There is no housing market in Hyndburn. We need investment in infrastructure, skills and apprenticeships, and, as he said, we need to clean up the industrial estates and attract business. Without the funding, we do not have the levers to make that an attractive proposition.

I will come to the new homes bonus, but I would hope that local authorities have been doing what he suggests with the transition grant to do their part for the local community’s economic growth. The incentive in the business rate scheme is there to drive that and to provide greater flexibility and freedom for local authorities to make decisions and manage their budgets efficiently.

As the hon. Gentleman suggested in his speech, for too long, the finance system has encouraged a sense of dependency. Councils have competed with one another in a race to the bottom to present themselves as being more deprived than their neighbours to secure more handouts from central Government. In place of that system, this Government have set out reforms that could deliver a £10 billion boost to the wider economy in the period up to 2020. Councils will have a key role in growing their local economy through the planning system, local transport investment and other levers of which they wish to take advantage. The business rates retention scheme will give councils every possible incentive to create the conditions for local growth.

The new homes bonus, which the hon. Gentleman mentioned, is another way in which local authorities can increase the funding they receive. We have established the bonus as a powerful, simple, transparent and permanent incentive for local communities to increase their aspirations for housing growth. In 2012-13, only the second year of the scheme, we will pay out a total of nearly £432 million to local authorities in England, with an average payment of £1.2 million. The figures will be higher in 2013-14, because they will include the year 3 allocations.

The Minister makes a powerful argument for some parts of the country, but not for the 12 authorities. Does he agree that it is not in local authorities’ gift to purchase houses? It is a question of whether there is demand in the market. Without the infrastructure and the attraction, and the jobs and skills, there is no housing market. The new homes bonus is therefore perverse in those 12 areas.

The hon. Gentleman tempts me into creating a fictitious market in any given area. The reforms, including the new homes bonus and business rate retention, are part of a package. No one magic wand will fix every problem. The package will encourage local authorities to develop their infrastructure and economy. The business rate retention could bring about economic growth, and therefore there will be demand for building the right houses in the right areas, which will mean that local authorities can benefit from the new homes bonus.

For each new build, conversion, long-term empty home returned to use or new Traveller’s pitch, a council receives a sum equivalent to the national average council tax for that band. For one band D home, the council would receive £1,439 each year for six years, which comes to more than £8,500. There is also a premium each year for every additional affordable home. I therefore strongly encourage local authorities to take advantage of the opportunities that the new homes bonus provides, not only to improve the supply of housing, but to help increase their income.

Let me return to the business rates retention scheme. The detail of our proposals will enable local government as a whole to keep 50% of the business rates. Some have said that local authorities should keep all business rates, which is not realistic. We have been clear from the beginning that, within a business rates retention scheme, some business rates income would need to be retained by central Government so that the scheme operates within the existing spending control totals.

A 50:50 split means that, although central Government benefit from a share in growth, they also share any risks with local government. Crucially, we have made it clear that all the money will be returned to the local government sector in the form of grants. We have proposed that the local share of the business rates will be split between lower and upper-tier authorities on an 80:20 basis, with 80% going to the districts. That ensures that the strongest incentive is placed on the tier responsible for the planning decisions that are often the key driver for growth.

Two-tier councils also have a greater degree of protection. All two-tier county councils will be top-up authorities. Top-up amounts will be uprated by the retail prices index, thereby ensuring that counties benefit from more protection and less volatility in their budgets. That will help them to maintain their service levels while providing them with the opportunity to benefit from a proportion of growth in their area. The scheme will also include further protections, in the form of a safety net, for those cases where business rate income falls by a certain amount. This will help to ensure that support is available to local authorities who suffer from significant shocks to their incomes, such as the closure of a major local employer—as has happened in the past, as the hon. Gentleman has said.

We have consulted on the appropriate level at which this support should be available. We have proposed that it should kick in at a point between 7.5% and 10%—a range that reflects the need to balance protection, incentive and affordability. The safety net is to be funded by local authorities through a levy on those authorities benefiting from disproportionate growth. The levy arrangements will ensure that adequate levels of funding are available for the safety net, but it will also operate in such a way as to ensure that there is no absolute cap on growth—the more a local authority grows its business rates revenues, the more it will benefit from growth.

Our proposals for business rate retention will provide a real incentive for all local authorities to be proactive in taking decisions that will help to deliver growth and jobs in their areas and to receive a financial reward for those efforts. We recognise, of course, that different areas will have different opportunities, as the hon. Gentleman pointed out, and different challenges. We are confident that these proposals have the right balance of incentive and support.

I hope that my remarks have highlighted the opportunities that our new funding reforms will offer to local authorities through the business rate retention scheme, as well as some of the other opportunities available, such as the new homes bonus. I appreciate that we are also considering the response to this summer’s technical consultation, and we are preparing for the settlement we will put forward in December. Let me be clear that at the moment it is too soon to offer any certainty on decisions about transitional funding. However, as I said at the beginning, I am actively aware of the situation—with my own authority being involved, how could I not be?—and I am actively considering all the views that we have received from across the piece for the need for transitional relief funding for 2013-14. I will be able to inform the House further on that issue should we be able to develop any proposals in December.

Question put and agreed to.

House adjourned.