Tuesday 7 January 2014
[Jim Dobbin in the Chair]
Annuities for Pensioners
Motion made, and Question proposed, That the sitting be now adjourned.—(Mark Lancaster.)
Today we are covering a subject that in many ways is both dull and important. “Annuity” is a difficult word, which lacks a simple definition, and it is not something that a man or woman under the age of 50 would wisely bring up in discussion with friends. However, 400,000 people this year will buy an annuity. That figure will grow substantially over the years, and anything that affects such a large percentage of our country’s population is therefore worthy of the first Westminster Hall debate in 2014. Annuities are dull, but important, and absolutely ripe for review and improvement. It is therefore timely that Mr Speaker has chosen the subject for the first Westminster Hall debate of the year, and it is a pleasure to participate in it under your chairmanship, Mr Dobbin.
I will first outline annuities and their market as it is at the moment, who buys them, for whom they are best and least suited, and whether we need them, before looking at specific issues raised by recent investigations and considering what more might be done to improve the world of annuities. Historically, pension structures have required individuals to bring certainty to our savings, effectively by exchanging whatever pool of savings we have for known income, by drawing an annuity or by having income draw-down—two technical terms already, which are perhaps better described as “income for life”. That is what an annuity was designed to deliver, and it is derived from a complex calculation that involves bond yields, longevity and charges. In due course, I will return to discuss the last especially.
The concept of an annuity is relatively simple: to provide older people with the certainty of knowing what their income will be in an otherwise uncertain world of costs and, perhaps, care. In a world of defined-benefit pensions, we had such certainty, but that world—outside the public sector—is going fast, so certainty of income is a bigger issue than it was, and in today’s world many people are searching for it. We might therefore imagine that an annuity is the product for today. As auto-enrolment expands, reaching about 8 million new pension savers, net of opt-outs, the number of new annuity customers will surely grow. It will be a slow burn, because most of those auto-enrolling over the next few years will not reach annuity-type age for some decades, but eventually the figure used in the media—the number of annuity customers doubling—will be reached. As a result, instead of more than 1,000 new customers a day in 2014, before long there will be 2,000 new buyers of annuities every day.
The annuities market will therefore soon have 500,000 customers a year, predominantly in their 60s and 70s, making what for most will be the second most important financial decision of their life—the first being their home. As Ros Altmann has pointed out, as things stand with an annuity, unlike buying a home, there is no going back: someone buys it and that’s it—no change, no transfer, no flexibility and no equivalent of renting out, moving on, selling or downsizing. An annuity therefore best suits customers who know exactly what they are looking for—because they are well versed in the language of annuities, such as open-market options, enhanced annuities or comparisons with income draw-downs—and perhaps already have a defined benefit pension and are looking to convert a smaller defined contribution pot, which is a modest percentage of their total savings.
Such customers use the comparison tables of the office of the Pensions Advisory Service, provided by the Money Advice Service. They shop around for alternatives offered by online and household-name providers. They know that they will keep the same wife, husband or partner for ever, that they will live long enough for the income draw-down to exceed the capital exchanged and the commission charges, and that, ideally, both partners will exceed the lifespan expectations of their current health and the geography of where they live—alternatively, perhaps they will buy their annuity in a poor city and thereafter move to an idyllic village where people live longer. Such a customer should do well in the current world of annuities. Unfortunately, he or she is as exotic and rare as a sacred ibis on the banks of the river Severn in my constituency.
I pay tribute to my hon. Friend for securing the debate and for the way in which he is presenting it. He rightly highlights the fact that the transaction is extremely complicated—that is exceptionally important—and he has used a range of phrases that are commonplace to financial advisers, but not necessarily understood by the clients. Does he accept that the retail distribution review, although perhaps painful in the short term, will deliver significant benefits over the longer term, but that the charging structure and the change in the culture might well put some people off seeking advice for annuities, thereby making this extremely complex transaction far more difficult for the average punter to decide on?
My hon. Friend has spent a lot of time working in the sector and knows the issues well. He is absolutely right to highlight the unintended consequence of the retail distribution review, which in a sense is to put people off the idea of buying up-front advice on a complex product such as an annuity. For those who have a relatively small pot of savings, such as £20,000, £30,000 or £40,000—a lot of money for some people—the idea of paying £400 or £500 for advice is not attractive. My hon. Friend is right to highlight that, because it is one of the issues.
I drew attention to the perfect customer for an annuity; let me now give the other side of the coin. By contrast is the customer who is told by the provider of their direct contribution pension—his or her only modest source of savings—that they need an annuity, has no idea what an annuity is and asks the pensions provider what they can offer; who has no idea whether that offer is good, bad or indifferent, goes for the cheaper of the options available, probably leaving out any cover for his or her partner and certainly any provision for inflation, and forgets to mention perhaps a hereditary heart weakness; and who moves from a suburb to the inner city to be closer to shops and a hospital, lives for a few years and then dies, having drawn only a small percentage of income from a capital sum that has now disappeared, leaving their wife, husband or partner on the state pension. For what purpose did he or she save?
With longevity the way it is, we might argue that such a customer scarcely exists, as we would all hope, but the reality is that some of his or her characteristics are a reality—as the Pensions Advisory Service has confirmed—especially in the understanding of what they are buying. Ros Altmann has estimated that insurers will often keep between half and three quarters of a pension fund they take over and convert it into an annuity.
I did a quick reality check on the word “annuity” in a Gloucester pub last weekend. Of the 22 people I asked, six said it was a financial thing like a pension, one of those said it gave income and most of the rest said they had no idea. I accept that it was a bad weekend for Gloucester rugby, and trying to discuss annuities in a pub was pushing my luck, but I do not believe that the people of Britain know what an annuity is or that the average response would be any different. Why is an annuity useful? Do people have to have one? The answer is no. How do they go about getting one? An annuity is potentially the second biggest financial purchase of our lives, so the current state of information about them is worrying.
In any market that size—£12 billion a year is big—if a customer feels that he or she has to buy something but does not really know what it is, the definition of good value is elusive. Customers need a lot of knowledge to pick the right product and the market is dominated by a handful of big names, so there is a danger of high charges, a lack of transparency and inadequate protection. The annuities market more than lives up to all those risks. I rang the Pensions Advisory Service yesterday to get some initial advice—just one man in his 50s ringing in to ask questions about annuities. I got good general advice on a whole number of issues, but when I asked about charges, I was told confidently, “You will never be able to work out what the charges are.” I asked the helpful adviser whether he thought that was right. “Not for me to say,” he replied, which was fair enough. However, it is right for hon. Members to raise and challenge the situation on behalf of our constituents, who ought to know what they are being charged for a product as important as an annuity.
Almost 20,000 of my constituents in Gloucester are between 50 and 64. For all of those people, some understanding of annuities would be useful. It is not good enough to have a product for which people will simply never know the charges. The situation for annuities sits oddly beside that for their stepbrother or sister, the pension. Huge efforts are being made to clarify, and make as simple as possible, all the costs and charges for pensions; to estimate a management fee that is neither rapacious nor drives investment managers to the lowest common denominator; and, above all, to make charges transparent to the client. The status quo is tantamount to an insurance firm—everyone is under the same roof, in the same organisation—saying, “Right, over here is a team of investment managers managing pensions: you need to be squeaky clean, work out all the costs and charges and report them completely. Your margins will be tight. Over here, in this corner, we have the annuities guys: your pricing is roughly what you want it to be, and there is no need to explain or declare anything.” That has to be wrong. When such efforts are being made to ensure transparency about money coming into a pension, it is especially strange that, at the moment, the system does so little for moneys coming out of a pension and into an annuity.
For today’s debate, we have the benefit of the detailed investigations by the Financial Conduct Authority’s consumer panel and The Daily Telegraph. The latter found that differences between annuities offered amounted to as much as £1,444 a year on a pot of £100,000. The FCA’s consumer panel found that commission charges vary by up to £1,000, which might, for the cynical, explain why the industry is so shy when it comes to explaining what the charges are.
The FCA found in general that the industry was “very dysfunctional”, with “possible exploitative pricing”—up to 6% of a customer’s pot could go in commission. In a rebuke to any of us who thought that the answer might simply be to provide more information, the consumer panel found that customers are put off by the mountain of jargon and “information overload”. Frankly, I am irresistibly reminded of the endowment mortgage I was obliged to buy in the 1980s: however it was explained, it was absolute gobbledegook, and there were high commissions, often from one insurer to another. The consumer panel found that 3.5% commission for an introduction from Zurich to Legal & General seemed to be the going rate for annuities today. In the 1980s, if someone wanted to buy a house, they had to have an endowment mortgage. Later on, of course, the fabulous projected investment returns did not materialise, the mis-selling was investigated, fines were levied, the product was binned and the financial sector moved on. Will we see a repeat of that?
I chaired a seminar recently on annuities and asked the Association of British Insurers whether there was a danger of any of its members being sued for mis-selling. There was a long pause before the answer came: “Not yet.” It is therefore not surprising that the FCA consumer panel has recommended urgent regulatory and Government-led reforms to protect and benefit millions of our constituents.
I will turn now to what changes have already been made, and then move on to what could or perhaps should be done next. I start by recognising what the Government have already done. Some of the changes made by the Treasury should have been made a decade ago. For example, it has removed the default retirement age and the effective requirement to purchase an annuity by the age of 75. That is a vital change: it means people no longer have to buy an annuity, and, if they do not, they can take 25% of their savings tax-free and draw an income from the rest. That is a serious option for many people. The starting point of a debate on annuities for every individual should always be whether an annuity will be useful and helpful to them, and what the alternatives are.
There have also been changes to the capped draw-down rules—more jargon, I am afraid, but those rules have been reformed, and that matters within the sector. The Treasury has also encouraged the ABI’s new code of conduct for retirement choices, which has come into play and has made modest steps forward on explanations and general advice, but I do not believe that that is enough. At the same time, the Department for Work and Pensions has promoted open market options and obliged DC schemes to provide what it calls a “wake-up pack” of information, pre-retirement.
It is a pleasure to serve under your chairmanship, Mr Dobbin. On that point, when people previously received their packs on coming up to retirement, there was every chance that there would have been a standard form in the pack from a chosen insurer detailing a chosen product. That has now gone, and people are given a form listing their options and saying where they need to go for each. That is a great step forward.
My hon. Friend is knowledgeable and absolutely right to highlight that all ways of giving people more options and widening the market to give them choice must be steps in the right direction.
The changes that the Treasury has made do not in themselves answer the nub of the issue, as highlighted so well by the FCA consumer panel. The uncomfortable truth remains that very few people understand annuities or make the informed choices that increased choice should enable them to make. They do not understand what they are buying or whether it is the right product for them, and they have no idea what charges are being levied and whether they are appropriate. As the consumer panel concluded, much more needs to be done. The fundamental issues that I flagged up at the beginning of the debate remain unresolved. An annuity is still something that is bought once and that lasts for ever; however, the circumstances of the buyer might change.
I will finish by touching on some of the issues that could and should be addressed. I do not want to make too much of the structure of the market, but it would be interesting to hear the Minister’s views. In a way, an annuity is an offshoot of the pensions sector—it is what happens after a pension—but because it is provided by the insurance sector, it is regulated by regulators that are ultimately responsible to the Treasury. The Pensions Advisory Service is DWP funded; the Money Advice Service is separately funded, and the appointments of its chairman and chief executive are approved by the Treasury, but it is answerable for its strategy to the Department for Business, Innovation and Skills. There is therefore a sense of different advice being offered by different agencies that are responsible to different Departments. That situation does not seem wholly satisfactory to me. It is interesting that the Opposition have today chosen to put up their pensions spokesman rather than someone from their Treasury team.
There is the structural issue of how annuities are regulated and whether the gap between increasing regulation on the pension side, especially in the context of defined contributions and auto-enrolment, could be mirrored by more regulation on the annuities side. I hope that the DWP’s consultation on charges will also shed light on the charges on annuities. Perhaps the Treasury will be able to absorb that when the FCA investigation gets under way.
The broader issues remain, and the nub of the problem is that annuities are unchangeable and inflexible. It is well worth considering the suggestion floated in The Sunday Telegraph by the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb)—that annuities might be changeable when circumstances change, so that they become more like mortgages that may be fixed for a period and thereafter traded or renewed.
A couple of hon. Members have highlighted advice. There is a strong case for believing that annuity brokers are not adding value for customers and that hidden commission should be revealed and consideration given to whether it is appropriate. More specific advice should be offered. When someone rings the Pensions Advisory Service to talk about annuities, they are told straight away that the service cannot discuss an individual’s specific circumstances and cannot access information about their pension or anything else. The advice, although good, is generic, but specific advice about people’s individual situations is most needed and least available.
I am delighted that my hon. Friend called today’s debate because I have received a letter from a constituent, Mr Tejpal Singh of Stenson Fields, who asked me to ensure that the House had a debate on annuities, so a new year resolution has been kept. Mr Singh’s point was that people were given specific advice to save and were given to understand that when they took out an annuity at a specific age, the return would be £10,000 or £7,500 a year, but they are lucky to get £4,000 or even £3,000 now. That is difficult for people who have done the right thing on this important cost-of-living issue, but then the market has collapsed. I wonder whether the advice that my hon. Friend is referring to could help with that.
I am grateful to my hon. Friend, who raises an important point. There is no doubt that annuity rates have dropped sharply from 10% to 5% over the last few years. Rather like charges on pensions and on investment management generally, it is only when a market becomes more difficult that it becomes more important to shine a light on charges and commission structures, because they become a much higher part of the total cost. If someone’s significant pension pot does not generate a significant income, they want to know where the money is going. My hon. Friend is absolutely right to raise that issue, which has propelled the annuities issue on to the front pages of newspapers from the business and financial sections.
I must sound a warning to the Opposition. We have heard from them over the last few weeks and months a sudden and dramatic cry that something must be done urgently. That rather prompts the question why they did so little during their long 13 years in office, with almost as many pensions Ministers. Some of the issues have been around for a long time. I am pleased that the FCA took up the issue of annuities relatively soon after its birth, put its consumer panel on the case and has now come up with research showing, I think without further question, that the annuities market is not working satisfactorily.
I want to make three points to clarify the matter. First, the annuities market is no longer working for many people in this country. It needs to be reformed, and if that is to be useful, it should be welcomed by everyone in the industry; otherwise, annuities will have no real role in future financial planning. Secondly, the opaqueness of the market stands in stark contrast with the increasing amount of light in the pensions industry as a whole and is therefore more of an anomaly than it was. Thirdly, the reports now coming in from regulatory bodies provide the Government with a wonderful opportunity to do something that millions of people throughout the country would be grateful for and reform an imperfect market so that it works much more effectively than at present. It falls to our Government to have that opportunity, and I hope we will seize it in the remaining 18 months of this Parliament.
I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing this debate. He is spot on in saying that annuities represent an important market and that we must ensure that it functions properly, fairly and to the benefit of those who have saved for their retirement and done the right thing but now face the second most difficult financial decision of their lives. The cost of getting that decision wrong is clear.
The National Association of Pension Funds has suggested that, every year, pensioners lose between £500 million and £1 billion by not shopping around for the best annuity rate, and that they make the wrong choices for a variety of reasons. We must tackle that. The research suggests that more than half of retirees do not shop around for an annuity but roll over to one of their existing pension provider’s annuities.
When I was a Treasury Minister, I worked with the Association of British Insurers in drawing up its code of conduct, which helps to shift the balance away from the default option of staying with the pension provider and towards shopping around. My hon. Friend the Member for South Derbyshire (Heather Wheeler) referred in her intervention to the change in the wake-up pack and the forms in it. However, I question whether that code of conduct is working; we must look carefully at whether the effective default is to shop around. I am not sure that the evidence exists that the code has been as effective as it should be.
My second point, raised in the report produced by the Financial Conduct Authority’s consumer panel, is about what happens when people do shop around. It is clear that the quality of help available is variable. There are some good sources of advice, but too often they are less than satisfactory. Some websites are not clear about the charges and commission earned from putting someone in contact with an annuity provider. It is sometimes not clear whether the website is offering a view of the whole market or just part of it. I looked at the Money Advice Service’s website this morning and it is clear that its comparison tables draw information from a panel of annuity providers. Firms must be much clearer about what service they are offering when people are shopping around.
We must consider whether consumers are being ripped off by hidden charges when they are shopping around, whether they are comparing the whole market or a segment of it, and whether they understand the regulatory protection when using such websites. We must ensure that consumers are properly protected and think about existing sources of information and whether they are adequate. My hon. Friend the Member for Gloucester referred to the Pensions Advisory Service. The Money Advice Service also provides information on annuities; one recommendation from the consumer panel was that the support given through the Money Advice Service and the Pension Advisory Service should be beefed up to help consumers.
We need to bear employers in mind, as they are another important player in the market. The reason why our constituents have to make difficult decisions about how to spend their pension pot is that employees are moved away from defined benefit schemes to defined contribution schemes. We are putting much more risk on the shoulders of employees. Although a large number of employers support their employees in making such choices and put them into contact with a pension adviser at retirement, we need to encourage more employers to do that, so that more employees who are coming up to retirement know exactly what they should be looking for and who they should be consulting.
We need to look at how the annuities market functions, because a poorly performing market has a detrimental effect on income for pensioners and also, in the longer term, reduces the incentive to save. If people feel that they will not get good value for money when they retire, they think, “Why should I put money into a pension? Why shouldn’t I put money into a house instead, or into an ISA?”
We need to make sure that we have a properly functioning market. That is not to say that all that providers should be doing is the bare minimum set out in regulation. Providers should recognise that they have a role to play in having high standards, so that consumers feel that they are being treated fairly and they know, for example, what they are being charged, that they have the best possible rate and that they have explored all the options. Providers have a role to play, too, in ensuring a high standard of conduct in those sectors. A low standard of conduct will lead to potential mis-selling risks in future and, as we have seen in the banking sector, that costs the industry dear.
I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing the debate. My hon. Friend the Member for Fareham (Mr Hoban) is making a compelling argument about the need to open up the market. I have been doing some research and it is clear that more than 400,000 people a year are making this decision. That is a huge number and it makes the case for opening the market up even more important. He talked about trying to delink product choices; we can look at what has gone on in the mortgage industry, for example, in decoupling household insurance. If we move forward to a more retail approach to the segment, it will help more people have a wide range of options as they consider this very important decision.
My hon. Friend is absolutely spot on. We need to ensure that there is a more retail-type approach. One reason why people are able to shop around and compare mortgages is that there is good-quality information out there.
It is easy to compare the different rates on mortgages and the monthly payments people will make on different mortgages. The charges are very transparent as well. We can learn things from the mortgage market and its transparency that can be applied to the annuities market. I do not often disagree with the pensions Minister, my hon. Friend the Member for Thornbury and Yate (Steve Webb), but I am not entirely convinced that being able to trade in annuities will work and be effective. There are some comparisons with the mortgage market that we cannot necessarily draw.
Finally, I want to make a broader point. Over the course of the past decade, there has been quite a lot of focus on, to use another bit of jargon, the accumulation phase—what happens when people build up their pensions savings. The previous Government commissioned Lord Turner to look at pensions. I think there was some dispute between Tony Blair and the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) about whether Lord Turner’s recommendations should be implemented, but they were, with cross-party consensus. There is considerable consensus over the introduction of the single-tier pension. One area that we have not debated in enough detail today starts that process. What happens when people spend their pension pot? What choices are available to them?
My hon. Friend the Member for Gloucester talked eloquently about an asymmetry of knowledge between someone seeking an annuity and an annuity provider, and about the circumstances that people face. Alternative products, such as income draw-down products, are out there, but that transfers both the investment risk and the longevity risk to the investor—the pensioner. We need to look carefully at the products out there, recognising that this very polarised market, with annuities on the one hand and draw-down products on the other, may not necessarily be in the interests of consumers. Other alternatives might be out there.
My hon. Friend is making his points with typical perspicacity. Before he concludes, will he consider what I think is one of the biggest factors in the market—the role of the Bank of England, both in terms of what it does to savers and what it does to the annuities market?
We were not going to get very far in the debate without that being mentioned; I am surprised that we got to four minutes past 10 before my hon. Friend raised the role of the Bank of England. I do not want to digress too much into that, but the Bank of England’s research into the inpact of quantitative easing on the pensions market demonstrates that there are upsides and downsides—that QE has stimulated the economy, and that has improved the value of equities as well as having a potential impact on gilt yields. However, let us leave that to one side.
We are moving to a situation in which people coming up to retirement will have a number of different sources for income in retirement. Those may be part-time work, equity in their houses or ISAs. There will certainly be a DC pension pot and there may be a DB pension. People’s income sources and needs will change over their retirement. Given that we are all expected not only to work longer, but to live longer, we will have choices to make. We need a proper debate about how we equip people for that post-retirement phase and how they can have the information they need to make the right choices—not only about what costs they will face in retirement, but about how to maximise their income in retirement.
Annuities are an important part of the market, but they are not the whole of it and we need a bigger debate to look at what is happening. That debate needs to involve not only pension companies and fund managers, but representatives of those in retirement, as well as those approaching retirement. It needs to ensure that the regulators—the FCA, particularly—are involved, as well as the Money Advice Service.
It is important that we get the issue right, because if we do not, many of our constituents will enter retirement with a lower income than they expect—perhaps lower than they feel is necessary to meet their financial needs. That is not good for them and it is not good for us. This debate has helped to spark a much wider process of debating how we ensure that people approaching retirement get the best financial deal possible.
I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing the debate and on his chairmanship of the all-party parliamentary group on pensions, which has aired these issues on a number of occasions.
Over the lifetime of this Parliament, we have discussed the pensions industry a number of times. To date, the discussion has mostly been of the accumulation part and not, to use the jargon, the decumulation part, which we will talk about today. However, the issues are similar. I am a little less sanguine than some hon. Members who have spoken about the fact that we have fixed the transparency problems in the accumulation part of the industry—I believe we have not started to do so yet. The same problems of market failure, asymmetric knowledge and lack of transparency exist in the industry. Whether hon. Members represent the party of the cost of living or the party of hard-working people—Conservatives seem to have won in terms of numbers, at least in today’s debate—the issue really matters.
The fact that annuities are talked about so little compared with, say, energy prices, is a function of the point my hon. Friend has made. People understand annuities so little—annuities take people outside their comfort zones. That is a terrible thing when 400,000 people a year sign up for such products. This morning, during the time of the debate, 250 people will have signed up for an annuity. By lunchtime, a constituent of every Member in the Chamber will have signed up for an annuity. Approximately a third of them will have bought the wrong product within the market, even by the terms of the market. In my opinion, the market is inappropriate and a great disincentive for people to be part of the pensions industry. It is one of the reasons why so many people who should be investing in pensions would rather bite their arm off than get involved in either the accumulation or decumulation part of the industry.
Let us step back and think about the structure of the industry, because my solution responds a bit to that. It is an artificial industry, fed by tax relief. We have made the decision in the UK to have a pensions industry that is predicated on the relatively low basic state pension—it is low compared with the rest of Europe—but one that is supplemented by tax relief and private sector provision, of which the annuity is one of the final products. The tax relief that we pump into the industry is about £30 billion a year, which clearly behoves the Government to get involved. With auto-enrolment, that urgency is becoming much greater. It is not acceptable for us to leave it as an industry that has failed, on any measure, at any time when it has been looked at. It is reasonable that the Government get involved.
There are two parts to the failure. The one that gets most attention is the failure of people to shop around—the open market option—notwithstanding the progress that the ABI has made with its code of conduct. It is in that context that one third of people are currently making the wrong choices. However, that is not the only aspect of the failure. The industry is not subject to the market pressures that would cause better performance. Within the context of the industry, one third of people are choosing wrongly, but the whole industry is failing to provide products that are competitively priced and transparent.
The industry has fairly viciously applied the term “caveat emptor”. It is playing it long, because it is only a matter of time before a Conservative Government or a Labour Government take the matter more seriously and start to fix things. In discussions of energy companies, in which I have also been involved, it has been said that they operate a cartel. I do not like to use words such as “cartel” lightly, but we have to look at the return on capital employed in industries and at transparency. Anybody who compares the pensions industry with the energy industry will know where the evidence of a cartel, such as it is, exists.
The National Association of Pension Funds and Cass business school report estimated that about £1 billion a year was being misappropriated, or at least was not going to the pension holder, because about one third of people buy the incorrect product. We could fix that through the application of the OMO—more attempts to make the market transparent—but the view I took as I was doing research for the debate is that that is not actually the solution for annuities market. The solution is that the Government should offer annuities. People will say, “You want to nationalise the industry.” I do not want to nationalise the industry—I am a free marketeer. I was about to say that I am as much of a free marketeer as anyone in the debate, but then I saw my hon. Friend the Member for Wycombe (Steve Baker), who possibly would challenge that. However, I really do believe in the free market. I believe that the free market is a panacea and a great mechanism for allocation of capital and all that goes with that, but the annuities market is not working. When a market does not work, particularly a market that is at the centre of Government policy on retirement and incomes in old age, and all that goes with that, it is reasonable that we look at what we might do about it.
Our national savings organisation in Glasgow offers interest rates as the Government sell gilts. I see no reason why an organisation like that cannot offer annuities in the same way. It is basically a very simple product. Because of the interest of the industry in developing the asymmetry and all that goes with it, the product has been overly complicated.
I apologise for missing the initial part of the debate because I was in a Select Committee.
The market is not completely free. The Government have already intervened to say that people should be contributing to pensions. People do not have a choice or increasingly will not have a choice not to take part. The Government have a responsibility to the people they have placed in that position.
That is absolutely the point that I am making. It is not a free market, and it behoves Government to do more than they have done so far to get it right.
One approach is to try to make the market work better—that was the subject of some of the points that have been made already. The other way of dealing with it is more dramatic. I believe it is reasonable that the Government think very hard and seriously about providing products that would compete in the market with the industry guys, because, in any event, the principal thing that annuity providers do is match Government bonds. One reason why QE has been an issue is that the industry is buying Government bonds in order to match income and liability. It is a classic middleman thing. It is entirely reasonable for the Government—a Government of either complexion—to look long and hard at that suggestion. I believe that will happen, because we cannot continue with the market abuse that has occurred over the past two decades.
My hon. Friend makes an interesting point on which we will no doubt hear more from the Opposition spokesman, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont). Does my hon. Friend really believe that nationalisation of the annuities sector is in the overall interest of large numbers of taxpayers, who will in effect see the risk for their product transferred to them?
The point that has been made, I think, is that that risk is currently with the annuity providers; that seems to be the implications of that point. If that is my hon. Friend’s belief, it would be reasonable to say that their profits should be transparent, understood and not abusive.
Does my hon. Friend not see that that is precisely the argument for reform? The case I have made is that the opportunity is there. The initial research by the consumer panel provides enough light to justify a more detailed investigation, which is happening. The Government can then make decisions to reform the industry. The mortgage sector was reformed, but the Government are not providing the country’s mortgages.
My hon. Friend is right that the Government do not provide mortgages, but they do provide people with interest rate products. There is an analogy with annuities, which are an extremely important transaction. In any event, the industry is an artificial one, because it is driven, as I have said, by tax relief. Annuities are not optional—we can draw down, but, broadly speaking, until very recently, everybody has had to buy an annuity.
By the way, I did not advocate nationalisation. I am advocating that the Government offer a product. They can compete with the existing market, rather like the National Employment Savings Trust competes with the existing market. That is not nationalisation. If the existing market is pricing things in a certain way and making very clever decisions on longevity and actuarial things and so on, it will win, and so be it; good luck to it. However, I suspect that that may not be the case. We must bring trust back. I agree that it is important to make the market work. I floated the point about national insurance because I think that that proposal will have to happen, but I also think that there are a number of things we could do to make the market work better.
One objective of the FCA is to promote competition. It is currently undertaking a thematic review of the annuities market. That would be a very good starting point for it to undertake a market study to look at the economics of the annuity industry, to see whether it is making excessive profits, and to understand the charging structures in order to help to inform what the next stage of the reforms of the annuity market should be.
I have absolutely no problem with any of that. In fact, the next point in my notes is on the Office of Fair Trading. We should try to make the annuities market work better, in the same way as we should make the accumulation market work better. The fact that NEST has been introduced is not a reason not to have that happen. My proposal on the Government offering annuities alongside the market is not a reason not to make the market work better.
The point was made earlier on education in the market, the retail distribution review and all the rest of it. I do not agree that the charging structure is a disincentive, if that was the point made by my hon. Friend the Member for Vale of Glamorgan (Alun Cairns), who has left the Chamber. It might be a disincentive, but it is no worse than a charging structure that pays people to recommend products based on commission and all that that means. That is not a solution in its own right, but I agree that we should try to make the market work better. We should hold the ABI to account on the application of the OMO.
We could try other things. If one third of people continue to stay with their existing supplier and buy inappropriate products as a consequence, there is a case for enforced separation, meaning that people buy the decumulation product from a different provider from the one from which they buy the accumulation product. That is entirely reasonable if the OMO code of conduct does not work better—it is currently rather patchy.
Another thing we could do to make the market work better is enforce the simplification of annuities, exactly as we have done in the energy industry, with bands to allow the comparison of products from different providers. The case for that is even stronger in the pensions industry than in the energy industry. I want recognition that draw-down might be used on smaller pots than at present, so that it receives wider application. When I speak to anybody who is about to make a decision on whether to use an annuity or a draw-down, I recommend that they think long and hard before they go down the annuity route. We could do more on that.
We need to make the market work better. The point I made about national insurance also applies to accumulation. NEST is working quite well, and it will be an incentive for reform in the industry. We could do the same with the decumulation part of the industry.
I have a couple of final points. It is interesting that a Treasury Minister is replying to the debate and a pensions spokesman is speaking for the Opposition. In a way, the issue has suffered because it has not wholly been owned by either Department and has tended to fall between the two. I hope that that does not continue. I also hope that people in the industry listen to the debate—I see that a couple of them are in the Public Gallery—because it is not right for the current situation to continue. It is not right that the industry response is to play it long. In the time I have been speaking, 40 people will have signed up for annuities, 15 of whom will have bought the wrong ones. We owe it to all our constituents to get that fixed.
It is a pleasure to serve under your chairmanship, Mr Dobbin. I congratulate the hon. Member for Gloucester (Richard Graham) on securing the debate, because annuities continue to rise up the political agenda. I was struck by the hon. Gentleman’s speech, which I interpreted as a clear message that the market is not working properly. Indeed, I understood him to say that the annuities market was broken and cannot be fixed simply through individual engagement by consumers. The repeated references to the Financial Conduct Authority’s consumer panel report were helpful, because the whole thrust of that report was that the market cannot be fixed purely by increased transparency.
Several Government Members referred to mortgages. A big difference between mortgages and annuities is that annuities are one-off products, so consumers cannot learn more about annuities over time through repeated purchases. I agree with the hon. Member for Fareham (Mr Hoban) that the idea of tradeable annuities, which was floated over the weekend by the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb)—I was a little surprised that the hon. Member for Gloucester repeated that suggestion—will not get far.
The hon. Member for Gloucester provided compelling evidence of the fact that the market does not work effectively and cannot be fixed by individual engagement. His speech might stand as a metaphor for the Government’s approach, because there is general agreement that the market does not work properly—the hon. Member for Warrington South (David Mowat) made that argument eloquently. Moving from diagnosis to solution, however, the Government’s cupboard is pretty bare. I listened carefully to the solutions that the hon. Member for Gloucester suggested at the end of his speech. He noted that the Treasury had acted to remove the default retirement age and that people are no longer required by law to annuitise by 75. As the House of Commons Library made clear earlier this year, however, someone with a secure pension of less than £20,000 essentially has to annuitise by 75. Draw-down works well for those with big pension pots, but the rest of us still have to annuitise our defined contribution pot, so that is not a solution.
The hon. Gentleman was good enough to mention the Association of British Insurers code, but he was absolutely right to say that that is not enough. Let us be clear about what the ABI has done so far. The open market option gives people more information about their ability not to take an annuity from their existing pension provider. The hon. Member for Fareham was somewhat generous when he suggested that the results were not in yet to show whether that will deal with the lack of shopping around. It will not deal with the problem. All the evidence in the market shows that inertia is a powerful force on consumers that leads to excess profits for providers.
The hon. Gentleman referred to the Turner commission. The thrust of its conclusions—and, indeed, of the auto-enrolment pensions policy pursued by the previous Labour Government and the current Government—was that inertia is a fact of pensions markets. Auto-enrolment is an attempt to use inertia for the good of the public and the consumer. That is the basis on which pensions policy is developing under the pensions Minister—a process that began under the previous Labour Government.
There is a massive lack of engagement and involvement in pensions. Leaving aside the ABI, there is general recognition in the pensions world that the open market option is simply not going to do the job. That is the thrust of the FCA consumer report, which has been mentioned several times. Having looked at the matter closely over two years, and based on the Turner commission consensus, which we wish to maintain, I am prepared to say that inertia in the annuities market is a reality that leads to excess profits. That is not only my description, but the description given by the pensions Minister, who said in a recent television documentary that excess profits were being made by insurers, which is a product of inertia.
The interesting point about inertia is that that is precisely the context in which I recommended that a change be considered to the current requirement for an individual to buy an annuity for life, whatever their circumstances or however those circumstances change. That crucial change would affect the inertia about which the hon. Gentleman is concerned, because it would enable people to reconsider and change their annuity if circumstances demanded that. Does he agree?
No, I do not agree. The problem in the market is that people do not shop around, but the hon. Gentleman suggests that we should solve that problem by creating an even more complex product, in which people will magically start to engage in trading and moving from one annuity to another.
No, let me continue. It is simply not feasible or credible. The idea of tradable annuities is a non-starter, and I will set out the response to it from across the industry. Phil Loney from Royal London said they had not been thought through by the Minister. Mark Wood from JLT Employee Benefits described it as misleading to compare annuities to mortgages. Tom McPhail, who is present in the Public Gallery, said that the Government
“should not try to invent products which…aren’t likely to be…value for money.”
The Actuary magazine described the wider response from the industry as “scathing”. The idea is a non-starter.
We have heard from the hon. Gentleman, who gave a long and interesting speech, and it is now my duty to respond. I shall make a little more progress and then I will let him back in. He diagnosed the problem effectively, but provided no solution. The airy-fairy, half-baked suggestion that we should think about tradable annuities does not deal with the reality, which more than one Conservative Member has set out this morning, that hundreds of thousands of people are annuitising every year, right now. What are the Government doing about that now, in real time?
Interestingly, the hon. Member for Gloucester diagnosed the problem very well, and understood that transparency will not solve it. The solution cannot be based on a utopian hope for greater individual engagement; it must be like what the OFT report did more widely for pensions. The demand side—the buy side—is too weak; how can we strengthen consumer weight or consumers’ ability to get a good deal? My view is that although individual engagement is a good thing, and anything that encourages it should be welcomed, it will not solve the problem, given that inertia is a central fact of the pensions marketplace.
The Opposition tabled a sensible amendment to the Pensions Bill which would at least have begun to tackle the problem, by ensuring that in the existing market—in the real world, right now—those who annuitise would get access to properly regulated, independent brokerage. That is not a panacea, but it is a reasonable starting point. It bears positive comparison with the Government’s lack of action. They have done nothing on annuities; there are no clauses about them in the Pensions Bill. That may or may not be an indictment of Government policy. No one says that the problem can be solved overnight, but surely an amendment of the kind tabled by Labour is a reasonable starting point.
More widely, the only answer is more purchasing power on the side of the consumer. That means we need to move to mandatory independent brokering, ideally in-house rather than external. [Interruption.] The hon. Member for South Derbyshire (Heather Wheeler) looks puzzled. In 2012, the National Association of Pension Funds, which is represented in the Public Gallery, rightly suggested that the annuity-buying process should be part of a pension scheme—that goes to the point that building up a pension pot is entirely part of the same process as producing an income at the end. Pension schemes should have a role in providing annuity brokering advice—that is what I mean by “in-house”.
Of course, that leads us into the argument about pension schemes being big enough for that to happen. I know that the hon. Member for Gloucester is aware, although it was not mentioned in the debate, that the market is fragmented. There are hundreds of thousands of pension schemes, but the providers of annuities are four or five insurance companies and three or four specialists. It is worth asking why market entrants do not emerge to compete with the giants. It is probably to do with the amount of capital needed, and the fact that on the insurer side it is possible to cross-subsidise products, because of being involved during the phase of building up the pension pot, as well as in the creation of a retirement income at the end. We need pension schemes to be involved as a matter of course in ensuring that their members get the best possible annuity at the end of the saving process. That seems a sensible way to proceed.
The hon. Member for Warrington South, who has done doughty work in the area we are debating, suggested that there should be a Government-backed annuity provider, and the hon. Member for Gloucester intervened and said that that was nationalisation. If it is, then so is the National Employment Savings Trust, which the Government support. NEST is a Government-backed scheme intended to bring down the benchmark for charges during the phase of building up a pension pot, and it has been very successful. That is not nationalisation, and nor is the suggestion of the hon. Member for Warrington South.
The hon. Gentleman’s earlier reluctance to give way is uncharacteristic, especially as 45 minutes were left in the debate for Front-Bench spokesmen. He has two or three times confused issues, especially on my exchange with my hon. Friend the Member for Warrington South about nationalisation. My hon. Friend clarified that and explained that he was looking for participation in the market, not domination of it. Members on both sides of the House have an opportunity today to express their views and reach a consensus; the review by the Financial Conduct Authority and the consultation by the Department for Work and Pensions provide an opportunity for the House to move forward on an issue of concern to all our constituents. Does the hon. Gentleman agree? He should surely reach for consensus, not political division.
I am not sure what the point of the hon. Gentleman’s intervention was, other than to show that he had not understood the point made by the hon. Member for Warrington South. Everyone else understood that he meant proceeding in the way NEST does, rather than nationalisation. For people who understood the point, no clarification was needed.
There is a fundamental difference between NEST facilitating the building up of pension pots and the state bearing additional longevity risk by providing annuities. The additional longevity risk would be borne by taxpayers if it were not correctly assessed. That would add to the existing longevity risk that taxpayers face through changing demographics and increased care bills and pension costs.
That sounds a plausible point; I should say it is for the hon. Member for Warrington South, who put the idea forward. My observation is that the idea is not nationalisation, but something along the lines of NEST, and that it would at least be worth thinking about for the Government.
Since we are discussing the point I made, I feel I should chip in. Of course it was about participation. Two of my hon. Friends have made points about risk. The state already carries risk of inadequate pension provision, which is manifested daily. To talk about further risk in that context is disingenuous.
That is clearly a matter for Conservative Members to debate among themselves after we leave the Chamber.
We face a broken market; the question is what to do about it. It seems to the Opposition that the way forward is increasingly to involve pension schemes in—I am wary about using this term, as I try not to use the jargon—“decumulation”. Pension schemes are involved in building up savings pots for members. They should also be involved in turning those savings pots into retirement income, which is what the process is all about, after all. Moving to a system in which pension schemes ensured that their members got decent, well regulated brokerage advice would mean bigger pension schemes, because many very small pension schemes do not now have the ability.
We have mentioned NEST. What does it do about annuities? It has sealed panel bids from annuity providers for each cohort coming to retirement. That is not the whole of the market, because NEST must annuitise for people with very small pots, as part of its public service objective, but that is the road we must go down. The Royal Mail pension scheme is another one that recently announced that it would provide an in-house brokerage service for its members.
The hon. Member for Gloucester was absolutely right in his analysis of the market. The problem—it is not his problem; he is an august Back Bencher, but not on the ministerial team—is that so far the pensions Minister and, I assume, the Treasury have not come up with anything concrete. Until they do, the hundreds of people who are annuitising as we speak and the 400,000 people who annuitise every year will surely look at the Government and ask when they will end the rip-off and the excess profits. If the pensions Minister says that insurance companies are profiting excessively from annuities, when will the Government act? Surely it must be sooner rather than later.
I make this point again to the Government, in the hope that they might listen. Any solution that depends solely on increasing individual consumers’ engagement in the process of buying an annuity will not succeed. The whole thrust of Government pensions policy since Turner, which this Government have continued, is that inertia is a reality that we must make work in the public interest, rather than in the interests of pension company shareholders. That has been the thrust of pensions policy for a decade now. Any solution to the annuities market dysfunction must start from that assumption. In the spirit of the Turner consensus and co-operation on auto-enrolment, I urge the Government to take heed of that reality in the annuities market.
It is a great pleasure to serve under your chairmanship, Mr Dobbin. I congratulate my hon. Friend the Member for Gloucester (Richard Graham) on securing this debate and opening it so well. He brings to the matter his professional experience before entering the House, his experience as chairman of the all-party parliamentary group on pensions and his experience of discussing these matters in Gloucester pubs, all of which have helped our deliberations. I thank my hon. Friend the Member for Fareham (Mr Hoban), who served with such distinction as a Treasury Minister dealing with such matters for more than two years and made a substantial contribution to the Government’s achievements in the area. I also thank my hon. Friend the Member for Warrington South (David Mowat), who spoke with great passion and demonstrated his determination to ensure that consumers—our constituents—are served well by the annuities market.
It is a priority for all of us that the annuities market should work in consumers’ best interests. When people have saved hard for a pension, it is right that they should get the best out of their savings on retirement. The decision that people make about their savings on retirement can determine what income they receive for the rest of their lives. Undoubtedly, it is one of the most important financial decisions that a person can make. As we have heard, more than 400,000 people purchase annuities each year, and studies show that there can be more than a 30% difference in the incomes offered by providers, highlighting the importance of making the right decision.
The Government want to ensure that the annuities market works in favour of the consumer and that consumers can make well-informed decisions to secure the best rates and exert effective competitive pressure on the market. The Government have been working with industry and consumer groups to make effective changes in the market, including work carried out by the open market option review group, which has introduced a number of measures aimed at encouraging consumers to shop around on the open market when buying an annuity.
For example, as my hon. Friend the Member for Gloucester pointed out—as did my hon. Friend the Member for Fareham, who worked so hard on the matter—the Association of British Insurers has introduced a code of conduct for retirement choices, which came into effect on 1 March last year. The code is binding on all ABI members that sell annuities, covering almost all the market. In addition, tailored advice and tools have been developed by the Money Advice Service and the Pensions Advisory Service to help consumers understand their choices and promote the benefits of shopping around.
The ABI code has brought about an important change in how annuity providers communicate with their customers, a point raised by my hon. Friend the Member for Fareham and my hon. Friend the Member for South Derbyshire (Heather Wheeler). The removal of application forms from pre-retirement packs actively encourages consumers to engage with the important process of choosing their annuity type and provider, ensuring that they do not automatically settle for the default. Through requirements on providers to provide better information to retirees in their wake-up packs, and new and improved tools such as the Money Advice Service’s comparison tables and the Pensions Advisory Service’s online planners, we can ensure that consumers have the resources that they need to make informed decisions.
The ABI will evaluate the impact of its code in March this year, one year after its implementation. The OMO review group will also evaluate its wider package of measures and their effectiveness.
I apologise for not being here in time, Mr Dobbin. My plane was an hour late, so I could not be here. I also apologise to the Minister and to the hon. Member for Gloucester (Richard Graham). I wanted to speak in this debate, but I did not have the chance. Does the Minister agree that the language used in the selling of annuities, especially to elderly people, must be such that they can understand what they are getting themselves into? I believe that they do not.
The hon. Gentleman raises an important point. It must be right that we should do all that we can to ensure as much transparency for consumers as possible. That includes a number of aspects, some of which I have mentioned. Let me go further.
The code and other measures will only be as successful as the outcomes that they prompt. We want clear evidence that more people are making active, better choices about their retirement income as a result of the changes. If we do not, we will not hesitate to consider further action. In addition to the ongoing work to help consumers make better choices, the FCA is currently conducting a thematic review of the annuities market and how well it is working to serve consumers’ interests, a pricing survey of all annuity providers and a comparison of the rates available to consumers through a range of distribution channels. The review will consider whether firms create barriers that can restrict consumers from shopping around, and what risks and potential for detriment those barriers may present for consumers. I look forward to the report’s initial findings, which will be published next month.
Although it is imperative that the annuity market works in the consumer’s interests as an effective option for retirement income, it is important to consider the retirement income market as a whole to ensure that consumers have income flexibility in retirement. To increase flexibility, the Government have removed both the default retirement age and the effective requirement to purchase an annuity by age 75. Whether they annuitise or not, individuals are permitted to take 25% of their accumulated pension savings as a tax-free lump sum before going on to secure an income with the remaining savings. To ensure that that income can best serve retirees’ needs, the Government have reformed the capped draw-down rules and raised the annual withdrawal limit from 100% to 120% of the value of an equivalent annuity. That can help to raise the retirement incomes of individuals in draw-down arrangements who may recently have experienced reductions in income due to wider economic conditions.
There is additional flexibility for those with a guaranteed income of at least £20,000 a year. With income already secured, they have the option of a flexible draw-down arrangement, in which they can withdraw any amount from their pension pot. Those coming to retirement will benefit from having more flexibility in deciding how to provide an income for themselves in retirement, and for those with small pension pots, the Government have taken steps to reform the trivial commutation pensions tax rules. An individual who is aged 60 or over with total pension savings of less than £18,000 can withdraw the entirety of their savings as a lump sum. The first 25% of that lump sum is normally tax-free, with the remainder taxable as income. In addition, small occupational pension pots under £2,000, and up to two small personal pension pots under £2,000, can be taken as a lump sum for those aged 60 or over, even when people have savings in excess of the aggregate limit. All those options add flexibility.
Having a decent retirement income is driven by two factors: saving enough for retirement through working life, and making good choices at retirement to secure a reliable and maintainable income throughout retirement. It is important to remember that the biggest determinant of how much income someone receives in retirement is how much they have saved during their working life. With the introduction of auto-enrolment, the Government have taken a huge step forward towards ensuring that consumers start to save for their retirement and carry on saving throughout their working life. Auto-enrolment is the most important pensions change for a century—around 6 million to 9 million people will make new savings and increase savings for their retirement. It is estimated that that will generate around £11 billion in extra pension saving by 2020, which will mean an extra £11 billion coming to the retirement income market within the next six years and a new wave of retirees with robust defined contribution pension pots, making it all the more important that we ensure that the retirement income market is working effectively.
The Government are also acting to protect those valuable savings. We recently consulted on proposals to cap pension charges and introduce a range of transparency measures as a means of ensuring that savings are not eroded by charges. We are currently assessing the responses to the consultation and an announcement will be made when that work is completed.
The Minister is right that the Government are consulting on pension charges. I have two questions for him. First, have the Government given any thought to annuity charges and to capping them? Secondly, approximately what level of charge does he believe is reasonable on an annuity of £100,000 during the lifetime of that annuity?
I suspect that my hon. Friend will not be surprised to learn that I am not inclined to be drawn into specifying what I believe is a reasonable charge for an annuity. What I will say to him—I will expand on this in a moment—is that we want to ensure that the annuities market works. We want to ensure that there are competitive pressures in that market. In the light of the consultation that we have undertaken on pension charges, the work undertaken by the FCA and the analysis of the evidence that has already emerged on the ABI code of conduct and so on, we want to ensure that the spotlight remains on the market, so that we do everything we can to ensure that it works effectively for consumers.
We are committed to ensuring that consumers have access to retirement income options that provide a reliable and decent income throughout retirement. That is an agenda to which ministerial colleagues in the Treasury and the Department for Work and Pensions and I are committed. We are working together to ensure that consumers have appropriate options, value for money and support when they come to turn their hard-earned pension savings into a retirement income. As the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), who has responsibility for pensions, has recently suggested,reforms will be considered in the context of that work. That is why the Treasury and the DWP are currently considering the broad range of research and evidence on decumulation and how the market is working—to explore the impacts and interactions between market and consumer behaviour and Government policy.
I thank my hon. Friend the Member for Gloucester for securing and opening this debate. It has allowed us to discuss important annuities issues that are crucial for consumers if they are to secure the best from their savings at retirement.
I will be very brief, and I am grateful to my hon. Friend for his very measured reply to the debate. When the FCA review is published and when the ABI one-year review of the code of conduct comes out, the Treasury—as the Minister was saying—will look closely at how well the market is working. Just so we can be absolutely clear, if there is evidence that it is not working as well as it should and that there are hidden commissions, unnecessary charges and all the rest of it, will they be taken into consideration and reviewed and changed if need be?
Let me put it this way: the industry, the Government, the regulator and consumers all have roles to play in ensuring that consumers get the best deal. So far, action by the Government, the industry and the regulator has focused on ensuring that the market works more effectively to ensure that consumers shop around; identifying conduct risks that prevent them from doing so; and ensuring that they have the right tools and information to make informed choices and provide competitive pressure on the market. However, as I said earlier, those measures are only as effective as the changes they bring about, and they should not stop here.
The Government look forward to the results of the ABI’s evaluation of the effectiveness of its code, and to the FCA’s findings following its thematic review of the market and how consumers are being treated. They will complement the Government’s review of the evidence on how the market is operating and whether improvements are necessary. However, to answer directly the question put by my hon. Friend, the Government are serious about ensuring that the action already under way has a clear and positive impact. We have not ruled out further action in future.
Does the Minister accept that the thrust of pensions policy has been to accept the reality of inertia and harness it for the public good? Everything that he has read so far from his script has been about individual engagement. Does he think that individual engagement is enough in this market?
The hon. Gentleman is too quick to dismiss the role of individual engagement—it seems to me that he dismisses it almost completely. It is important that we engage individuals in such hugely important decisions, that we increase transparency and that we remove any hidden barriers that may exist. There is consensus—we all want the market to work. If we are to succeed, we must take every measure available to improve individual engagement. We should not dismiss it.
Is not the point that we can design legislation around inertia to benefit from it, and that we can also design out inertia? The default—acquiring an annuity from a pension provider—can be designed out through an effective open market option, which will ensure that consumers can shop around and have good-quality information. The mass engagement solution put forward by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) is another way of tackling inertia. He accepts that we can change inertia and get people to shop around instead.
My hon. Friend puts it very well and I agree with his point.
To conclude, the view of all hon. Members who have spoken in the debate is that annuities are very important. There are concerns as to whether the market has worked as well as it might have done during a number of years, but there is recognition that the Government have made a number of reforms on our watch—I am delighted that my hon. Friend the Member for Fareham, who was so involved with those reforms, is here. However, we must keep our eyes on the matter and keep the spotlight on the annuities market. Crucially, we must ensure that the market is working in the best interests of consumers.
Health Funding (Telford and Wrekin)
Mr Dobbin, it is a pleasure to see you in the Chair this morning and to have the opportunity to talk about health funding in Telford and Wrekin.
The objective of all of us, across the political divide and in the health community, is to strengthen the links between the formal national health service and local authorities and care providers in the community. That is the general consensus and I think everybody agrees with that as an overarching policy. However, I am concerned about the amount of resource available to tackle issues to do with continuing health care in the community in Telford and Wrekin, and about how that health funding integrates with the work that the local authority is doing.
It is pretty much acknowledged, across the political divide, that Telford and Wrekin council is a good unitary authority. It performs well and is working hard to ensure that it protects local residents as we move through a period of budget restraint and cuts to services. That is difficult and tough for the local authority and it has a major impact on our community. The way we integrate health services with the ongoing provision of front-line social care services is important.
The council is undertaking a consultation on its budget. Real pressure is emanating from Telford and Wrekin clinical commissioning group’s stance on funding continuing health care cases in the town. Some 50% of the council’s revenue budget—the money it spends on day-to-day services, such as caring for the elderly, looking after children and taking care of the environment—comes from the Government, and in the last three years it has been cut by almost £29 million.
By the end of 2015-16, the cut in the council’s funding from the Government will have reached nearly £50 million. These are cuts to cash grants that the Government provide to the council. Clearly, if inflation is taken into account, the real-terms cuts are much greater. At the same time, the council is facing major challenges from the growing cost of caring for increasing numbers of vulnerable people in our community. The CCG has added to the financial pressure by shunting around £8.5 million of costs that it would previously have covered in respect of CHC cases to the local authority. That is being done by the CCG’s taking a much harder line in the assessment of CHC cases. That is impacting seriously on the council and its budget.
Today is about exploring what more we can do to integrate health funding with the work that the local authority is doing in its social care environment. To set this out fairly starkly, in 2009-10 the primary care trust spent some £13.9 million on CHC cases. In 2012-13, the equivalent body in Telford and Wrekin spent just £2.3 million directly on care packages for CHC. I acknowledge that the CCG has topped that money up this year, with an additional £2.4 million, but that is a one-off payment. There is concern that such an enormous reduction in funding for CHC cases is putting enormous pressure on the health service and on front-line integrated health and social care services.
The other important issue to consider is how the funding formula has been calculated in respect of the number of people receiving continuing health care funding in our community, in comparison with surrounding locations. As at 30 June last year, there were 19.4 people per 50,000 population in Telford and Wrekin receiving CHC funding; in Shropshire, the figure was 82.2 per 50,000 population. Considerably fewer people, proportionately, are receiving CHC funding in Telford and Wrekin, but I cannot for the life of me determine why. Some have said that it is because Shropshire has an older population and because its structure is different, but it might be imagined that, given the provision of community hospitals in other parts of Shropshire, the figure would be different and that Telford and Wrekin would be doing far better.
If Telford and Wrekin is compared with similar local authorities—what might be called its Chartered Institute of Public Finance and Accountancy neighbours—we see that we are struggling to match the numbers of people per 50,000 weighted population who are receiving continuing health care funding. For example, in Warrington the figure is 54.6, in Darlington it is 65.1 and in Stoke-on-Trent it is 48.4 of weighted population per eligible 50,000 people. I reiterate that the figure is 19.4 in Telford and Wrekin and I cannot understand why, in that context, so few people are receiving continuing health care funding. This places enormous pressure on the local authority. As people move out of hospital or into care, whether at home or in other settings, the council is having to step in and try to provide care and support that ought to be provided, in my view, by the health service.
Although I accept that the primary care trust, at one time, was generous in its CHC funding compared with national averages—I mentioned the historical figures—the position now seems to have reversed. As I said, the ratio of CHC cases per 50,000 population in Shropshire is almost four times higher than in Telford and Wrekin. The council has calculated that, if the CCG spent at the national average, it would need to spend in the region of £7.65 million. That is significantly different from our current funding profile. I am concerned that the formula is not working effectively for Telford and Wrekin—either that, or the assessment procedure is not being undertaken in the same way as in other areas of the country.
The Prime Minister made it clear in the Conservative manifesto for the last general election that health funding would be protected. I am concerned that costs are being shunted away out of the health service and on to local authorities. The real concern is that these hidden cuts within the health service are being fed through into the local authority sector, so that nobody notices. Well, I hope that after today people will notice. This dilemma will be faced by a range of local authorities that will increasingly have to pick up costs that would previously have been met by the health service.
The Minister is a good man with a good reputation for understanding how the health service works—understandably, given his background—and I am sure that he agrees with my opening remarks. We want to see better integration between the health service and social care, as provided by local authorities. That is what I am calling for today. I should like him to look at the formula for Telford and Wrekin overall, in terms of the work being done by the CCG, and at whether the assessment procedure operating in our area is correct and being applied effectively.
The council is making a lot of savings. It has delivered more than £50 million of ongoing annual revenue savings, and it is considering proposals to cut the remaining £23.7 million that has to be saved over the next two years. Colleagues from mid-Wales will have seen the coverage in the Shropshire Star over the past few days on how the council is working extremely hard to identify where some of the cuts can take place. We have already seen significant cuts in the council’s back-office staff, and large numbers of people have left the structure of the local authority—1,000 posts at the council have been deleted or become subject to voluntary redundancy in recent years—so there has been a lot of work to try to pare back costs.
In the next two years, the council will endeavour to meet the Government’s proposal to freeze council tax too, because we are conscious of the big cost-of-living issues for ordinary people. That means that some of the cuts to front-line social care services will fall on the most vulnerable people in our community. If the continuing health care budget is not correct, and if the health funding that passes through, in partnership with local authorities, to care for the most vulnerable people in our community is not correct, we will have an even greater challenge in the long term.
We are trying to develop proposals to make savings at local authority level, but the Government need to reconsider the issue of continuing health care. I would like the Minister to address direct support for trying to achieve a fairer apportionment of CHC costs between the CCG and the council in future years. The council’s managing director has written formally to the CCG. I understand that, fortuitously, a meeting is taking place today to discuss some of the issues.
I am not pitching for large pots of new money. We just want a fair deal on what we are entitled to, and I hope that the Minister can reassure us today that he is aware of the issues and how important they are for health funding within our community. I also hope that he is aware of the pressure on Telford and Wrekin council, which I think he will agree is a good council that tries to do a good job and is trying to deliver on the Government’s commitments while ensuring that we provide care and support for some of the most vulnerable people in our community.
It is a pleasure to serve under your chairmanship for the third time, Mr Dobbin.
I congratulate the hon. Member for Telford (David Wright) on securing today’s Westminster Hall debate, on his strong advocacy for the needs of his constituents and on his highlighting of the importance of political consensus on these issues. He is absolutely right to do so.
We know that the single biggest challenge facing our health services is how better to look after older people and people with long-term disabilities and how to provide dignity in the care of people as they grow older. The key to delivering better health services for that group—and for all patients, including those in the early years of life—is an increased focus on integration and more joined-up health care services. That is very much at the heart of the hon. Gentleman’s contribution, and I hope my remarks will reassure him that it is very much the focus of the Government’s stewardship of the health care system.
The hon. Gentleman will be aware that a £3.8 billion integration fund has been set up that will, in the longer term, drive and improve joined-up services between local authorities and the NHS. For far too long, there has been too much silo working. Silo budgets have sometimes reinforced the silo working, and it is often patients who have fallen through the gaps and paid the price. That is why the Government are determined to fix the situation and ensure that, not just through the changes we are introducing in the Care Bill but through the integration fund, there will be greater synergy of joint commissioning and pooled budgets between local authorities and the NHS, where that is to the benefit of patients.
It was a pleasure for me to visit the Princess Royal hospital in November 2013 to see the birthing centre and the development of the new women and children’s centre. As the hon. Gentleman will be aware, the trust has benefited from some £35 million of external capital money to support its capital investment programme, including the development of the women and children’s centre, which is due to open in autumn 2014.
Before we proceed, there are two issues. First, there is the key issue of how the national funding formula is set. I reaffirm that throughout the NHS, including in Telford and Wrekin, there have been real-terms increases in NHS funding under this Government. Secondly, the local CCG has discretion on how it allocates its budget, so there is some local discretion, which probably goes to the heart of some of the hon. Gentleman’s concerns.
Until recently, the funding allocation was set by the Department of Health, but under the new arrangements politics has been taken outside the setting of health care funding; NHS England now has direct responsibility for funding allocations. The NHS, through NHS England, relies on the Advisory Committee on Resource Allocation, or ACRA, and its assessment of the expected need for health services to help set allocations for each area.
We were all pleased that, for the 2013-14 allocations, NHS England decided that following the ACRA recommendations exactly would lead to higher growth for areas with better health outcomes and possibly reduced budgets for areas with less good health outcomes. Given that, like NHS England, we are all concerned about reducing health inequalities, the important decision was made to maintain the substantial weighting in the formula for areas of deprivation and health care inequalities. The ACRA formula was not directly followed, an issue on which we have touched in previous Westminster Hall debates. NHS England’s thinking, in outline, was that the recommendations were inconsistent with the responsibility to reduce health inequalities. NHS England conducted a fundamental review that has informed the allocations.
On 17 December 2013, NHS England’s board met and agreed CCG planning guidance and allocations for 2014-15, which will help commissioners to commission services for the benefit of local populations. The Government have protected the overall health budget, and NHS England has ensured that every CCG in England will continue to benefit from at least stable real-terms funding for the next two years.
The Government’s mandate for NHS England makes it clear that we expect it to place equal access for equal need at the heart of its approach to allocations; to consider health inequalities; to ensure a transparent process; and to ensure that changes to allocations do not destabilise local health care economies. A rapid change to or endorsement of the ACRA recommendations would have led to mass destabilisation of local health care economies. NHS England was mindful of that, and of the need to prioritise funding for areas of deprivation, in its allocations.
The 2014-15 allocation for Telford and Wrekin CCG will be almost £187.8 million—the per capita allocation is £1,058 a head, about the same as my constituents receive in Suffolk. That is a cash increase of 2.14% on the funding that the CCG received this year. The CCG will also receive a 1.7% increase on its allocation for 2015-16, which means that its funding will go up to almost £191 million. Additionally, NHS England has announced that the Shropshire and Staffordshire area team will receive a 2.38% rise in primary care funding in 2014-15 to almost £342 million and a further 1.8% increase in 2015-16 to more than £348 million. Those increases are higher than average, which reflects the historical underfunding in those areas against the primary care funding formula adopted by NHS England. I hope that is some reassurance to the hon. Gentleman that, in a general sense, increased funding is coming to his part of the country.
The hon. Gentleman will be aware that the Government have also provided £221 million in additional funding to the NHS to help cope with winter pressures this year so that patients get the treatment they deserve. Winter is a challenging time for all health care services, and it is right that we have put in place additional money for the NHS. The local health economy has received £4 million in additional funding, of which £1.2 million will be directly invested in Shrewsbury and Telford Hospital NHS Trust to staff all escalation areas.
The trust has also outsourced a proportion of day surgery to the Nuffield hospital to protect elective activity, should that be necessary at times of high demand during the winter. The remaining £2.8 million is being used to improve unscheduled care capacity and flow outside the hospital. An additional 69 beds have been sourced outside the trust, including intermediate care, care home and specialist dementia beds.
As the hon. Gentleman will be aware, the winter pressures money is being used to fund intermediate care beds and the focus on rapid discharge, not only in Telford and Wrekin, but nationally to some extent. That benefits not only the NHS, but local authorities, and it is part of the drive to achieve more integrated and joined-up health and social care.
If an old person can be promptly discharged home with the right care package, it is important that that happens; that is better for the person and the care they receive, but also better for the NHS’s financial settlement. To put it crudely, stuffing beds with patients does not make good financial sense, and it is not good for patients, who would much rather be at home in their communities. I am pleased that the money is going towards making that possible in the hon. Gentleman’s area.
I absolutely agree with everything the Minister says—it is basic common sense. Although I am glad to hear him say it, and it is really positive, it would be helpful if he could address one concern, although I am not necessarily suggesting he will have an answer today.
I accept that we want to get people out of hospital and into their homes if possible to ensure they are cared for effectively. However, he must admit that the figures I highlighted, as well as the local authority’s concerns, suggest there has been a fairly significant reduction in the CHC pot. Given the scale of the local authority’s budget, compared with the health service’s budget, that reduction has an enormous knock-on effect on the local authority. I hope the Minister will take some time to look at that.
The hon. Gentleman is absolutely right to highlight the issue. The point I was coming on to is that although the region’s funding allocation from the Government through NHS England is going up, the CCG obviously has some local discretion over how that allocation is spent, and that goes to the heart of the matter.
As has been highlighted, continuing health care funding is the crux of this matter, and it is relevant to mention NHS continuing health care, which is a package of ongoing care arranged and funded solely by the NHS where the individual is found to have a primary health need. The NHS provides that throughout the country, and it is vital that it does.
There is sometimes quite a blurred line between where NHS funding and care end and where local authority responsibility starts. The issue is not whose budget is involved or which budget the money comes from, and that is part of the reason why the Government set up the £3.8 billion integrated care fund. This is about joining up budgets. The hon. Gentleman and I, the doctors and nurses on the ground, and the local authority are interested in the person, rather than who pays for treatment. The fund is a recognition of that, and we are setting it up to drive forward joined-up working.
However, we have to look at where we are now and why we have come to the place the hon. Gentleman highlighted. He will be aware that audits were carried out in 2009-10 and 2010-11 of the then PCT’s accounts. It was decided that the continuing health care funding was not being allocated properly, appropriately or even, potentially, legally.
At that point, the PCT was putting a lot of additional money into continuing health care, but a similar approach was not being taken elsewhere in the country. The auditors therefore rightly took the view that funding had to be allocated in accordance with the correct public rules for spending money, including NHS money, and that if money was, potentially, being allocated in an illegal way, that needed to be addressed under the rules at that time.
Yes, indeed, I do believe that. My concern is that the figures I highlighted suggest that, in comparison with similar and surrounding authorities, we are doing very badly per head of population in terms of the assessment process for qualification for continuing health care. That suggests to me that the pendulum has swung too far in the other direction and that the assessment procedure is being used to ensure that the figures are kept down.
I am concerned that some people with care needs in the community will lose out—as the Minister rightly said, this is not about structures and silos in the health service, but about individuals and their families in the community who are trying to cope.
The hon. Gentleman is right. In terms of the per capita spend in CCG allocations, Suffolk similarly has large towns with very rural surrounding areas, and the CCG in the hon. Gentleman’s area has a fairly similar allocation to the one I represent.
There is also an issue about how the money given to CCGs is spent. In a knee-jerk reaction, perhaps, to the auditors’ findings and the fact that the spend was not allocated appropriately, Telford and Wrekin went from being almost one of the highest spenders on continuing health care to being one of the lowest, and that is the crux of the problem. That is down to decisions by the CCG, or the PCT as it was, about how to allocate the budget given to it.
If, in 2009, 2010 and 2011, the PCT was picking up funding responsibilities that should perhaps have been the local authority’s, but then, in response to the audit, changed the amount it allocated to continuing health care, that could clearly have a destabilising effect on the local authority. However, the PCT and then the CCG have done everything they can to mitigate that, and they have given the local authority discretionary funding.
In particular, just over £3 million has gone to the local authority thanks to the fund set up by my right hon. Friend the Member for South Cambridgeshire (Mr Lansley) to facilitate exactly that kind of activity. At its own discretion, the CCG has also given the council £2.4 million on top of that, over and above what the council expected to receive. The CCG has therefore acknowledged and accepted that, in reacting to the auditors, there was perhaps an over-reaction, and it has now righted that by giving the local authority some discretionary additional funding.
That does not detract from the overriding point that, generally throughout the country, and particularly in Telford and Wrekin, we need to see increased emphasis on integration and joined-up care. It is in no one’s interests to have such discussions about funding, which waste a lot of time and effort on the part of the local authority and the CCG. If we can drive more joined-up working, more joint commissioning and more pooled budgets, where appropriate, as the Government will be doing through the Care Bill and the integration fund, the number of these turf wars will be reduced, because the emphasis will be on the patient, rather than the budgetary silo. That must be the right way forward.
I am sorry that, in this instance, the hon. Gentleman’s constituents and local authority have perhaps been caught up in errors made by the former PCT, although I am pleased the CCG is doing all it can to redress the balance by giving the local authority discretionary additional funding. I hope working relationships will improve and that, as we move forward, with further emphasis centrally on integrated health care and joined-up budgets, we will see greater improvements to the local health care economy and, more importantly, continuing improvements to patient care locally. If the hon. Gentleman wants to discuss the matter further or to meet me, I will be happy to do so.
Financial Sustainability (Local Government)
[Mr David Crausby in the Chair]
This debate is about sustainable local authority funding. It is my contention that it is neither sustainable nor local, and it certainly does not confer any authority. I will focus on our cities, not because I want to set up an argument between urban and rural areas, but because what is bad for our cities is bad for our urban areas. If our cities do not do well, rural areas will suffer.
Our cities do not reflect the national economy; they are the national economy. If our cities do not do well, the country will do not well. If we do not generate growth, the rest of the country will suffer, and one certainly does not generate growth by throttling one’s engine. Our cities are competing not with rural areas, but with other cities internationally. Cities are a complex system, even though Whitehall treats them as though they are only complicated. Jet engines are complicated; they are predictable and have predictable outcomes. Cities are complex; their outcomes cannot be predicted, and the players are not always rational. Above all, cities are systems that can come up with their own ideas and solutions to problems, if given permission to do so.
England is the most centralised country in the world—something that holds back our cities, stymies growth and productivity and produces poor value for our public services. Our cities were once great—Birmingham MPs will certainly be aware of that—but their power has continuously reduced since the 19th century and there has been a shift toward the centre. The most radical power shift probably came in the 1980s, when rate capping and financial penalties were introduced. Then, in 1986, the Greater London council and the six metropolitan counties covering England’s largest cities were abolished.
It is worth looking at the continent, where things are different.
“Every city outside the capital in Germany has GDP per capita above the national average, they are dragging the national average up. In Italy it’s six out of the eight, in France all are at or above the national average. We are the only country in Western Europe where, apart from Bristol, the level of the eight cities are some way below the national average and therefore are bringing down the national average of GDP per capita.”
Sitting suspended for a Division in the House.
Those were not my words—the comparison of England with France, Italy and Germany —but the words of the Minister of State, Cabinet Office, the right hon. Member for Tunbridge Wells (Greg Clark), who has responsibility for cities.
Previously, the Labour Government embraced devolution. We devolved power to Wales, Scotland and Northern Ireland, and we restored London’s city-wide government in 2000, led by a directly elected executive Mayor. England outside the capital, however, remains unfinished business. It is a shame that the Government imposed police and crime commissioners, but presented us with a rather botched referendum on directly elected mayors in some of our cities.
I regret that our major cities do not have directly elected mayors, because such leaders need the support of the whole electorate and not only a small cabal of their own councillors. They need authority. To be frank, the names of the leaders of the core cities ought to be rolling off the tongue in the same way as we can name Cabinet Ministers, but they do not. Running a city the size of Birmingham is probably a far more difficult task than many a Cabinet post, yet we do not give those leaders the political authority that they ought to have.
A small way to remedy the situation, citing the noble Lord Whitby of Harborne as a precedent, might be for retiring council leaders to join the House of Lords, giving some representation for local government. I am not sure that the Mayor of London would be terribly keen on a place in the House of Lords after he finishes his term, but it is worth a try.
My second contention is that local government funding is not actually local. To quote again from the cities Minister:
“At the root of the problem is a lack of local control over the cities’ own affairs and spending”.
When talking about taking up his post, he said that he had to do two things, the first of which was
“to persuade the Cabinet to accept the principle to have licensed exceptions to national policy”,
so that cities could come up with their own way of dealing with things. If I remember rightly, in questions to the Deputy Prime Minister today, a number of Members also suggested that the presumption about deviations from national strategy should be that they were allowed, rather than having to prove the case.
I congratulate my hon. Friend on securing the debate and making such excellent points. In response to my recent debate on local government finance hold-backs, the Under-Secretary of State for Communities and Local Government, the hon. Member for Great Yarmouth (Brandon Lewis), who will respond to this debate, claimed to be freeing local authorities to stand on their own two feet. Does my hon. Friend agree that it is the height of hypocrisy to claim to be freeing up our great cities when actually the Government are taking key powers into Whitehall, such as on inward investment, housing, skills, economic development and European funding?
Indeed, and I shall make that case with regard to Birmingham. Presumably, a true liberal regards the freedom to fail as a freedom, and that is one of the freedoms that our cities have been given.
The cities Minister also said:
“The second thing is to liberate from the central government barons funding that can be better spent locally.”
I cannot improve on his observation. Quite a number of colleagues will agree, in different ways, that the current funding structure is not sustainable. If there were some great vision of how our cities can succeed, we could engage with that, but what is happening at the moment is that, to quote Sir Albert Bore, the leader of Birmingham city council:
“Politicians in Westminster are systematically dismantling services that maintain the very fabric of culture and community here.”
Birmingham’s total budget for 2013-14 was £3.4 billion. That sum has to cover a whole number of things that the council must do and a number of things that the council might do. The money comes from a variety of sources, and the structure of the system is virtually impossible to explain to our voters.
I am wary of quoting figures, for two reasons. One is that we throw the words “millions” and “billions” around as if the difference is a change of just one letter. I have always found it useful to remind myself that 1 million seconds is 11 and a half days, whereas 1 billion seconds is 31.7 years. There is a massive difference. The second reason is that whenever I think I have a handle on the cuts, things change. I turned on the television yesterday and found that the Chancellor was in the west midlands announcing another £25 billion of cuts. I am not entirely sure where they will come from.
The latest figure for Birmingham is that we need to find savings totalling just under £840 million between 2010 and 2018, including £120 million of cuts in the financial year 2014-15.
The hon. Lady is making a powerful case for maintaining local government funding across the nation—not just in cities, but everywhere else—but I have one question. Those cuts are necessary because of the financial situation that the Government found themselves in three years ago. Would she prefer savings to come from local government or national Government, and, if the latter, in what areas?
That is a fair point, but as I will come to later, by the end of this Parliament local government will have taken 33% of the cuts, whereas Whitehall will have taken 12%. I will also suggest some ideas that would not be robbing Peter to pay Paul but would instead give greater liberty, in a managed way, to our cities to survive. At the moment, those areas in the greatest need are being cut most.
This might sound slightly boring, but let us look at the figures per dwelling. In Birmingham in 2014-15, using the Government’s preferred measure—that of spending power—we will lose £145.59 per dwelling, a cut of 5.3%. The national average is £71.58. Leafy Wokingham—Wokingham is not popular in my constituency because of the comparison, although one of my local councillors comes from there and takes slight umbrage that we keep quoting it—gets an increase in funding of £5.20, or 0.3%. In 2015-16 it will be even worse: Birmingham will lose 5.6% and Wokingham will have an increase of 3%. There is a whole list of shires and counties that are also getting an increase. At every turn, the combination of grant reduction and budget pressures widens to the point where—let us be clear on this—it is no longer a question of cutting services: some services simply will not be delivered.
My hon. Friend is setting out an important case. Does she agree that the issue is not just the impact of cuts on local authority spending, but the cumulative impact when taken along with welfare reforms, which tend to hit our most deprived cities the hardest? That combination is having a detrimental impact on local economies.
Absolutely. I have a couple of specific questions for the Minister that will help me outline how we can minimise further cuts.
In answer to a question on 18 December, the Minister suggested that Birmingham should
“be more efficient with its back office, and look at how to use its reserves to invest for the future.”—[Official Report, 18 December 2013; Vol. 572, c. 750.]
I had a chat with people at Birmingham city council about how much it spends on its back office services. It has already made some cuts to them, and will go on to make some of the largest single cuts in 2014-15. However, even if Birmingham were to remove its back office services entirely, it could not meet the required cuts for 2014-15, let alone those for 2015-16.
That puts me in a rather unusual position, in that I am at one with the noble Lord Heseltine. When he addressed the 200th anniversary dinner of the Birmingham chamber of commerce in April 2013, he called for no less than a “peasants’ revolt”, and I agree that that is what is needed. His definition of a peasants’ revolt was a reallocation of power back to the people who created the wealth in this country in the first place.
For that, we require three elements. The first is more control over the money received from central Government and—this is an important point—a time scale that allows for proper planning. At the moment, cuts are being imposed so quickly that local authorities, whether in cities or rural areas, have not had the time to reflect properly on how best to reorganise. In some areas, we even find confusion over which duties are statutory, because some statutory functions have been farmed out—councils have found that when they cancel the contracts, they are in breach of their statutory duties. The second element is greater freedom over the money raised locally, and the third is the means to benefit financially from investments and savings made.
However, I do not believe that that will be sufficient. Something far more radical is required. Relying on council tax to raise revenue will help only affluent areas. Capping via referendum and the utterly out-of-date banding system mean that, for authorities that rely heavily on central Government grants, relying on council tax to raise revenue just makes the situation worse. We need a more radical idea. We could raise a local tax or look at a system of apportionment of locally raised VAT to replace the grant. At this stage, I am simply looking for the Minister to acknowledge that if he continues on the current trajectory, some of our cities will go to the wall. I do not say that to be dramatic; the statement is borne out if we look at the figures.
I also have a number of specific questions. First, on the better care fund, am I right to assume that, although NHS transfers across clinical commissioning groups, which start in 2015-16, will not overtly redistribute funds from rural to urban areas, they will end up doing so in practice, given the age profile of rural areas? The better care fund is not new money, but a kind of redistribution. In Birmingham, almost 46% of the population is under the age of 30, compared with 36.8% in England as a whole. In contrast, Birmingham’s over-65s represent 12.9% of the population, compared with 16.9% in England as a whole. If we focus on the older population, therefore, we will be disproportionately hit.
The second question is about education. Education funding was not part of the local government finance settlement, because it comes mainly through the ring-fenced dedicated schools grant. However, the current formula is historic, and a consultation is going on. When can we expect the result? Will it include a minimum funding guarantee that protects against losses at a per-pupil level? Next year will be a crunch year for our cities and local authorities. Unless they have some indication of how not just the known grants, but the ones that underpin them, will play out, they will not be able to plan.
That takes me to my final observation. The Local Government Association already says some councils are not viable. How many councils does the Minister think are in that category? Does he agree with the work done by the Mayor of London, which suggests we should hand tax-raising powers to England’s largest cities? Will he give English cities control of the revenues from all property taxes, such as stamp duty, council tax, land tax and business rates? One thing is for sure: they will manage those funds differently and, I would contend, better. Will he also lift the cap on local government capital borrowing? I am not for one moment saying that local authorities do not need renewing or that some of the funding structures do not need to be looked at. However, that needs to be done in a planned and sustainable way that allows authorities to respond positively.
Finally, I invite the Minister to come to Birmingham, because 2014 marks the 100th anniversary of the death of Joe Chamberlain—the man who introduced the concept of good governance into our cities. If we do sit down and talk together about some of these structures, I hope we can come up with a way of maintaining the strength of our cities, rather than marking the 100th anniversary of Joe Chamberlain’s death by killing our cities with 1,000 cuts.
Order. I intend to call the two Front Benchers at 3.55 pm, which will give them 10 minutes each to sum up. I think six people want to speak, and while I do not intend to impose a time limit, we should be able to get everyone in if Members keep their contributions to less than 10 minutes.
I congratulate the hon. Member for Birmingham, Edgbaston (Ms Stuart) on calling this timely debate and on introducing it in a constructive fashion. However, I do not share her enthusiasm for elected mayors, so I must demur on that point.
Several people in the room have probably sat on both sides of the political fence that divides local government from central Government, so they will be familiar with the scenario many of us have had visited on us: we listen to a statement about the local government finance settlement and think, “That’s not so bad,” but when we talk to our borough treasurer, we find that the world has more or less fallen in. I am very familiar with that scenario because my first experience of Whitehall involved coming down to Richmond house to see the now Lord Boateng, who was a Minister at the time. I was castigated on behalf of Sefton council because he felt we had quite enough money to deal with our problems, while we felt the money he was giving us fell significantly short of what he should have given us.
That scenario is fairly familiar, and it is part of a very dishonest conversation that has taken place decade after decade between local authorities and central Government. It is a dishonest conversation about local resources, central resources and their effect on services. All Governments say that the funding settlement is fair and generous in the circumstances and that councils surely have sufficient funding to get by. If Ministers need a further defence, they will point to occasional—or perhaps less than occasional—instances of local authority inefficiency or profligacy. They will then point to some local authority—normally one from their own political party—that does things particularly well and set it up as an exemplar for all others to follow.
Local authorities, in turn, talk about savage reductions, service impairment and the new and sometimes unnecessary burdens that have been imposed on them, but not financed, by central Government. Characteristically, they will accuse the Government of deceitful sleights of hand, favouritism and formula rigging. I think Members will acknowledge—particularly those who have sat on both sides of the fence—that those involved put their side of the case in a very one-sided way.
The past few years have been no exception. It helps local authorities that are making their case to their local populations to blame the Government for the totality of their woes, whether those result from demographic factors or unaddressed issues from years gone by. Most local authorities worth their salt big up the cuts, blame all the financial pressures they face on central Government and try as far as possible to ignore their own failings.
Equally, central Government help themselves by confusing the grant regime, changing the names of the grant from year to year—from revenue support grant, to formula grant, to spending power or whatever—and presenting their case in the best possible way. The Minister and I have had many interesting discussions about whether to describe a local authority’s situation in terms of a fall in its spending power or a fall in its grant. I prefer the latter; he prefers the former.
The hon. Gentleman talks about authorities bigging up the cuts, but, taking into account all the adjustments he has just spoken of, Sheffield will, by 2015-16, have seen a 50% reduction in funding since 2010. That is not bigging up the cuts; it is the absolute fact. Sheffield cannot go on with that level of cuts to its funding base.
I have no experience of Sheffield, but I have experience of my own local authority, and at times it rolls up many years’ cuts into one total figure, as if those cuts were imposed in one particular year. That is par for the course. Equally, central Government will find obvious scapegoats and point to the things such as assets and reserves—they are sometimes usable, but sometimes not—as though they can be regularly tapped.
Such things are all part of the toolkit or the argument, and most people are fairly familiar with them. The public tend not to pay a lot of attention to the debate, and they almost split the difference in many cases, because they are not certain who is telling the truth. They do get exercised when council tax goes up and certainly when services they are particularly enamoured of disappear, but, by and large, they are fairly agnostic on this issue, and they do not always know who should be blamed.
However, the game has now got deadly serious. What has been a familiar scenario over many years is now having a more severe effect. As the hon. Member for Birmingham, Edgbaston suggested, the sustainability of local services and, in some cases, local councils appears to be at stake—there is a fair case to be made in that respect. If we cut through what I described as the usual dishonest conversation, there are four absolutely indisputable facts.
First, in terms of deficit reduction, councils have been hit first—that is not particularly helpful, because they have to work within annual budgets and cannot make plans over two or three years—and they have been hit hardest, as has already been said. The second fact is that the reduction in central Government expenditure is considerable, and it may end up being something like £20 billion.
Thirdly, it is also an indisputable fact that the funding reduction for local authorities is proportionally greater in the poor areas and particularly the metropolitan districts. I take that as an unarguable fact, which we can all acknowledge around the room, although we may want to explain it in different ways. That fact is well documented, and it is what the Rowntree research, the Institute for Public Policy research, the National Audit Office and the Audit Commission report “Tough Times” all say. It is an indisputable fact.
Clearly, one element in it was the initial loss of area-based grants. We could argue that that happened because the previous Government were looking after the local authorities that were most of their persuasion. However, the fall in the less affluent areas, if I can put it like that, is in no way compensated for in its totality by city deals or regional growth funds. Those are often talked of as a compensating factor, but they must be looked at in terms of the general decline in regeneration funding in those areas as a whole. Taking the totality of the issues, I would be prepared to—although I will not—argue that case at length. There is nothing to suggest that things are otherwise; the proportionate reduction in poorer areas is greater.
It would be inappropriate for the Minister to respond, as often happens in parliamentary debates, by saying that none the less Birmingham gets so much per head, as opposed to some other area that he wants to nominate. I assume that we all buy into the assumption that grant support for local authorities must be based in some way on need. Therefore we would expect per capita spending in Liverpool, for example, to be greater than per capita spending in Surrey, and so on.
Like the hon. Member for Birmingham, Edgbaston (Ms Stuart), the hon. Gentleman makes a powerful case for maintaining spending on local government. I disagree with his thesis that cuts are deeper in urban areas than rural areas, but let us leave that on one side for a moment. If I am right in guessing that the hon. Gentleman is saying that spending must be maintained at local government level, will he, a Liberal Democrat, tell us which central Government budgets he would like cut so that the local government settlement could be increased?
I am not necessarily making a case for increasing the local authority settlement. I am mainly making a fair case for different distribution, and for spreading it over more years, to enable local authorities to make the appropriate adjustments.
My fourth point, which has not been stressed in the debate so far, is that local authority spending is now significantly unbalanced. Because of the nature of the cuts, local authorities have had to concentrate on their statutory services, which primarily means social services. Most ordinary punters and electors do not ordinarily interact with social services. That is a democratic problem as well as a financial one. We have all heard of the graph of doom and the view that some local authorities will end up spending on nothing but social services. If that happens, neither electors nor the authorities will welcome it.
The hon. Member for Birmingham, Edgbaston is right about the situation. She did not say that it was not sustainable; she said that the trajectory we are on is not sustainable, and I agree. Various things could be done about it, and she suggested some. I shall not cover the same ground that she did. We can spread good practice and develop community budgets—the Select Committee did some work on that. We can talk about possible savings from the integration of health and social care, which would be good, or about possible benefits from the repatriation of rates, and accompanying incentives.
We can talk about things on a grand scale, as the Local Government Association is doing at the moment with the Rewiring Public Services campaign, which would also be good. All those ideas are ways forward, but they will not work at all unless we sensibly and intelligently—starting in this Chamber—stop the dishonest conversation and look at the facts for what they are. If we concentrate on formulae designed to present the Government’s or a local authority’s case polemically in a particular way, we will never get central and local government speaking the same language, or succeed in making local authorities sustainable as a result.
It is a pleasure to serve under your chairmanship this afternoon, Mr Crausby. I congratulate my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) on securing today’s debate.
I was disappointed at the contempt with which the Minister dealt with my question to him in response to the statement on the local government finance settlement before Christmas. Liverpool’s settlement is so dire that I offered personally to fund two rail tickets for him and the Secretary of State, so they could visit my city and look at the books. If they truly believe that Liverpool has not done everything they say a responsible council should do to mitigate the cuts, surely the Minister should have bitten my hand off and accepted the offer. It is still open—to avoid confusion, I want to make it clear that it would not cost taxpayers a penny: I would fund it from my own pocket—so perhaps the Minister will respond.
The cuts to Liverpool’s funding are deadly serious. They deserve not light-heartedness or levity, but sombre deliberation and scrutiny. That is why I felt so strongly about the lack of an adequate response from the Minister in December. Far from being a good news story for local government, as he injudiciously claimed, his statement was a disaster for local government. He also argued that the cuts he announced were fair to all parts of the country. However, far from that being the case, they disproportionately hit core city regions—those least able to absorb their severity and those with lower levels of gross domestic product.
I want to concentrate on what that so-called good news day for local government meant for Liverpool. Unsurprisingly, but none the less shockingly, Liverpool city council was once again hit hardest. The latest cut of 5.5% will have a devastating impact on a city that is working tirelessly to pull itself up by its own economic bootstraps. Even the Prime Minister has recognised the work that Liverpool has done to cut out waste and restructure its services.
Indeed, despite the latest savage cuts, Liverpool’s entrepreneurial spirit is alive and kicking, and in a few months we will host the international festival for business on behalf of the UK. Hundreds of thousands of businessmen and women will once again be able to see our city and feel the warmth of our welcome. That will happen despite what the Government are doing to us, but our resilience is legendary. It is crucial to understand that Liverpool, like all the core cities, is asking not for handouts but for a fair local government settlement, so that when the Government wield their axe it will not be hit disproportionately.
I have great sympathy when the hon. Gentleman speaks up for his wonderful city, but I feel uneasy about the way the debate is centred on how the cuts focus on poor areas and cities. Leafy, Conservative Wiltshire this year received 18.2% cuts; next year it will have 26.8% cuts; the year after that they will be 7%. We are going from a revenue support grant of £76 million down to one of £45 million. That is a great deal deeper than Liverpool’s.
I do not know the source of the evidence cited by the hon. Member for North Wiltshire (Mr Gray), but I think the Audit Commission showed that one in 10 of the best-off areas suffer only a fraction of the cuts being suffered by the poorest 20% of areas in the country. Has my hon. Friend seen that evidence?
I have, and I mean to refer to it later. I also have further evidence about how badly the Government have treated Liverpool. I understand what the hon. Member for Southport (John Pugh) said about years of dishonest argument, but that is not what we are talking about. At times that dishonest argument was about some authorities that thought they should get a greater increase than other authorities. We are now talking about savage cuts, not increases.
Not only is Liverpool’s cut the deepest; there are 38 other areas that will receive either a flat settlement or an increase in funding. How can that be fair? What happened to the Chancellor’s claim that he would not balance the budget on the backs of those in most need, or to the Government mantra that we are all in this together? Before some hon. Member intervenes with the inevitable argument that Liverpool will still receive above the national rate per capita, let me point out that the very fact that the city is struggling to meet its statutory requirements as a local authority gives credibility to the argument that further consideration of the funding formula is necessary to reflect socio-economic and multiple deprivation indices.
Perhaps the best description of the consequences for Liverpool of Ministers’ actions was from the shadow Health Secretary when he suggested:
“The Government do not understand, or they do not care, and they just rip up the fabric of an entire city. It is disgraceful.”—[Official Report, 18 December 2013; Vol. 572, c. 765.]
I could not have put it any better myself: it is managed decline, based on an inequitable formula that, at its core, is predicated on an ideological assault on the cities that no longer offer the Tories or Lib Dems any form of electoral support. It is not fair and it is not good news for local government.
I wish, in a way, that the debate had followed the lines laid out by the hon. Member for Birmingham, Edgbaston (Ms Stuart) in an admirably even-handed and non-partisan way. Is it not true, as a matter of historical fact, that under the previous Government, heat maps were generated that specifically tied public funding to areas of actual and potential Labour support? That has been in the newspapers. We know that it is a well established fact, which has been well attested from other grounds. Should the hon. Gentleman not be properly recognising that in his remarks?
Deprivation has always been recognised on heat maps and areas of the country are well known in that regard. I do not accept the premise of the hon. Gentleman’s question. If he is saying that money in the formula was given to those areas of greatest need, and that showed up on a heat map, yes, that is true, and quite rightly so—it should have been.
Some might argue that it is simply coincidental that Labour-controlled Liverpool, Labour-controlled Manchester, Labour-controlled Birmingham, Labour-controlled Sheffield, Labour-controlled Newcastle and so on are the hardest-hit councils, with, in some cases, cuts to their budgets of more than 50% over the life of this Parliament, while councils that benefit most are well-off, Tory-controlled authorities. Some might suggest that that is just a coincidence, but I do not buy that. The formula was designed to do exactly that.
Let me put on the record that the heat maps are not reflective of imbalances in deprivation funding at all. Let us take an example that is completely open and known to everyone, which is the scandal of the private finance initiative, in which 106 new hospitals were built at enormous cost. The vast preponderance of them were built around a model of funding that was for very large outpatient hospitals in major cities, and it was deliberately targeted on those cities. The result has been, at a time when health care has been moving to a much more localised, technology-enabled solution, a disaster for health care. We will find that these great hospitals, including the new one being built in Liverpool, struggle as a result.
It absolutely beggars belief that individual Members of Parliament do not understand that every area is different. Areas that had infrastructure from Victorian times, hospitals that were literally falling apart and schools that leaked, needed intervention at that time—not in 15 or 20 years, when the country might well have been able to afford it. Intervention was needed.
I am no great fan of PFI, by the way, but according to the latest figures the Chancellor is signing off as many PFI contracts, worth as much, as the previous Labour Government did. Members really cannot have it both ways—be anti-PFI while not even standing up to their own Chancellor, who is signing off these huge contracts, including the one for Liverpool.
My right hon. Friend the Member for Leeds Central (Hilary Benn) said:
“Tough times do indeed require tough decisions”—
nobody would argue against that—
“but this Government, as they have shown time and again, from the bedroom tax to the top rate of tax and local government funding, take most from those who have least. That is unfair and unjust.”—[Official Report, 18 December 2013; Vol. 572, c. 746.]
A cumulative 52% cut to Liverpool city council will mean not only that it has to make staff redundant, which means even more human misery and an even higher benefit bill, but, as I have said, that it may not even be able to fulfil the requirement to deliver statutory services to the level that it has to date. In other words, keeping our libraries open will be virtually impossible. Services for the young and old will be decimated. Children’s centres will be affected. Street lights and roads will not be repaired at the same rate, and the legacy of our year as European capital of culture will be damaged, possibly beyond repair.
Perhaps the most devastating aspect of the whole debate is the fact that decisions continue to be made, by a Minister and his boss in a cold and calculated manner, that I know will detrimentally affect Liverpool’s history, heritage and traditions and adversely affect every man, woman and child in our city.
Thank you, Mr Crausby. I am grateful to you and to the hon. Member for Birmingham, Edgbaston for calling this important debate.
I absolutely applaud the measures that the Government have taken over the past couple of years, not merely to bring the national economic crisis under some kind of financial control, but to make specific improvements to local government in the hope of making it more relevant, more accountable and more autonomous. The hon. Lady made the very good point that local government was glorious in the 19th century, and one reason for that was how autonomous it was. It is very important that we restore proper dignity to town halls, and I think the Government are doing that.
It is remarkable that the Government have been able to do that in the extremely difficult financial conditions in which we find ourselves. It is extraordinarily hard to change embedded funding decisions and disparities that have been left over from times past. In my county of Herefordshire—although we are talking about cities and the wider impact, I hope that we can strike a rural note, as the hon. Lady acknowledges the differences between them and the effects that each can have on the other—levels of funding have always been extremely low. The culture is one of making do and mending. To take one example, it was a minor miracle when we moved from having the third worst-funded schools in the country to the fourth worst-funded schools in the country, in the past year or two. I hope that we will continue to motor rapidly up the tables thereafter.
Above all, the issue is not only about local government, but about the totality of public services, because, as I think all Members would recognise, the services interlink with each other and the cumulative and interrelated effect of them makes all the difference. I am perhaps somewhat unusual in that I commissioned an independent study of underfunding in Herefordshire in 2010, which concluded, based on a comparison with other authorities, that it had been underfunded to the tune of £174 million over the previous five years—the period from 2005 to 2010. That is £35 million a year or roughly 10% of local government spending.
Those totals broke down across the public services as: police, £11 million a year; fire, £4 million a year; schools, £30 million a year; and health, £44 million a year. Each of those sums, in turn, was dwarfed by the underfunding of local government, which was £85 million over that period, or £17 million a year.
It is important to put that in perspective. It is not only about underfunding in some of the leafy suburbs to which people like to refer, because there are areas of deprivation in Herefordshire. It is not a rich place; it is a county in which the average earnings are significantly below the averages for the west midlands and for England as a whole. It is well known to those who have studied the issue that public services are harder, not easier to deliver, and more expensive, not cheaper to deliver, in rural areas than in cities, whether that involves filling potholes or the number of women whom a midwife can see in a given year.
I want to see whether I understand the essence of the hon. Gentleman’s point. Is he arguing that his area is underfunded, as a number of us would think of our areas, and therefore that central Government need to do something to relieve that underfunding? Alternatively, is he arguing that money should be taken off other areas and given to his area to address what he perceives as the underfunding problem in his area alone?
I am arguing that the situation in Herefordshire is the result of well over a decade—possibly two decades—of underfunding and that therefore, although every area has been hit badly because that is the nature of the tough times we are in, the case for treating with care and attention areas that have suffered from that inherited imbalance of underfunding is clear.
Let me give an example. In many parts of the country, local councils have reserves—indeed, large amounts of reserves that they have stored up over many years against a rainy day. That is not true in Herefordshire. Herefordshire council is only 10 or 15 years old. It does not have large inherited reserves. All the reserves it has are spoken for, more or less, and therefore it is not in the position that some cities are in of being able to draw on inherited reserves.
I am exceptionally grateful. The hon. Gentleman mentioned that Herefordshire is a relatively young county. Is not that the problem? When there was a split between Herefordshire and Worcestershire, there was always a debate about whether they were big enough to be sustainable local authorities. Do not some of the problems in his area relate to the question whether the size and configuration of local authorities is optimal?
Of course, that point would be much stronger if it were ever true that Herefordshire had received anything like a fair level of funding relative to its comparators. Unlike, I think, most other hon. Members, I have the facts and the evidence in my hands and on my iPad if anyone would like to check them, so we can be quite precise about it.
My final point has to do with reserves. Herefordshire does not have huge reserves. It has virtually no reserves and an embedded underfunding over at least two decades. In that context, the Government’s efforts to level the playing field, if that is what they are, are to be welcomed, because that is doing a difficult thing in unusually difficult circumstances. I am grateful to the Minister and his colleagues and hope that they will continue to look closely at this issue and at the disparities between different authorities as reflected in their reserves.
It is a pleasure to serve under your chairmanship, Mr Crausby. I, too, congratulate my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) on securing this important debate. She is a tireless campaigner for the people of Birmingham and, like me and many of my colleagues on the Opposition Benches, is simply unwilling to let the issue of unfair cuts to local government go.
Indeed, I have lost count—I am sure that the Minister has too—of the number of times I have raised with him and other Ministers the impact of disproportionate cuts on cities such as Newcastle, yet he continues to bury his head in the sand about the scale of the consequences of the decisions that the Government are taking. I therefore look forward to hearing his response and seeing whether he will acknowledge the impact of those decisions on communities and services in cities such as Newcastle. However, given the provisional local government finance settlement that was confirmed to the House on 18 December, I am not holding my breath.
The United States celebrates groundhog day on 2 February, but I think mine might be occurring at the beginning of this month, because on 8 January last year, I introduced an Adjournment debate on the effect of funding cuts on Newcastle city council, during which I was complacently told by the Minister:
“Predictably, the doom mongers have been consulting their Mayan calendars and issuing dire warnings about the end of the world as we know it and a billion pound black hole in local budgets. Concerns that the poorest councils or those in the north will suffer disproportionately are well wide of the mark”.—[Official Report, 8 January 2013; Vol. 556, c. 293.]
What is the reality facing cities such as Newcastle? In the debate last year, I outlined how in 2012 Newcastle city council had started to consult on a three-year budget for the period from 2013-14 to 2015-16 in the light of the unprecedented funding challenges it faced. When it began the consultation process, it believed it was looking at a funding shortfall of £90 million over three years as a result of disproportionate central Government funding cuts and rising cost pressures, such as inflation, energy prices and the costs of providing services to an ever-ageing population. That figure rose during the consultation process to £100 million, following further cuts announced in the 2012 autumn statement and the local government finance settlement. However, following the 2013 spending round and provisional local government finance settlement announced in December 2013, Newcastle city council now believes it faces a funding gap of £108 million over the same period.
I have no doubt that the Minister will again seek to dismiss concerns about the scale of the cuts faced by cities such as Newcastle by reminding us, again, of the “spending power” that Newcastle has at its disposal—it is groundhog day, after all—but I suggest, as other hon. Members and I have suggested on several occasions, including today, that that measure is absolutely meaningless if it is used simplistically to compare total spending power without taking into consideration the completely different spending pressures facing cities such as Newcastle and those facing other parts of the country with totally different needs and challenges to support.
The Minister repeatedly fails to mention the scale and the speed of the change in spending power that is proposed for the next two years. Newcastle may have a higher total spending power than certain parts of the country, but it faces a cut in that spending power of £232 per dwelling over the next two years. In sharp contrast, Wokingham, which my hon. Friend the Member for Birmingham, Edgbaston also referred to—I appreciate the concerns of the friend to whom she referred—and which the Minister often likes to cite, will see its spending power rise by £60 per dwelling, and Windsor and Maidenhead’s will rise by £32 per dwelling. Therefore, although the spending power of cities such as Newcastle is being significantly cut, the spending power of some of the wealthiest and least deprived areas of the country is not only being protected but increased under this Government. The straight fact is that the additional spending power of cities such as Newcastle has not originated from some unfair funding decision of the past, but reflects very real differences in spending pressures and, in particular, differences in the requirement for statutory services.
Newcastle, as an urban and relatively deprived city, faces significantly greater spending pressures than the two councils that the Minister frequently chooses to compare it with. However, as Newcastle city council officers have pointed out:
“The reduction in spending power of areas with higher needs and lower resources and the increase in spending power in the wealthiest areas is a trend that will continue each year if the Government continues to operate the grant system as is currently proposed. It will not just close the funding difference between these areas but in time will potentially reverse it...This effect is happening because the Government’s funding system now focusses on self-sufficiency and providing incentives for areas where economies grow as opposed to applying the core principles of providing sufficient funding to reflect the different needs to provide statutory services across the country and to compensate for very different abilities to raise money locally from a standard council tax. These were the core principles introduced…in 1993/94 by the Conservative Government at that time. The principles were aimed at ensuring that residents anywhere in England could receive a standard level of service to meet their needs with a similar council tax charge for similar bands of property. Now that this no longer holds true the provision of statutory services can and will only be achieved by councils in poorer areas with higher services demands by charging a higher Band D council tax than wealthier areas of the country. As the Government is effectively restricting increases in council tax this will in effect mean that similar levels of service (including statutory services) can no longer be provided in poorer areas of the country or those areas with higher calls on statutory services.”
Crucially, the officers say:
“It is unclear whether Ministers...fully understand the implications of the new funding system that they have introduced.”
With regard to the title of today’s debate, the key concern is the cumulative impact of higher percentage cuts and higher cash cuts in spending power per dwelling. Far from Opposition Members bigging up the cuts, those cuts will place much greater pressure on the financial sustainability of councils sooner than would be the case if they were proportionate. The Minister may decide to use his response to the debate to continue to bury his head in the sand on this critical issue. Perhaps he thinks that if he sticks his fingers in his ears and sings loudly enough, we will all just go away, but it is not just Opposition Members and Labour-run councils that fear that, although they are clearly the ones worst affected by the Government’s decisions. Ahead of the autumn statement, the Conservative chairman of the Local Government Association, Sir Merrick Cockell, commented:
“The next two years are make or break for many councils and the Chancellor has it in his power to either deliver a stable environment in which they can plan for the unprecedented challenges ahead, or he can deliver uncertainty and risk which will put even more stress on vital local services and push councils toward failure…This Government is testing the resilience of councils to breaking point and in many areas the cracks are starting to show. 2015/16 is shaping up as the crunch year and we expect some councils to be placed in a position where they do not have the money…to meet their statutory obligations.”
That is a truly damning statement, and if it comes to fruition, it will be residents of constituencies such as mine, in Newcastle North, who will pay the price.
It is a pleasure to serve under your chairmanship, Mr Crausby. I am slightly disappointed at the outcome of the debate, although I congratulate the hon. Member for Birmingham, Edgbaston (Ms Stuart) on the thoughtful way in which she introduced it. The subject of the debate deserves a little better than some of the contributions that have been made. I agree with the hon. Member for Southport (John Pugh) that we must use the debate as an opportunity to think about the sustainability of local government finance in the longer term.
Some of the matters that have been raised relate, I suggest, to symptoms rather than disease. The hon. Member for Birmingham, Edgbaston hinted at the real problem with financial sustainability in local government, which is that the state in this country is highly centralised. That needs to change. I gently say that that is not the construct of any one party; it has happened over about 50 years. In fairness, it must be said that this Government have taken important steps to seek to reverse that.
I agree with my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) that Ministers should be congratulated on the devolutionary steps they have taken at the same time as having to make significant spending reductions to meet the economic crisis we inherited. We cannot have sustainable financing for local government, which accounts for some 25% of the spend on public services, without a sustainable economy for the public finances as a whole. I do not accept lectures from Opposition Members who suggest that we should exempt local government from the necessary spending reductions.
In the longer term, we need to tackle the real problem, namely that local government has historically been too dependent on central Government grant for its finance. The Government have taken important steps to address that, but the degree of the problem is highlighted by the London Finance Commission. I represent a suburban London seat, which falls somewhere between the two poles when it comes to the matters that are being discussed. The LFC report, which the Mayor of London commissioned and endorsed, points out that some 7% of all the tax paid by London residents and businesses is retained locally, as opposed to, say, New York, where the picture is some 50%.
I am not saying that it is realistic to change those figures overnight, because we come from different constitutional and historical traditions, but we can move in that direction. In that regard, the Minister and the Government—I might have a slight interest in this—are to be commended for providing other financial levers to local authorities beyond pure dependency on central Government grant or council tax. The new homes bonus was an important additional income stream from central Government.
The hon. Gentleman rather misses the point. During the whole time that the Labour party was in government, it made no such devolutionary steps in local government finance. It ill behoves the Labour party to criticise the steps that the Government have taken against a background of financial stringency.
Secondly, the retention of business rates, particularly if we follow it through in due course and increase the local share, has a real opportunity to reduce dependency on central Government grant. Currently, for understandable reasons such as deficit reduction, the local share has to be constrained. The primary legislation is drafted in such a way as to permit the local share to increase as the economy grows. I hope that happens, and I think hon. Members would do better in the longer term at finding financial sustainability for local government if they were to support that growth on a cross-party basis rather than seek to make short-term points about the funding of individual local authorities.
To some extent, the hon. Gentleman makes a fair point about the long term. The problem is that we are dealing with the situation we are in, which is that local government is dependent on grant from central Government. Waltham Forest council, which covers most of my constituency, has already faced extensive cuts and will probably face further cuts in grant from central Government of some 8% over the next two years. That reaches the stage, as Sir Merrick Cockell has said, where it is unsustainable and cracks start to appear. My local authority has wrought miracles in delivering services in difficult circumstances, but I am not sure that that can continue.
With every respect to the hon. Gentleman—I know he thinks about such matters carefully—the problem with his analysis is that simply shovelling more money into the system that cannot be paid for in a sustainable way is not, I regret to say, the answer. A much more radical approach is needed to the way in which we deliver services, which good councils of all political persuasions are willing to undertake. We should move away from the high levels of dependency that local government in this country has on central Government bail-out.
There are things we could do. I hope we will not only increase the local share of the retained business rate and therefore reduce dependency on central Government grant, but work with the Local Government Association to deliver a genuinely sustainable market in municipal bonds, which holds real opportunities, particularly for big cities.
I hope we can extend the period of the funding settlements for local authorities. It is worth recognising, as the LGA recognises, that in the autumn statement this year we set out that local public services will get the same long-term indicative statements as central Government, which will provide more certainty. That is an important and valuable step forward, on which I congratulate the Minister. We might, in due course, roll that out to five-year settlements for local government, which will provide a sensible approach to long-term planning.
There are things that can be done, but it is not enough simply to talk about a system and to have a needs-versus-resources argument that does not recognise efficiency. We can do more in the system to recognise efficiencies and past efficiencies. Although the cities are a pressure point, it struck me when I was a Minister that we should not forget that there are financial pressures on rural authorities as well. One thing that concerned me when I first came into office at the Department for Communities and Local Government was that the then formula grant system did not recognise the cost of rural services or the particular pressures that give rise to rural deprivation. I congratulate the Minister and the Government on taking important steps to recognise that. There are positive, long-term things that we can do, and I hope the Minister will reflect on what we can build on in a constructive way.
I congratulate my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) on securing the debate. Reference has been made to the Local Government Authority’s position. It is a good idea to take notice of those who, day to day, have to deal with the problems we are discussing and make decisions in local government. Sir Merrick Cockell, the Conservative leader of the LGA, which has a Conservative majority, has said clearly that the position of local Government finance is not sustainable. I happen to agree with him, and there is cross-party agreement in the LGA. That comes about because, as my hon. Friend has said, local government has been asked to make twice the level of cuts demanded of central Government Departments. Local government services are more important than that, and the extent to which local government services have been singled out for disproportionate cuts is unacceptable.
We can argue about which authorities have had the worst deal, and I certainly argue that those with the greatest needs and traditionally the highest level of grants have had the biggest cuts in their grant. That is not questionable—the figures are there to back it up. Local government generally has a good record on efficiency savings. It has coped with the cuts so far quite well, but we have already seen across the country cuts to community services such as libraries and changes to eligibility criteria for adult social care that are affecting communities and individuals in local authorities of all political persuasions.
We cannot continue on that basis, because it is not sustainable. Cuts that are made one year cannot be simply repeated and enhanced the following year. Every year it becomes more difficult because there is less room for manoeuvre and a lower percentage of discretionary spend that can be cut. That is not a steady state, because more pressure is being put on spending for adult social care all the time. The graph of doom that the hon. Member for Southport (John Pugh) referred to is already there. As cuts are made in spending availability and extra demands are made on adult social care, the amount left for other local government services is squeezed until it becomes non-existent. Adult social care and care for looked-after children ultimately benefit a minority of people, important though those services are, and the rest of the population do not know what they get from local councils because virtually nothing is left. That undermines local democracy, which is very worrying.
The hon. Member for Bromley and Chislehurst (Robert Neill) is absolutely right that we have to look towards the longer term. The Government have done some good things, such as abolishing ring-fencing, moving a little on business rates—I would like to see more—and introducing city deals. The most significant thing they have done, however, is to undermine the basis of local government finance in this country to such an extent that a future Government simply will not be able to come back and build on what was there before.
There has to be a fundamental and radical change. There was a good contribution to the debate from the LGA with the “Rewiring Public Services” document. There was a good contribution from the London Finance Commission. The Communities and Local Government Committee is to conduct an inquiry into local and inter-city financing and how city governance affects other parts of the country. Important elements have been raised for discussion, and I hope we can take that debate forward.
In the meantime, what will the Minister do when a local authority gets into real difficulties? The National Audit Office has been highly critical that the Government have not done an impact assessment on the cumulative impact of cuts to local councils. The LGA has said that 56 councils will spend 15% above their income by 2015-16. What happens if one of those councils gets into serious financial difficulties? Would the Government insist on a council having a referendum if it needed to raise council tax by 20% to make ends meet and to deliver its statutory service? Will the public vote for an increase in a referendum if they know that the Government have section 31 powers—civil servants and Ministers revealed them to the Committee—to step in at any point and give councils extra grant to stop them from going bust? Where do we stand when an authority gets into serious difficulty, whether that authority is Conservative, Labour or Lib Dem, rural or urban, a city authority or a district council? What action will the Government take if a council gets into difficulty, which seems to me to be almost inevitable?
I will do my best, Mr Crausby. I congratulate my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) on her excellent speech, which had depth and context. The only thing I can add on the history of local government is its contribution in cities such as Sheffield and Birmingham to our housing, our schools, our leisure facilities and our libraries. The green legacy, particularly in Sheffield, bears a heavy debt to the history of local government in the area. She succinctly outlined the declining powers of local government over many decades, which was echoed by the hon. Member for Bromley and Chislehurst (Robert Neill).
The case for cities as economic motors was powerfully made by my hon. Friend the Member for Birmingham, Edgbaston. I want to compare Sheffield with Pittsburgh in the USA—she made comparisons with Europe, but comparisons can occasionally be made with the USA. Pittsburgh is Sheffield’s sister city and suffered the same decline in its industrial base, but it is now motoring ahead. Why? It is because Pittsburgh had the powers available to rebuild itself. It has focused on life sciences and hydraulic fracturing—fracking to most of us—and has rebuilt its economic base very successfully. It has managed to tap in to resources made available by the federal Government, but beyond that it has tapped into local resources and rebuilt itself. It stands as a shining example of what can be done when a city is given control of its destiny. It is not just Europe we can look to for comparisons of what can be done; sometimes, the US can teach us lessons.
By comparison, Sheffield will, over the lifetime of this Parliament, suffer a 50% reduction in its grant. Barnsley, the other borough I represent, will suffer a 41% cut over the same period. The contrast between what is happening in some of the great cities of the world and what is happening in the UK could not be greater. People living in Sheffield and south Yorkshire more generally feel emotional and strongly about the loss of their industrial base. Something has to be done to rebuild the economy of south Yorkshire. Even the boroughs of Barnsley, Rotherham and Doncaster would acknowledge that Sheffield has to be at the heart of that regeneration.
The myth about the rural and the urban needs to be scotched. Some 70% of south Yorkshire is rural, but it is within a metropolitan area. It has suffered declines greater than Herefordshire, Worcestershire and other areas in the country. I do not want to pitch south Yorkshire against other parts of the country, but south Yorkshire and areas like it helped to build the UK’s industrial base, and they have the capacity to do that again. The role of local government in that is critical. Local government as we know it is broken for ever. The model has gone. Devolution has to be at the heart of the solution for countries and regions such as ours. For Birmingham, for south Yorkshire, for Greater Manchester, for Newcastle and for the north-east, we have to have devolution and a different model for delivering local government in future.
It is a pleasure to serve under your chairmanship, Mr Crausby. I congratulate my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) on securing this very important debate and on how she has spoken up for her constituency and her city and made a wider and powerful case on the importance of our cities to the UK economy. Cities have helped to shape local government as we know it.
As my hon. Friend has said, urbanisation and industrialisation in the 19th century created the impetus in cities for the growth of local democracy, whether that was guilds of merchants and craftsmen coming together; the turnpike trusts and the improvement commissions; or the local Acts of Parliament, such as in Newcastle, to ensure that houses had privies attached to them, or those in the west midlands, where councils came together to promote an end to animal cruelty, or those of many local authorities who sought public health measures to tackle diseases such as cholera and tuberculosis. There was also the invention and confidence of municipalism in Birmingham, symbolised by Joseph Chamberlain—he was mentioned by my hon. Friend—who municipalised the gas works and the water supply. London blazed the trail for the national health service. Some 40,000 of the 55,000 hospital beds in the city were run by the county council.
Today, the challenge is even greater for our big cities. They must lead the renewal of local government, not only for local citizens who rely on their local services, but also, as my hon. Friend rightly said, for our national economy. They must do that in spite of Government policies that have hit our cities hardest of all. Birmingham council’s leader, Sir Albert Bore, said that
“these cuts will mean the end of local government as we know it”.
My hon. Friend the Member for Liverpool, Walton (Steve Rotheram) spoke powerfully about how his council has already worked incredibly hard to reform local public services and to make efficiencies. We know that local government, despite receiving the biggest cuts of any part of the public sector, is viewed by the Government as the most efficient part of it. The Prime Minister has said that.
The core funding reductions in local government are an average real terms cut of 33%, and the figures announced in the 2013 spending round envisage a further 10% cut in the local government resource budget, but I believe that it goes further than that. The key issue is the unfairness of the distribution of those cuts. By 2014-15, the 10 most deprived local authorities in England will have lost six times more than the 10 least deprived local authorities, compared with 2010-11.
While Birmingham, Newcastle and other cities will lose most, the Prime Minister’s local authority—West Oxfordshire council, which is one of the wealthiest—is seeing its spending power increase. My hon. Friend the Member for Birmingham, Edgbaston contrasted the cuts to her local authority, as did other hon. Members, with the increases in Wokingham, Hampshire, Surrey and Windsor and Maidenhead. Where is the fairness in a policy that takes most from those with least to give to those with most and a policy that takes from the have-nots to give to the haves? The council cuts are brought to us by the Government who gave millionaires a tax cut while imposing the bedroom tax on the poorest.
We know that the policy is deliberate. The former local government Minister, the hon. Member for Bromley and Chislehurst (Robert Neill), whom we have heard from, is on record as saying that. Both the Audit Commission and the Joseph Rowntree Foundation have said that councils in the north have been hit harder than those in the wealthier south-east. Can the Minister explain why that is right?
The National Audit Office has warned that cuts are having a direct impact on front-line services—we know that from our own areas—and that many councils are at risk of being unable to balance their books in future, with potentially disastrous consequences, not only for the delivery of those discretionary services, but for the delivery of those statutory services that our constituents rely on. The Public Accounts Committee report on the financial sustainability of local authorities found that there had not been a proper analysis of the impact of the cuts. The Committee highlighted the unfairness of the cuts for different areas of the country and raised serious concerns that some councils will simply not be viable.
As my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) has said, it is not just the scale of the cuts but the pace of them that is having such a significant impact on our areas. The Chair of the Committee has said:
“Central government is cutting funding to local authorities by more than a quarter over four years but does not properly understand what the overall impact will be on local services.”
For instance, the Department for Education has failed to provide a proper cost analysis of how funding reductions will affect children’s services. As my hon. Friend the Member for Liverpool, Walton has said, the cumulative impact of cuts in other departmental budgets on local authority public services is affecting our cities most. Nor is enough work being carried out across Departments to determine how funding reductions in one area of spending might affect services in another—for example, how cuts in local authority adult social care are leading to bed blocking in hospitals, as they are in my area.
The Public Accounts Committee says that the Government do not understand the impact of their cuts on vulnerable groups. We know that, and it is reflected in other policy areas across government, not least welfare reform. We want to know what actions the Government would take in the event of the financial failure of multiple local authorities. As my hon. Friend the Member for Sheffield South East (Mr Betts) said—he is the Chair of the Select Committee on Communities and Local Government, and I hope the Minister will listen to him—we must hear from the Government what action they will take if councils cannot balance the books.
The hon. Member for Bromley and Chislehurst told us that the shifting of funding is aimed at reducing dependence, but the truth is that often the areas with the highest demand for services have the least capacity to raise income through business rates or council tax, as I am sure he knows. Although some of the changes to business rates can be built on and are to be welcomed, on the issue of fairness, he is not right. It has compounded the problem for some of the toughest areas of our country with greatest need.
In the Government’s spin operation following the provisional finance settlement, they said that there would be no more cuts to local government. I was astounded to read august publications such as the Local Government Chronicle reporting “No more cuts to local government”, when we know that next year, the year after that and—to listen to the Chancellor yesterday—in the five years that follow, if the Conservatives are in power, there will be substantial further cuts to local authorities. The Chancellor has said that 10% will be cut in the next two years, but I ask the Minister to take this opportunity to correct the record. The Local Government Association, a cross-party organisation, is clear that without including NHS support for social care, which is not available for all councils, the reduction over the next two years will be 15.9%.
The Minister and I are having our own groundhog day; we were here a few weeks ago debating holdbacks. I welcome the Government’s U-turn on holdbacks, particularly the decision to return some of the money held back as part of the new homes bonus, which was the subject of a debate led by my hon. Friend the Member for Newcastle upon Tyne Central (Chi Onwurah), who was here earlier. The second U-turn that we heard about was to adopt Labour’s policy to act on business rates, which have increased for small and medium-sized businesses by £2,000 under this Government. However, we would go further, freezing and then cutting business rates for 1.5 million small and medium-sized businesses. If the Minister were to confirm that the Government are willing to take that U-turn, I am sure it would be welcomed around the country.
My generosity to the Minister does not extend to the fairy tale that we are likely to hear about council tax and the notion that it will again be frozen. When will we hear the details of the council tax freeze grant for 2014-15? What is his response to the recent report in The Daily Telegraph that at least 42 councils, more than half of which are Conservative-led, plan to reject the Government’s additional funding and raise council tax this year? The leader of Conservative-led North Yorkshire said that
“settling for the additional funding for another year could place the council’s finances in a perilous position.”
The next Labour Government will not be able to turn back the clock, but we can offer hope to local authorities and local government around the country that we understand the depth of the financial challenge that councils face and are committed to finding a way forward. We will start by putting fairness back at the heart of the relationship between central and local government. We will acknowledge the difficulties that councils face, not try to sweep them under the carpet. We will respect decisions made by councils at local level about how to use resources, not criticise and carp from Whitehall, as the Secretary of State does about everything from the level of reserves to bin collections.
The next Labour Government will, of course, want councils to meet communities’ needs, but our approach will be one of partnership. It is crucial that we support councils to deliver economic growth in all areas of the country with fairness. We will consider the report of the London Finance Commission and some of its proposals, and the LGA document “Rewiring Public Services”. We want to devolve power over housing and planning, and jobs and skills. Councils will have to come together to decide how best to use those powers, not just in our cities but across England, as part of what my right hon. Friend the Member for Leeds Central (Hilary Benn) calls the English deal. We will take the process of devolving power from Whitehall further, through Labour’s “Total Place” programme, which has sadly stalled under this Government, but whose pilots in places such as Greater Manchester show that there is much potential.
The local government innovation taskforce, set up by the Leader of the Opposition, makes it clear that Labour in local government is already innovating in responding to the challenges faced by our communities. As my hon. Friend the Member for Liverpool, Walton said, our councils are doing a great deal already, even in these difficult circumstances. That taskforce will press for a growing role and greater freedom for local government. Labour’s localism will be an ambitious programme requiring Whitehall and local government to work together as we transfer much more power and responsibility to local councils. In that way, although resources will be tight, councils will have a better chance to find a sustainable and fair way forward for their communities.
One would be forgiven for believing that there was some golden inheritance for local government when this Government came in. Many council leaders across the political divide would struggle to recognise the description given by the shadow Minister. Having been a council leader under the last Government, I find the idea of the Labour party favouring anything involving flexibility or partnership with local government, as opposed to top-down central control through one mechanism or another, almost laughable.
We should put this debate in context. We still have not heard anything from the Labour party about the £52 billion in cuts to local government that they outlined—local government still has something to fear. Members have also talked about money for areas. We have heard the debate about the difference between rural and urban areas. We would argue that we have created a fairer position, but we should also remember the backdrop outlined by the right hon. Member for Birmingham, Hodge Hill (Mr Byrne): the previous Government basically spent all the money. As my hon. Friends the Member for Bromley and Chislehurst (Robert Neill) and for Hereford and South Herefordshire (Jesse Norman) rightly said, we are working within the tight financial envelope left to us by the mess of the last Labour Government.
Having said all that, I must also congratulate and thank the hon. Member for Birmingham, Edgbaston (Ms Stuart) for securing a debate on this important issue and for her thoughtful opening speech. This Government have armed local government with a fair funding deal for all parts of the country—rural and urban, district and county, city and shire—which means that councils can plan budgets and deliver sensible savings while protecting front-line services. I will come back to the context of “fair” in a moment.
As has been outlined, every bit of the public sector must do its bit to pay off Labour’s deficit, including local government, to account for a quarter of all public spending. Our hats should go off to local government for the impressive work it has done, because we have shown that we can make those savings and still deliver good front-line services. Public satisfaction is at an all-time high, especially compared with 2010.
The autumn statement ensured that local government is protected from further spending reductions for 2014-15 and 2015-16. Councils now have the stability and certainty to plan their budgets and move ahead with transforming local services and ongoing efficiencies, which they absolutely need to do.
No, I will not, due to the time constraints.
Councils now have stability. A number of local authorities have already done much work to prove that efficiencies deliver not only savings, but better services for their residents. Ultimately, that is the key. It is not about Government money or councils’ money; it is about taxpayers’ money being spent on good front-line services for local residents. I encourage authorities to look at the good councils out there doing great work with efficiencies and innovation, such as those that have done work through the community budget programme and the public service transformation network.
Their work is becoming more efficient and effective for council residents. Independent reports show that it is saving about £20 billion a year in this country. More importantly, areas going forward with such innovation show better outcomes for residents, not the least of which is being highlighted through the work of the better care fund, which involves work between the Department for Communities and Local Government and the Department of Health, and is showing benefits. I will touch on Members’ individual points in a moment, and I will write to the hon. Lady with some details about the better care fund, particularly with relevance to Birmingham. I am happy to meet her separately on that issue as well.
The average spending power reduction for councils in 2014 is expected to be limited to 2.9% per household. Members have mentioned the top 10% and the bottom 10%. Let us be clear that authorities’ spending power in the most deprived areas is much higher. In 2014-15, it is up to about £4,200 per dwelling in the 10 most deprived authority areas, compared with about £2,100 per dwelling in the 10 least deprived. That absolutely reflects, as the hon. Member for Southport (John Pugh) said earlier, ensuring that need is recognised.
The hon. Member for Birmingham, Edgbaston mentioned better care, as I have said, and education, which I will feed through to the Department for Education. I appreciate the invitation to Birmingham. I will look at the diary and see whether we can work out a visit, to ensure that we get up there. However, I gently point out to Members from Birmingham, Liverpool and Newcastle that we are holding consultations right through January—councils are coming to see me to talk about the financial settlement—and at the moment those individual authorities have not even asked for an appointment to come and see the Department. I gently suggest that those Members go back and say to those authorities that if they feel they need to talk to the Department they should make appointments to come and see us. I am seeing the councils from the north-east next week, but at the moment Birmingham and Liverpool councils have not asked to come and see us.
As I have said, I am not giving way, either to tide or time.
Regarding Liverpool more generally, I will happily see Mayor Anderson. In fact, I saw him just a few months ago, and the next time I am in the north-west I will make a point of ensuring that I go to see him again. I appreciate the kind invitation that has been made to visit him, but if it is a working visit it will be even more efficient for the taxpayer.
My hon. Friend the Member for Hereford and South Herefordshire quite rightly made the point about the backdrop we are working with. He also made the point about rural and urban funding. I appreciate his comments on the work we have done in that regard, which recognises the problem for young councils.
As I have said, some councils have been mentioned today whose representatives have not yet made an appointment to come and see us. I hope that they will do so, but I particularly want to point out that my hon. Friend the Member for Bromley and Chislehurst quite rightly highlighted the key role for moving the relationship between local and central Government, particularly on funding, so that we have a system that is much more based on reward rather than handouts, and on giving local authorities the power—the autonomy—to decide their own future and their own destiny, which is something we are very keen to do. That is about ensuring that we get efficiencies, and that we encourage local government to move away, as some councils are doing—not all councils are doing so but there are some really good councils doing great work, across the political divide. As has been highlighted, Manchester is a good example, with its community budgets work.
However, councils must not do what they do just because they do it. They must go even further than the occasional stop and pause to think, “Can we do this better and quicker and faster?” They should start from the beginning by asking, “What is it we are looking to achieve? What is the outcome we want for our residents and how do we best supply that?” The councils that do so are finding substantial savings.
There is significant scope—with small things as well, in some cases—for small authorities with a small budget of £5 million to £20 million to merge back office services to do more joint working. Councils that are doing that are finding up to 18% in savings—substantial money. They can get more for less that way and do better with the £60 billion-a-year procurement budget that local authorities have; they could tackle the £2 billion of local fraud that is still there; they could reduce the £2 billion of lost money in council tax arrears, with arrears substantial in some areas such as Liverpool; or they could use their record £19 billion of reserves and get better value for money from the billions they have in property assets.
We touched on spending power this morning in the House and the Government grant is, of course, not the only way councils receive their money. People need to understand why we look at spending power. Local councils have income from a wide range of sources, so it is right and accurate to look at their overall spending power. The Government have again looked at all of a council’s income, from council tax, settlement funding assessment figures, specific grants, new homes bonus and, as I have said, from 2015-2016 the pooled money that will come from the NHS to support health and social care.
Councils still have a long way to go in terms of the work they can do to be efficient. They can look at the transformation fund—there is a new fund of £330 million. There is a £200 million extension of the troubled families programme to support 400,000 more families that need help and to build on the progress that has already been achieved. There is £100 million to enable efficiencies in service delivery; a £30 million revenue fund; and £45 million to drive transformational change just in the fire and rescue service.
There are rigorous safeguards in place to protect local authorities’ sustainability. Local authorities are legally required to balance their books and are responsible for managing their cash budgets within each financial year. The chief finance officer plays a key role in positively influencing the budget-setting process, including setting out the key risks associated with the budget and helping to find sustainable solutions in future. Chief finance officers have a duty to stop council spending effectively instead of allowing an overspend, and there is an audit process in place to ensure that the books are balanced. I encourage authorities to look at the 50 ways to save for local government and at what good authorities are doing to find those savings, and to learn from them.
Authorities have considerable flexibilities to set income and spending levels and to move money between years to help themselves. We have given more flexibility and more local autonomy, and councils are now directly able to benefit from local business growth for the first time in a generation, with around £11.5 billion per annum available through business rates and the annual growth on their share. Therefore, there is a strong incentive to support and develop local businesses, and to help people get into work and to see those businesses grow. There are cutting-edge councils that are doing this work—they know how to do it and they are leading by example in developing best practice for the rest of the country to follow.
I know that getting the ball rolling can be a hard part of overhauling local services. We have seen that. That is why the transformation challenge award was brought in. We were pleased to announce 18 successful schemes just last year, including projects looking at shared services and integration of health care and council services.
Local government has shown commendable skill in reducing its budget and protecting front-line services. With the economy now in recovery and more job opportunities being created, councils are managing their budgets and have a once-in-a-generation chance to step out from Whitehall’s shadow and be masters of their own destiny.
Mid Staffordshire NHS Foundation Trust
Thank you very much, Mr Crausby, for calling me to speak. It is a pleasure to serve under your chairmanship. Given the interest of several colleagues from the Staffordshire area, with your permission I will take a number of interventions in the course of making my remarks.
On 18 December, the administrators of the Mid Staffordshire NHS Foundation Trust published their final report. It recommended the dissolution of the trust as soon as possible and the absorption of Stafford and Cannock hospitals into the University Hospital of North Staffordshire NHS Trust and the Royal Wolverhampton NHS Trust respectively. It also set out proposals for the services that would continue to be offered at both Stafford and Cannock. The total cost over three years would be £220 million, of which £63 million is revenue and £157 million capital.
Let me first address the proposal to dissolve MSFT. I believe that is the right thing to do. It will enable both Stafford and Cannock hospitals to work much more closely with larger specialist teaching hospital trusts. They will both then be able more easily to recruit clinical staff who see greater opportunities for skills development within a larger organisation working across two or more sites and overhead costs will also be reduced.
However, the administrators’ proposals do not go far enough in ensuring that the interests of those who currently use MSFT are fully taken into account. Monitor and the Secretary of State clearly need to state that the expanded trusts should immediately recruit suitable non-executive directors from the areas served by MSFT, such as Stafford, Cannock, Penkridge, Rugeley, Stone, Brewood and so on, to ensure that those areas are properly represented.
Under the proposals, the University hospital of North Staffordshire will take over Stafford hospital. North Staffordshire hospital has a deficit at the moment, caused by reopening beds to cope with blockages in A and E and in admissions. Does the hon. Gentleman agree that in taking over Stafford hospital, it is very important and in the interests of everybody—everybody in Stoke-on-Trent, Newcastle-under-Lyme and Stafford—that the University hospital of North Staffordshire has the prospect of attaining financial stability?
I thank the hon. Gentleman for his intervention and I entirely agree with him. I would see the situation more as two hospitals coming together, but it is vital that the financial difficulties that UHNS is facing are sorted out. I particularly urge the Government to look at the private finance initiative cost, which is too great for that particular trust.
I am most grateful to the hon. Gentleman for giving way and I congratulate him on securing the debate. May I point something out for the record, so that when the Minister comes to reply he can, hopefully, give cast-iron assurances about the financial input that will be needed for this reconfiguration to take place, addressing the issue that UHNS has identified—that the additional expenditure needed for service configuration is in the order of £28 million or £29 million, whereas the trust special administrator has said that only £13 million would be needed? Also, the trust special administrator has proposed a cost improvement programme of 8.5%, whereas Monitor has said that anything above 4.5% is dangerous. We need a very clear, detailed calculation and input from the Government as to how these extra costs will be met, also taking on board the issue about PFI.
I thank the hon. Lady for her intervention and I entirely agree with that point. There is no point in Stafford’s merging with Stoke if the consequence is that we have a trust that will be financially failing in the future.
The administrators rightly place emphasis on the need for swift action, and I believe that the dissolution of MSFT in the autumn of this year should be possible—indeed, it should be possible even earlier. In fact, I would go further. MSFT has improved greatly in recent years following the huge failings brought to light through the vital work of Cure the NHS and documented in the Francis report. Its recently published hospital standardised mortality ratio figures were the best in the west midlands, but it is fragile and finds it difficult to recruit in some areas. We need the overall arrangements to take immediate effect, even in shadow form. In recent weeks I have detected less engagement than is necessary, because of the uncertainties of the administration process. That needs to stop.
This is all taxpayers’ money. It is our national health service. It is time to work together.
I congratulate my hon. Friend on securing this debate and on the work that he has done in recent years. He used the words “fragility” and “uncertainty”. He understands the fragility and uncertainty of the health care economy in Staffordshire. Queen’s hospital, in my constituency, is a Keogh hospital, which has huge financial debts and is struggling to survive. Does my hon. Friend agree that it is essential that this reorganisation takes place and is properly funded? If not, the knock-on effect on other hospitals, such as Queen’s, and on the wider health economy, could be damaging and have a domino effect, with other hospitals falling over.
My hon. Friend is right. We must make sure that we do not jump from the frying pan into the fire. We must get to a sustainable condition for the health economy. These new overall arrangements must take immediate effect. I urge the Minister to make that clear today, to give the various managements confidence to get on with their work.
I shall make one final point about the future UHNS and the Royal Wolverhampton hospital. The Secretary of State has rightly emphasised patient safety and care since the publication of the Francis report. The new expanded trusts have the opportunity to become national leaders in zero-harm health care, so I urge Monitor and the Secretary of State to seize the opportunity to support them in doing so at this time. Let this administration not be a dry legal exercise. Let it be the chance for Stoke, Stafford, Cannock, Wolverhampton and Walsall to become, even more, shining examples of the best 21st-century health care.
I congratulate my hon. Friend on securing this debate. I do not think that any other hon. Member has had to deal with a local hospital issue as all consuming and difficult as the one in Stafford. I congratulate him, on behalf of everyone, on his tireless dedication to getting the best deal for his constituents.
My hon. Friend mentions Cannock Chase hospital, in my constituency—the other hospital run by Mid Staffordshire NHS Foundation Trust—which will be taken over by Wolverhampton as part of the administration process. I welcome the abolition of that trust, which left my hospital 50% empty and which, even as we speak today, has just closed Littleton ward, to decant nurses to Stafford to try to shore up the hospital there.
Does my hon. Friend agree that we cannot wait until later—until sometime this year; perhaps even the back end of the year—for Wolverhampton to take over running Cannock and for UHNS to take over running Stafford, and that we need to move to the new organisational structure as soon as possible? I mean weeks, not months, so that both of our hospitals can have a secure future and the staff can know that their jobs are safe.
I congratulate the hon. Gentleman on securing this debate. I know how hard he has worked and I echo the tribute of the hon. Member for Cannock Chase (Mr Burley).
The impact on the Manor hospital in Walsall has been immense, as the hon. Gentleman said. We have already had to open 70 beds, as well as attempting to open two wards. The hospital desperately needs £40 million. I have raised this matter frequently with the Minister. I should be grateful if the hon. Gentleman took that on board in his summing up and if the Minister looked at the Manor hospital—he has visited it, although I was not there when he did—to ensure that it gets the funds that it desperately needs, having taken the impact of the closure of accident and emergency at Stafford hospital.
I am grateful. I place on the record my thanks to all the staff at all the hospitals—Stafford, Cannock, Wolverhampton, Walsall and Stoke—for all they have done through this difficult time.
Let me turn to the detail of the services, which comprises the bulk of the trust special administrators’ report. We have come a long way from 11 months ago. Then, the contingency planning team recommended removing A and E and all acute services from Stafford, as well as elective surgery from Stafford and/or Cannock. We now have proposals that retain elective surgery at Cannock and, indeed, foresee increased activity there. At Stafford, we retain 14/7 A and E, together with acute medicine, elective and some less serious non-elective surgery, day-case surgery and a large out-patient department.
As a result of the consultation, the administrators proposed a midwife-led unit for maternity, when their original proposals removed all childbirth from Stafford. The estimate is that some 90% to 91% of all current patient attendances would remain at Stafford and Cannock.
Most of my constituents and, I am sure, many of my hon. Friend’s, would find it deplorable if Stafford hospital did not have a consultant-led maternity unit. The pressure that that will place on so many hospitals—Walsall, Manor, New Cross, Queen’s or the University hospital of North Staffordshire—will be unsustainable. I urge Ministers to look at the issue again.
I am most grateful to my hon. Friend. I will come to that important point.
I pay tribute to the work of Support Stafford Hospital, because the impact of its campaign has shown just how much the community values the services at Stafford and Cannock. I also pay tribute to the working group, which I set up, and all those who have worked with me on that to provide us with the detail on alternative proposals, some of which I shall outline.
There is no doubt that the administrators listened carefully to what was said in the consultation and made a number of changes in their final proposals. However, the proposals as they stand are insufficient. What I am setting out requires not a re-doing of all the work of the trust special administrator—given what I have said about the urgency of the situation, that would not be sensible—but a modification of the detail.
I do not believe that such a modification would necessarily require more money than is currently proposed, although that remains to be seen, but it would be of huge benefit to many thousands of my constituents, and those of hon. Friends and other hon. Members. It will also ensure that both Monitor and the Secretary of State can fully comply with their legal obligations under the Health and Social Care Act 2012, in respect of health inequalities, as I will show later.
My proposal is that rather than cutting three areas of service in Stafford, those continue in a more cost-effective form, at least for two or three years. I, and the clinicians at Mid Staffs, consider that it will be quite possible to show how these services can be run across the two sites in Stoke and Stafford on a networked basis. The areas concerned are paediatrics, obstetrics and maternity and critical care.
First, the report proposes a reduction of the critical care unit to four beds. It says that the possibility of the highest level of critical care—level 3—should be maintained, but it is not clear how this will be possible without a rota for specialists in critical care. The critical care department at Stafford made its own submission to the consultation, which suggested a reduction in beds and a networked specialist rota. That seemed eminently sensible. Given that the CCU at Stafford is a net contributor and supports several other activities, I urge Monitor and the Secretary of State to determine that this model is tried for a period, during which it will, hopefully, be proven to operate well, clinically, operationally and financially.
The TSA’s final report also proposes, as my hon. Friend the Member for South Staffordshire (Gavin Williamson) mentioned, removing the consultant-led obstetrics and maternity service and replacing it with a midwife-led unit dealing with approximately 350 to 400 births a year. That is a step forward from the draft report, which proposed no childbirth at all at Stafford. However, my constituents and I do not believe that it is sufficient.
Currently, Stafford sees more than 2,000 births a year and that is likely to rise, with extensive house building, various new business parks being built and the doubling of the size of MOD Stafford, to mention but some developments, resulting, in the coming years—even with a MLU—probably in some 2,000-plus babies being born in other maternity units, mainly at Stoke and Wolverhampton. UHNS in Stoke already sees some 6,000 a year and its population is also growing. With at least 1,000 births, and probably more from Stafford, UHNS will probably approach 8,000, which is the number currently born at the largest unit in the country, in Liverpool.
The NHS rightly promotes choice for women about where to have their babies and the Prime Minister has spoken out against the trend towards ever larger units. Yet that is precisely what is being proposed here for women who are unable to use a MLU, due to the possibility of complications in childbirth. There would also be an impact on those who currently use UHNS and the Royal Wolverhampton, as their local units will become even busier—probably including Walsall as well—taking in women from a much wider area.
My proposal, and that of clinicians at Stafford, is to continue with the current service, fully networked with UHNS, while the impact of the current rise in both the population and birth rate is assessed. That would also enable the special care baby unit at Stafford to continue to support the regional intensive care network for babies, as it currently does. An added benefit would be that women will continue to have a local obstetric and gynaecology service, which I am sure the Minister will appreciate as he comes from that specialty. Again, that would relieve pressure on the larger University hospital of North Staffordshire and the Royal Wolverhampton hospital.
Thirdly, the TSAs propose to reduce the paediatric assessment unit to 14 hours a day from 24 hours a day and to do away with in-patient paediatric beds. There will be no paediatric rota, although A and E doctors will receive extra paediatric training and paediatric out-patient services will continue. The principal reason given by the TSAs is the national standards of the Royal College of Paediatrics and Child Health, which state that such services should be provided by a full consultant rota, which is usually between eight and 10 consultants, whereas at Stafford it is between five and six.
Let me be clear about the consequences: if the proposal is allowed to happen, the clear logic is that dozens of other paediatric units across the country that have similar numbers of consultants, or indeed fewer consultants, must be closed or have their activities drastically curtailed. Monitor cannot use the argument that that must happen at Stafford but not at other foundation or NHS trusts for which Monitor or the NHS Trust Development Authority are responsible, and neither can the Government.
The argument that all in-patient paediatric care should take place in the largest hospitals is not accepted by the general public. They fully understand why very sick children should go to specialist units; they do not understand why their local general hospital cannot receive sick children at night or for short stays, and neither do I. If experts at the Royal College insist on making that argument, however, let it be open, let it be consistent across the land and let it be agreed by all political parties. The proposal should not be implemented by stealth through a trust special administration that in no way arose because of the performance of the paediatrics department at Stafford.
I have one final point.
I have been waiting for my hon. Friend to reach his conclusion so that I can say how much I support him in his endeavours on Stafford hospital, which affects my constituency of Stone. I had to fight so hard to get the public inquiry that has led to many of the changes, and I simply offer him many congratulations. I support pretty much everything that he says, and I believe that he has done an enormous service to his constituents through his work over the past few years.
I am most grateful to my hon. Friend, and I return his compliments. He has likewise tremendously supported the trust and the work that has been done.
My final point is that the children and families who will be most affected by the paediatrics proposal are those on the lowest incomes. Such families are the least likely to have access to private transport to take their children nearly 20 miles to the nearest hospital at night. For them public transport in the daytime is often poor, and a taxi fare is beyond their means—certainly if they have to visit a sick child several times. I believe that those on low incomes should have fair access to health care, which both Monitor and the Secretary of State have a responsibility to ensure.
The paediatrics department at Stafford made an alternative proposal in its response to the consultation. That alternative was measured and understood the need to cut costs. The alternative proposal included a reduction in the number of in-patient paediatric beds, and consultants would have worked in a network across both of the new trust’s sites.
A pattern can be seen: critical care, maternity and paediatrics. There are sensible alternative proposals.
I echo the sentiments of other hon. Members in thanking the hon. Gentleman for securing this debate. I also echo the sentiments of my colleague and near neighbour, the hon. Member for Stone (Mr Cash).
Before the hon. Member for Stafford (Jeremy Lefroy) concludes, I have two points. First, he is absolutely right that there are sound alternatives that need to be considered very quickly, and a proper process must be put in place. Secondly, the situation’s impact across the whole of north Staffordshire, and indeed the whole of Staffordshire, should not be underestimated. I hope he agrees that there is probably no right solution, but we must get as near as possible to a right solution.
I entirely agree with the hon. Gentleman, and I appreciate his support and the support of colleagues from Stoke-on-Trent, Newcastle and across Staffordshire. We have worked together, which is a great achievement on a subject that can be political.
In conclusion, surely it makes sense to work through the proposed clinical networks while Stafford is joining the expanded UHNS—with things roughly as they are now—for a period of two or three years. I believe that those network solutions can work. If they prove as effective as the clinicians and I think they can be, we will have achieved the objective of securing services that are financially, clinically and operationally sustainable in Stafford, and indeed elsewhere, under the expanded UHNS. Such services would be welcomed by my constituents and would reduce the potential pressure on other hospitals, such as UHNS, the Royal Wolverhampton, Manor hospital in Walsall and hospitals in Burton.
It is a pleasure to serve under your chairmanship, Mr Crausby. It is also a great pleasure, as always, to respond to my hon. Friend the Member for Stafford (Jeremy Lefroy) and, indeed, to all hon. and right hon. Members who have contributed to and supported this debate, which raises an important issue for patients and constituents, not just in my hon. Friend’s Stafford constituency, but across Staffordshire and the wider region.
It has been an incredibly difficult time for local patients and staff at the Mid Staffordshire NHS Foundation Trust. I entirely agree with my hon. Friend that the trust has come a very long way since the terrible events exposed by the inquiries and the Francis report last year. My hon. Friend has walked the journey every step of the way with his constituents and with the patients, and he should be congratulated and commended on his strong and superb advocacy of the needs of local patients, of all his constituents and of the families of those who were treated appallingly by the trust in the past. He should also be congratulated and commended on his strong advocacy for the improvements and the high-quality care that is now being delivered by parts of the trust today. I am sure we would all like to put on record our congratulations on his advocacy and on the work done by him and my hon. Friend the Member for Stone (Mr Cash), who for many years has also been a strong champion of local patients.
In responding to some of the points that have been raised today, it is important to talk a little about the trust’s background to provide some context. The trust has been operating at a deficit for some time, and certainly since 2009. In April 2013, the trust reported a deficit of £14.7 million. As my hon. Friend the Member for Stafford alluded to, that position is expected to get considerably worse. As a proportion of the trust’s turnover, the deficit forecast for 2014 is higher than that of almost any other trust in the country. For the past two financial years, the trust received approximately £20 million a year in support from the Department of Health. Without that funding to supplement its income, Mid Staffs would have been unable to pay its staff.
The contingency planning team sent into Mid Staffs in late 2012 concluded that the trust was delivering services at a cost substantially higher than most other trusts in the country. A key challenge faced by the trust is the recruitment and retention of staff and the high cost of temporary staff, which is no wonder, given that it must have been a very demoralising time for those working in the trust when there have been ongoing investigations into events that took place in the past. Additionally, some of the trust’s services are operating with consultant numbers significantly below Royal College guidelines. The 2012 contingency planning team reported that, despite improvements in clinical services, the trust is unlikely to be able to achieve the required cost savings without adversely affecting the quality of care provided to patients.
On the reasons why the special administration process has been set up, it is important to take the initial report into account and to recognise that we are where we are today because of that report. In cases such as this, where a trust is facing substantial financial challenges, it is crucial that action is taken quickly to secure services for patients and ensure that high-quality patient care can still be delivered. The special administration process for foundation trusts offers a time-limited and transparent framework for resolving the problems of a significantly challenged trust. Like the regime for NHS trusts, the special administration process is intended to be used only in the most serious circumstances.
As my hon. Friend the Member for Stafford is aware, Monitor made the decision to place Mid Staffs into special administration on the basis of the 2012 work. The CPT’s first report concluded that Mid Staffs is not financially or clinically sustainable in its current form and recommended the appointment of administrators as the best option for identifying the changes required in the years going forward to continue to secure high-quality patient care. Acknowledging the serious financial challenges facing the trust, the Secretary of State wrote to Monitor giving his support for the appointment of the trust special administrators.
It is worth touching briefly on the work of the trust special administrators at Mid Staffs. The TSAs have been in place since April last year, and they have had two tasks. First, they had to take over the day-to-day running of the trust. Secondly, they have had to work with the trust’s staff, commissioners, providers and other local stakeholders to develop a plan for services. The work undertaken by the TSAs builds on the earlier conclusions of the CPT and only strengthens the case for urgent change. If no action is taken, the TSAs estimate that Mid Staffs’ annual deficit will exceed £40 million in four years.
I will of course respond to those that I can, but as the hon. Lady will be aware and as I will set out later, the TSAs’ report is currently with Monitor—I would expect it to be recommended to the Secretary of State by the end of this month—so it would be inappropriate for me to comment on it at this stage. I hope she understands that it would be wrong for me to make assumptions about a report that has not yet been submitted to the Secretary of State.
I have asked nearly 10 times for a report to be debated on the Floor of the House in Government time, but it has not happened yet. Nobody can understand why it has not happened yet. Can we please have an assurance that a debate will take place and within a matter of weeks?
My hon. Friend makes an important point. The Secretary of State has previously given that assurance, and I give my hon. Friend that assurance again today. It is obviously for the Leader of the House to organise Government time, but I will have conversations with and write to him following this debate to ask him to expedite the issue.
Returning to the report, the TSAs have also highlighted the serious clinical implications of failing to act. They predict that services operating below the recommended consultant level, such as A and E, would need to be reduced. Low-volume services would risk being closed altogether, forcing patients to travel further for treatment. Throughout the process, the TSAs have stressed the fragility of the trust and emphasised the huge importance of agreeing to and implementing the changes required as soon as possible.
I will now move on to the next steps, about which all hon. Members are concerned. I know that it is frustrating for hon. Members wanting answers that I cannot provide them all today. The report is currently with Monitor, so it is for Monitor to make recommendations to the Secretary of State on the basis of that report. That will be the appropriate time for the Secretary of State and Ministers to comment. That may be frustrating for hon. Members, but that is the way that things need to be. We cannot comment on the matter until Monitor has made its recommendations. If Monitor is satisfied with the TSAs’ final proposals, the Secretary of State will have a maximum of 30 working days to consider them against a set of requirements defined in legislation. These aim to secure services for patients that are of a sufficient level of safety and quality and that offer good value for money. The Secretary of State will consider each requirement carefully before coming to his final decision.
As I have said, it would be inappropriate for me to pass further comment today on the TSAs’ final report because its final version has not yet been submitted. It is clear from the debate, however, that there is widespread interest from around the region and from local Members who are concerned about the wider impacts of the report on the health care economy and on services for other local patients. I am confident, however, given the interest from Members and the support provided to the trust from other health care trusts and hospitals in the area, that we will come to the right conclusion. We all want to see a strong and viable health care service for patients in Stafford and the surrounding areas, and I am confident that that is what we will have delivered once the Secretary of State has considered the report.
Autumn Statement (Coventry)
This is one of the few times I have had the honour of serving under your chairmanship, Mr Crausby. I will start by looking at the background to why I asked for this debate.
The Chancellor said he would eliminate the deficit by 2015, but we heard yesterday that he is going to have to make a further £25 billion of cuts. At the same time, the Government have presided over a cost of living crisis that is affecting ordinary families right across Coventry. Families are on average £1,600 a year worse off. The purchasing power of their wages is down by 5%. Energy prices have rocketed, adding £300 a year to the average family bill. Train fares have increased by up to 6% and bus fares have increased by 2.5%.
Food prices have also increased. The bedroom tax has penalised many in the social housing sector, while rents in the private sector are at an all time high. The benefit cap is also making life difficult for children in Coventry, in particular those in care—the Government are making things harder for around 287 children who have already had a tough start in life.
All that has culminated in large numbers of people relying on food banks across the city, with 67 families receiving food vouchers from the Coventry citizens advice bureau in November alone. Nationally, Citizens Advice expects to allocate over 100,000 vouchers this year.
Cuts could mean that pensioner benefits, such as the winter fuel allowance, could be cut back. As a result of spending cuts, other pensioner benefits are also at risk. Centro, the west midlands transport agency, has to cut £14 million from its budget over the next two years, which will mean reducing pensioner benefits to the statutory minimum.
Benefits for the disabled are also at risk in the transport budget, with Centro having to consult on removing up to a third of ring-and-ride services. Many of my constituents are also facing long delays in receiving their benefits and problems with Atos, which seems to be forcing ill and vulnerable people off benefits and back to work.
Since the Government came to power, the cost of child care has gone up by 30% while wages have been cut by 5%. Moving on to the situation regarding women, tax adjustments made last year raised £14 billion, of which women contributed £11 billion. Given the £11 billion in tax that was inflicted on women and the cost of child care, women are hardest hit by this Government. More women than ever before are on low wages. More women than ever before cannot get a job. More women than ever before are bearing the brunt of cost of living increases.
I turn to the settlement for Coventry. Core funding has been cut by £45 million since 2010. Coventry will face a further £19 million funding cut in 2014-15, which is a 10.6% cut. In 2015-16, the provisional settlement indicates that Coventry will face a 15.2% cut. Government figures regarding Coventry’s spending power do not make sense as they ignore inflation and include funding from council tax and new burdens placed on the council. The council tax base is being eroded; council tax has not increased as a result of the freeze grant, which is storing up problems for the future.
I turn to the impact on children’s services and education. There will be a significant impact on youth services and social care services to support education and the well-being of children, and schools’ basic need grant has been reduced to zero. That may be a mistake by the Government that needs clarifying urgently, because it puts in jeopardy plans to expand our local schools. If what I have said is correct, plans to expand primary schools to meet the demographic changes will have to be cancelled.
In our casework and surgeries, we are all seeing the effects of what my hon. Friend is outlining. If we couple that huge increase in need, which is apparent to Members of Parliament and is impacting on the services provided by the local authority, with the deep cuts that have taken place and will continue to take place, is there not a substantial magnifying effect of the gap between needs and the ability to provide for those needs?
I totally agree with my right hon. Friend. I come back to something that Nicholas Ridley said many years ago—about 25 years ago. He foresaw a time when local councillors would meet once a year and give contracts out to the private sector. If we look at the strategy of this Government and of previous Conservative Governments, we see that they have slowly but surely taken powers away from local authorities. They do so in a number of ways, in particular by slowly but surely cutting budgets and forcing services out to the private sector, and yet the private sector does not always know best.
Also, we have a big issue regarding pensioners, in particular caring for them, that started under the previous Conservative Government and the matter has never been resolved, as far as I can remember. We are still debating changes that should have happened 25 years ago. Instead, 25 years ago local authorities were forced to hand over—or sell, if people want to put it that way—old people’s homes to the private sector. Five or seven years down the road, however, after the private sector had made a profit, the homes closed down. That, too, created a shortage of beds, but more importantly it forced the prices up for care for elderly people.
The whole strategy can be seen. I have always said that this Government think in generations: what the previous Conservative Government leave off, the next Conservative Government pick up. At the end of the day, in local government we will have only one or two little services, while the rest is in the private sector. Mr Ridley’s prophecy is becoming true.
I move on to the impact. Support for Age UK and other local charities will reduce by 22%; there are significant reductions to housing-related support; the housing-with-care scheme in Coventry at Jack Ball house and George Rowley house has ceased; a range of day centres and the in-house, short-term home support service have closed; and charities will no longer get the business rate support that they once had, even though that is meant to be something to do with the Prime Minister’s big society.
If we cut the public sector—the social sector, in particular—we can hand things over to the private sector, or the voluntary sector, but if we hand it over to the voluntary sector, the Government inflict cuts on the voluntary sector. It is an endless cycle of viciousness. If the Government want to get some credibility in local government—even Conservative councils are concerned about what the Government are doing—they need to get a grip and have a good look at what they are doing.
Finally, there is the impact on benefits, such as the local welfare provision grant, which will also end this month—£1.4 million for Coventry, providing emergency funding to those in direct need.
Many of my constituents in places such as Binley Woods, Bulkington and Brinklow see Coventry as their major city, so what happens in Coventry is important to them. I notice, however, that the hon. Gentleman is not merely restricting himself to the autumn statement; he is having a rather broadsided blast at lots of things that the Government are doing. Does he agree, however, that the steps the Chancellor took in the autumn statement to reduce the burden of business rates on small businesses is beneficial to the prosperity of Coventry, as was the freezing of fuel duty, which means that fuel is now 20p less than it would have been had Labour been in power? Are those things not beneficial to his constituents and mine?
I expected the hon. Gentleman to come in on that. That should have been done three and a half years ago, and not left until now. He mentioned that I have had a wide-ranging debate on a lot of subjects, but the Government have had three or four Budgets since coming to power, and each one has had an effect on the areas that I have outlined.
As I said, the Government have to look seriously at the burdens that they are inflicting on local government and, more importantly, on the public. Up to 1,000 more jobs in Coventry, or 1,800 over the past three or four years, will go as a result of the Government’s so-called rebalancing of the economy.
I am pleased, Mr Crausby, to serve under your chairmanship. I congratulate my hon. Friend the Member for Coventry South (Mr Cunningham) on securing the debate, and I thank Mr Speaker for allowing this important local debate on the impact on Coventry of the autumn statement.
My hon. Friend covered well and succinctly the overall impact of the autumn statement on the country as a whole. We have at last had some small growth, which is very welcome, with a continued reasonable increase in employment, but there is no point in trying to kid ourselves that we are anywhere near where we said we would want to be. Furthermore, the Government should not kid themselves that they are anywhere near where they want to be on the deficit, because the deficit has not been tackled to anything like the extent that they said with such confidence that it would be when they took office in 2010. As a result, we are still facing the cuts, an increasing level of cuts, that we are discussing this afternoon.
Coventry, which is anything but one of the richest cities, has suffered a massive collapse. All Members who know the west midlands or live near there will recall that in the first period of the Thatcher Government up to 1983, we lost something in the order of 30% of our manufacturing capacity—certainly more than that in Coventry—and the city has never really recovered. Whether that was necessary is not for today’s debate, but the hangovers and the legacy are still with us, meaning that Coventry is quite simply not a rich city and cannot bear the level of cuts being imposed on it.
Since 2010-11, we have lost £45 million from the core support to Coventry, which is 20% over about three years. I have heard it said by various business men, in the House and in particular elsewhere, that 10% of any company’s budget can be cut and it will survive quite well. Frankly, I have done that myself—it can be done. I have never heard any sensible business man say, however, that that should be done for three or four years running and then tried for another two years at an even higher level of cut than 10%. I have certainly never attempted to do that myself. It simply cannot be done, but the figures show that in effect that is what the Government are trying to do.
The figures given by my hon. Friend bear repeating, I am sorry to say. In 2014-15 we face a 10.6% cut, and in 2015-16 a 15.2% cut. I am well aware that that is not the entire income of the company, if we want to regard the local authority as a company. Nevertheless, that is a substantial and continuing sustained cut to its core budget, from which it has to deliver the key services.
Put together, the cuts from 2010 through to 2016 in Coventry, I think, come out as something in the order of a 65% cut in the core budget—making allowance for inflation and all the other things that the Government do not necessarily allow for in their figures. I do not invite the Minister to bandy her figures against ours—we all know that local government finance is an extremely complicated and tiresome matter, which can be twisted in any way and used to prove almost any argument—because that would not be helpful.
Instead, I ask the Minister to address two questions asked by my hon. Friend, to see whether we can get clear answers. I think that she has passed a message back to the officials about one of them, which—to quote from a note received from the local council—is:
“Coventry’s capital allocation for Schools Basic Need has, without prior explanation, been reduced to zero for 2015/16”.
That is surely a mistake. The council cannot believe it. How will it maintain its school buildings? The worst thing a school can do is neglect its buildings. I remember that when we took office in 1997, schools had buckets underneath the holes in their roofs where the rain was coming in. Difficult though it was, the first thing we did was to release £1 billion from the tax on utilities’ excess profits to deal with that situation. It costs a lot more in the long run to deal with such situations in that way. What I read out must be a mistake; I am sure that the Minister will be able to reassure us on that point.
The other specific point put to us by the Coventry local authority, to which my hon. Friend the Member for Coventry South also referred, is that the local welfare provision grant will end from 2015-16. That is worth £1.4 million to Coventry. That is not a lot of money, but it is a line in the budget until 2015-16. There has been a line in our budget for local welfare for as long as I can remember.
My right hon. Friend the Member for Coventry North East (Mr Ainsworth) referred to what we are seeing in our surgeries. People turn up destitute: they have nowhere else to go or to look. A constituent came to my surgery with two young children and asked, “What am I going to do?” I said that we had to release some funds from what I think we call the hardship fund—that is the vernacular for it. That fund, too, has disappeared as a line in the budget. I would like the Minister to note that.
Now, if a line in a budget disappears, we can bet our bottom dollar that the money for that line in the budget has disappeared as well. We had a temporary holding reply from the Government—I do not think that is good enough—on this matter, which says that the money is still there, but is simply in the whole total rather than being identified separately. Nobody is going to buy that—if a line has disappeared, the money has disappeared. We are facing a 16% cut in the year. It is simply not possible to believe that that money is still there. The money comes from core funding, and has gone down by 16%, yet we are being asked to believe that the money is still there. It is not.
Those are the two fundamental errors in the settlement that we are discussing this afternoon, and we need a reply on each. There are many other problems in Coventry, of course, that are very sad. The hon. Member for Rugby (Mark Pawsey) spoke of the small amount of help on business rates: every help is welcome, especially from this Government, and so we welcome the measure. But then one thinks of what could be done for small businesses. We could get rid of national insurance for new small businesses, or get rid of NI for businesses taking on new employees. There are so many imaginative measures that could grasp the attention of small businesses—particularly in the west midlands, where we have not done so well and could do so much more. But none of that was in the local government settlement in the autumn, and we did not imagine that it would be.
I ask for three things. The level of cuts should be re-examined; they are simply unmanageable in their present form. They cannot happen. They are just too big. Will the Minister also please answer the two specific points I raised, if possible this afternoon? If not, will she answer them in writing as soon as she is able to?
It is a pleasure to serve under your chairmanship this afternoon, Mr Crausby. I congratulate the hon. Member for Coventry South (Mr Cunningham) on securing this debate, and the hon. Member for Coventry North West (Mr Robinson) on his speech. I shall try to address the points hon. Members have raised. Although I appreciate that this is not always the style of the House, it would have been helpful if an indication of specific questions had been given in advance, so that I could have come with specific answers. If I do not answer the specific points raised by the Member for Coventry North West, I shall write to him with further information.
I should say that the subject for this afternoon’s debate was the effect on Coventry of the autumn statement. The points that have been raised are partial and do not fairly reflect the impact on the city of Coventry and the surrounding areas of Warwickshire of the Chancellor’s autumn statement. Hon. Members have focused on local authority funding as the main reason for the debate, but the whole point was that local government funding was excluded from the autumn statement and 2013 Budget reductions to help local authorities to freeze their council tax for 2014-15 and 2015-16. In fact, it is central Government Departments that are going to have to make further spending reductions as a result of the autumn statement, not local government.
The hon. Member for Coventry South started by talking about a cost of living crisis. The best way to deal with the fall in living standards is to deal with the economic crisis left to us by the previous Government. The hon. Gentleman is shaking his head, but he cannot possibly ignore the fact that the economy at the end of last year was 7% smaller than in 2008. That will have an impact on every household budget and every business in this country. My right hon. Friend the Chancellor has made enormous progress, as heralded in 2010, in putting our economy back on track. That should be welcomed by all hon. Members on both sides of the House.
I do not know whether the hon. Lady was in the House when the Chancellor was the shadow Chancellor and used to tell us that there was too much red tape. The actual economic crisis was worldwide and started in America with Lehman Brothers. She should not rewrite history.
I thank the hon. Gentleman for that intervention. There was certainly an issue with the banks that had to be bailed out. I was not in the House when that happened; his colleague, the former Chancellor of the Exchequer, the right hon. Member for Edinburgh South West (Mr Darling), made the decision to do so—rightly, in my opinion—but the point is this: from the early 2000s, the then Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), was running a deficit budget, which means that a huge gap now needs to be plugged. The previous Government consistently spent more than they raised, which means that the achievement of this Government in cutting the deficit by a third—indeed, the Office for Budget Responsibility is forecasting that the deficit will be halved by next year—is an enormous one and should be welcomed by all people in this country.
If I could take us all back to the situation in Coventry—we could argue indefinitely about local finance and about the Government’s economic policy—I wanted to raise one other point, and apologise to the Minister for not having mentioned it before. I will write to her about, and hope that she will take note of, another issue arising directly from the cuts in Coventry, concerning the Meriden Street Housing Co-operative, which is facing cuts of 60%—a figure she will recall. I promised to raise that matter today, and I look forward to her reply.
I look forward to the hon. Gentleman’s letter. Either I shall answer or I shall ensure that a colleague in the Department for Communities and Local Government answers if the issue is more within its remit than within the Treasury’s. He is right: today’s debate is about Coventry. When I was handed the brief I was amazed and impressed—although I should not be, as I am an east midlands Member of Parliament and Coventry is in the west midlands—at the amount of investment that both the Government and the private sector are making in Coventry. I will come on to the city deal that was announced recently, but I am also impressed by the number of new jobs that have been created in Coventry. Only yesterday, I was reading an article in the Coventry Telegraph about a software company, Phocas, which is choosing to locate its global headquarters in Coventry, bringing jobs with it. That should be welcomed and I am sorry that the hon. Member for Coventry South chose not to make a single mention of job creation or of companies choosing to locate in the midlands, a part of the country that I would agree is a fantastic place for companies to locate.
I will leave aside statistics on the autumn statement, and will talk about ensuring fairness. The hon. Gentleman failed to mention the rise in the personal allowance that came into force last April, and the further rise that will come into force this year: from this April people will be able to earn up to £10,000 without paying any income tax. If he thinks that that is not making a difference to the pockets of hard-working families in Coventry, he is very much mistaken. I can tell him from my constituency casework that it is very much making a difference to the hard-working families in Loughborough and the east midlands.
The autumn statement delivered an average saving of £50 in household bills. It will maintain support for the poorest families and provide new home owners with incentives worth up to £1,000 to undertake energy efficiency measures. That package of support will also help more than 2.3 million households in the west midlands with the costs of their electricity bills. We are freezing fuel duty for the remainder of this Parliament, saving motorists in Coventry £11 every time they fill up their tanks.
Sitting suspended for Divisions in the House.
I will be brief because we expect further Divisions, but I want to finish the points that I was making, particularly in relation to council funding. The hon. Member for Coventry North West talked about not trading figures, but as he referred to some figures in the debate, I will tell him that, for Coventry city council in 2013-14, the spending power per household —per dwelling—will be £2,323, which is £107 more than the England average of £2,216. In relation to welfare payments, I think he was referring to the discretionary housing payment, which residents can apply for in relation to the spare room subsidy. My figures show that in the first six months of the scheme, Coventry city council allocated only 20% of that budget to households that had asked for help, so I hope he asks the city council why some of the funding remains unspent.
I thank the hon. Gentleman very much indeed. Let me finish with some good news, which I did feel was lacking from his speech.
We have already talked, thanks to the intervention from my hon. Friend the Member for Rugby (Mark Pawsey), about the announcements in the Chancellor’s autumn statement on business rates, which will benefit 174,000 properties in the west midlands. Thirty-seven per cent. of properties will see their business rates either frozen or falling, which is extremely welcome news. We are making it cheaper for businesses in Coventry to employ young people by abolishing employer national insurance contributions for under-21-year-olds. That will help 123,000 people in the west midlands under the age of 21.
I mentioned the good news announced yesterday that the software firm Phocas is to move its global headquarters to Coventry. Its work force will increase by one quarter. In China, Geely, which had recently acquired the London Taxi Company, announced that it was to quadruple its work force, creating 500 jobs in Coventry. In the hon. Gentleman’s constituency, food manufacturer Mission Foods has announced 50 new jobs as part of an expansion of its factory in Coventry. I understand that the hon. Gentleman used to work for Rolls-Royce. He will know the extremely good news about the success of that company. I am pleased to say that the east midlands, through the facility in Derby, shares that success.
On 12 December, my right hon. Friend the Prime Minister announced the agreement of a bespoke city deal for Coventry and Warwickshire. I know that that is the result of an enormous amount of hard work by Warwickshire Members of Parliament, including my hon. Friends the Members for Nuneaton (Mr Jones) and for Rugby. The city deal recognises the fact that the west midlands and Coventry and Warwickshire are a key engine of growth for the United Kingdom. Part of that success is the advanced manufacturing and engineering sector, including the automotive sector, but further growth in that sector is being impeded by a series of barriers, including insufficient business support advice, access to finance and the non-availability of individuals with appropriate skills. The city deal rightly seeks to tackle those key barriers.
The Coventry and Warwickshire local enterprise partnership predicts that the deal will include the delivery of more than 15,000 jobs in the wider economy, of which 8,800 will be in the advanced manufacturing and engineering sector. A range of innovative business support programmes will support further growth in the advanced manufacturing and engineering sector and a new flagship clearing house centre, where key business support agencies are co-located in one building.
Over the years, the local MPs have pushed for a lot of the companies that she has mentioned—for example, Jaguar Land Rover—in the midlands and particularly in Coventry. A city deal would push for that as much as anyone else, so we are not totally negative. We have played a part in some of the things the Minister has outlined.
I am very glad to end the debate in a spirit of positivity. I thank the hon. Gentleman. He is quite right. All hon. Members, from both sides of the House, come together to support their local areas. That is why I felt that his speech missed the importance of the west midlands and the successes that are being achieved there. I am sure that neither he nor any MP would want to talk down their constituency or city. I am pleased to see that, as we approach the end of the debate, we are getting there.
Before I finish, let me talk about education funding, which was referred to by the hon. Member for Coventry North West. I have just been handed some figures, which show that Coventry’s capital allocation for 2014 to 2017 is £6.25 million. That is funding for new school places. In relation to the pupil premium, the extra in 2013-14 is £13 million and in 2014-15 it is £17 million. I will write with more detail to both hon. Gentlemen who referred to the figures, but I wanted to get that on the record.
I thank the hon. Member for Coventry South for organising the debate, for bringing this matter to the attention of the House and for enabling me to highlight some of the positive impacts that the autumn statement has had on Coventry, the west midlands and the United Kingdom.
Question put and agreed to.