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Local Government Finance

Volume 729: debated on Monday 18 July 2011

Statement

My Lords, with the permission of the House, I shall now repeat a Statement made by my right honourable friend the Secretary of State for Communities and Local Government. The Statement is as follows.

“I would like to update the House on the Government’s review of local government finance. The past year has seen the beginnings of a long-awaited and much-needed shift in power: from national to local; from Whitehall to the town hall. But if localism is to reach its potential, the new legal freedoms must be matched by freedom over finance. This is not a new idea. Reviews from Layfield in the 1970s onwards have emphasised that increasing local financial control is key to strengthening local democracy.

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

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

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

Councils in England collect some £19 billion of business rates each year. No sooner has the cash come in than it is gathered up by the Treasury, and then redistributed to councils according to a complex formula. This approach has major shortcomings: it denies councils control over locally raised resources; it deprives them of the certainty they need to plan their finances for the longer term; and it creates a disconnection between the success of local businesses and the state of their own finances. Surely it is common sense for the system to encourage councils to boost local jobs and growth. Radical change is needed, and councils themselves agree.

In a major step for transparency, my department is publishing today every representation made to the recent local government finance settlement. There is a common theme. Councils believe the current system is complex and opaque. They have to talk down their successes, and talk up their difficulties, in order to secure the best possible deal from Whitehall. To address this, mere tinkering—adjusting the formula here, amending the area cost adjustment there—will not be enough.

This Government are determined to repatriate business rates. Today, I am publishing a consultation outlining our proposals. No more will proud cities or historic counties be forced to come to national government with a begging bowl. Councils will have greater control over cash, helping them plan for the longer term. Tax increment financing will let them borrow against anticipated increases in rates, giving them a new way to invest in infrastructure, from transport projects to regenerated town centres. Councils should see a direct link between the success of local businesses and their own cash flow. This will create the right incentives for them to work closely with local businesses.

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

It is also of paramount importance to ensure our proposals on local government finance are balanced, fair and equitable, creating the right incentives for all areas to grow while protecting the most vulnerable. We propose a number a measures and safeguards to achieve this.

First, poorer places will share in the increase of growth with more prosperous areas. Those places with greatest dependency should, and will, continue to receive support while being allowed to keep the products of enterprise, and those places which raise the greatest sums through business rates should expect to make a contribution. A system of tariffs and top-ups will make sure that we start from a fair base. As the Deputy Prime Minister told the Local Government Association last month, we will ensure that no one will be worse off when the new system is introduced than they would have been under the old system.

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

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

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

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

I am placing in the Library a plain English guide so that honourable Members’ constituents can understand what our proposals would mean for them. We intend that business rates should be repatriated in 2013. We will bring forward a Local Government Finance Bill to give our proposals legal effect.

The publication of this consultation begins a debate that I hope will be wide-ranging and constructive. I want to work with all local authorities, representative groups and political parties and build a consensus for lasting change. That consensus will be built on, putting power back in the hands of local councils and communities; supporting local jobs and local firms; and creating the conditions for renewed, sustainable economic growth”.

My Lords, that concludes the Statement.

My Lords, I thank the noble Baroness, Lady Hanham, for repeating the Statement on local government finance and for the offer of a plain English guide to be placed in the Library. I also thank her for the prospect of another local government Bill which might keep us busy for a few days.

In a recent publication on local government finance, the Smith Institute observed that local government finance has been a backwater for most national politicians. Since the poll tax debacle, Ministers have been cautious about reforming local taxation, not least because the issue is seen as divisive and complex. The challenge is to seek a lasting consensus on how to change the system in a way which satisfies councils which are rich as well as those which are poor. Indeed, that is the test for these proposals.

That is why we will look closely at the Government’s announcement because the devil is, of course, in the detail. We should make it clear, as we did in another place, that we back a funding system for local authorities which supports jobs and growth and encourages enterprise. We support the taking forward of tax increment financing and the continuation of small business rate relief, and we welcome the publication of the responses to the consultation. Yes, we support localism—but true localism, which is why we have opposed the raft of centralising powers that the Secretary of State has taken to himself in the Localism Bill. We also support localism in matters of finance.

We hear today that the proposals on local government finance are balanced, fair and equitable, I think was the term, but the precedents are not good. Where, for example, is the fairness in the cuts we are seeing right across the country to home helps and care services, to street cleaning and bin collections? The Statement reiterates what the Deputy Prime Minister told the LGA last month: no one will be worse off when the new system is introduced. Even if that is the case at the point of introduction—and we are not all reassured by cast iron promises from the Deputy Prime Minister—what will the position be at the end of year one, year two or year three? Perhaps the Minister can tell us.

The Minister tells us that the spending review totals are to remain unchanged. Therefore, if there is a fixed pot of money for any council to gain, logically others must be losing out. Can the Minister say what assessment has been made of winners and losers, and how this squares with the assurances of the Deputy Prime Minister?

We recognise some of the weaknesses in the current system. However, a local government finance system that does not reflect needs and available resources could have disastrous consequences for some councils, while others would enjoy large surpluses compared to existing budgeted expenditure. It remains to be seen whether the proposed detailed system of tariffs and top-ups is a fair mechanism to ensure that all local authorities have resources that are adequate to deliver services that are needed and that will allow all communities a chance to prosper. Our fear is that the poorest areas, with the most deprived communities and the smallest business base, will again miss out. Those very communities that saw their area-based grant cut, putting services like children’s centres at risk, through a finance settlement that singled them out for the heaviest cuts, will now lose out on the localising of the business rates.

We know that currently the formula grant is financed significantly by local business rate income, and the latter is forecast to grow as the grant is forecast to fall. The Government are planning to hold back something like £2 billion in local business rate income to give effect to these cuts. Business rate localisation would clearly be one way of stopping this. However, what will happen to the surplus business rate, amounting to some £2.2 billion in 2014-15? Will it now be available to local authorities or will it be retained centrally? Can the Minister tell us the forecast baseline above which local authorities will be able to benefit from growth in business rates? The Statement refers to an area benefiting disproportionately from growth in business rates, which will be subject to a special local levy to capture a share of the benefit. How will it be determined that an area is benefiting disproportionately from growth in business rates?

Cutting funding to areas with the highest need does not free councils from central control or empower them. It stops them from doing the things that their communities need of them. If people do not believe that their council can make a difference, it does not encourage civic activism; it undermines it and fuels a sense of disengagement from the political process. We want a funding system that supports jobs and encourages enterprise. However, as the Minister recognised, not every area has the same ability to attract investment and new businesses. Not everywhere can be like Westminster or the City of London. Areas with the highest levels of deprivation and the weakest business base need the most support; they do not need funding cuts. We will support incentives to boost enterprise and put councils and communities in control, but fairness must be at the heart of the system.

My Lords, I thank the noble Lord for his comments and contributions. From the outset, I remind noble Lords that this is a consultation. Therefore definitive answers may not be pouring out of my mouth, although I will do my best to answer as much as I can about the consultation. However, technical documents will be ready by August to back up the consultation, so some of the points will be considered there.

I am grateful to the noble Lord for his indication that he supports funding for jobs and enterprise. Naturally that is what we are trying to achieve. I am also glad that he supports the tax incentive finance, which will come about as a result of business growth and will be a useful area for borrowing.

The noble Lord referred to the fairness in cuts. The whole process will start in 2012. At the start of this spending review, for the first two years there will be no change at all. Only in year 3 will we begin to see the changes with the business rate being kept within the local community. We are proposing that in years 1 and 2 it will stay as it is, and in year 3, instead of the local authorities collecting the business rates and passing them on to the Treasury, they will collect the business rates and, under an arrangement, pass some of them on to the Treasury. The rest will be held by local government in year 3 and subsequent years.

With regard to the tariffs and top-ups, the control totals will not change within the four-year spending review. However, in areas where we believe the business rate is in excess of those totals, a tariff will be levied that will help poorer areas, about which the noble Lord spoke in terms of top-ups. There will be a swing of money between one and the others, so the poorest areas will be given the help that they need.

The £2.5 billion that will be held by local authorities will be directed to other local grants. It is suggested that the levy, which again is a matter for consultation, will be on top of the business rates, from which local authorities make what is called in the consultation paper a disproportionate amount. They will then share that through a top slice with other authorities.

The Minister answered a number of the questions I raised. Could she tell us how the test of disproportionately benefiting from business rates is going to be set?

My Lords, I think I am going to direct the noble Lord to the consultation, because this is one of the areas where we want to talk to local authorities to understand the nature and impact of that issue. At the moment, I do not think I can give a substantive answer, but it will be in an authority that has access to far more business rates than perhaps other local authorities comparably.

My Lords, I thank the Minister for repeating the Statement in this House, and also for the plain English guide being put in the House of Lords Library, which I am sure will sell like hot cakes before the summer holidays. I also congratulate the Minister on resisting the temptation to start answering the questions posed in the consultation document before that document has actually been seen by those being consulted.

I warmly welcome the commitment of the coalition Government to start delivering on a promise that I think has been made by every opposition party since the Conservative Government first nationalised business rates over 20 years ago. It is understandable that local authorities will want to look at the detail and consider particularly the proposed equalisation scheme. Does the Minister agree that, when they have done so, this proposal is likely to receive a warm welcome throughout the country by councils under any political control? Does she agree that probably the repatriation of business rates is arguably the best boost to business regeneration that this Government—certainly her department—can provide? Finally, will she confirm that the setting of the tax rate will continue to be done centrally in line with the retail prices index; and can she say whether, at any stage in the future, the Government propose to introduce an element of localisation into the setting of the tax rate?

My Lords, I thank my noble friend Lord Tope for his kindly and warm welcome for this consultation document. I agree with him that local government will be content with this proposal; whether it is content with all the details will come out in the consultation. As long as I have been involved in local government, and since the rate began to be set centrally, local government has looked to having the business rate repatriated—in that it does not go out and come back in again but is contained within local authorities. The repatriation of the business rate is a good thing. The setting of the rate for the grant will continue to be set centrally, for the time being at least. As far as I know at the moment, that will continue to be the situation.

My Lords, to follow the pointed last question of the noble Lord, Lord Tope, does it not make rather a nonsense of the fine phrase about “freedom over finance” when all that is being restored is the right to retain business rates at a level decreed by the Government, with no capacity to vary it one way or the other at the local level? Is it not also the case that the vaunted reduction in ring-fencing, which in principle is to be welcomed, really amounts at present simply to more freedom to spend less and to incur the odium of taking the decisions over cuts in services that the Government are imposing on authorities through the significant, massive and unprecedented reduction in the government grant?

There is a sentence in the Statement that says:

“Beyond this spending review period, we will look to align more closely local authority functions and total business rate income”.

What does that mean? What are the implications of that sentence?

As for the fairness between authorities, is it not striking that the City of London stands to gain £545 million a year in increased business rate income and the entire authorities in the north-east of England stand to lose £544 million a year? For how long and to what extent will losses in authorities such as those in the north-east be compensated? There are many others; Birmingham, for example, will lose £300 million. Will the losses be fully met and, if so, for how long? Is the Minister aware that in a debate in Westminster Hall, Andrew Stunell, who is a Minister in the department, seemed to indicate that it would be for a year? Is that the position?

Finally, how will this compensation adjustment be made? Is there any detail in the consultation paper about how these huge imbalances are to be addressed, or is it another case of politics in the style of the late lamented Tommy Cooper, whereby things will happen “just like that”?

The noble Lord said it so nicely, he will almost be able to go on the stage and do Tommy Cooper, but I am sure he does not really want to do that.

At the outset I remind the noble Lord that local government finance is at the level that it is because of the disastrous deficit that had to be met. Local government has had to take its share of that. The noble Lord knows that if a Labour Government had come into power, they too would have had to make very substantial reductions. Local government would have been left facing very similar problems and decisions to reflect those reductions.

The compensation system will be the tariffs and the top-ups. The expectation is that the control totals that are in place at the moment for the four-year spending review will stay in place. However, with the retention of the business rate, as the noble Lord has rightly said, some areas will have a far higher business rate than others and will be able to generate more. At the start, the tariff will be set at the level of those that have higher rates; the expectation is that, above that, money will be taken off and passed to those in the poorest areas. There will be a sort of balancing between them.

The noble Lord asked how there would be growth. The rate will encourage local government to talk to businesses and encourage the development of businesses, because they will be able to retain some of the extra rate that comes from that. I hope that that answers the noble Lord’s questions.

My Lords, I, too, like my noble friend Lord Tope, warmly welcome the main thrust of what is proposed in this consultation paper. Like him, I admire my noble friend’s refusal to try to answer the questions that are asked in the consultation paper. We are very grateful for the repetition of the Statement; indeed, it reads very well.

I have two points to make. I was the Secretary of State who introduced the nationalisation, as it has been called, of the business rate. One has to remember what lay behind that—namely, that 20 years ago we examined the question of the local authorities and who paid, who benefited and who voted. This was not a coterminous group, although there were some overlaps of course, but businesses, particularly small businesses, felt that they were being overcharged by local authorities fixing the rate to get the benefit of the revenue so that they could provide extra benefits for those who voted but who perhaps did not contribute any rates. That is what my noble friend has to avoid. What has been proposed in this consultation paper goes a long way towards that; it was very reassuring when she said that the business rate would still be set nationally and that it would not be open to local authorities to change that. While one would like to feel that setting the rate could make it more responsive to business requirements, the fact of the matter is that we had many years of experience of that and it did not work.

The one point on which I disagree with my noble friend Lord Tope is that I hope that the Government are not tempted to go down the road of letting local authorities fix the business rate themselves. They do not vote and yet they would be asked to pay what might be quite substantial sums. Indeed, when I had to deal with local authorities, they were asked to raise very substantial sums. I just issue that warning to my noble friend.

I end by saying that I think this is a valuable first step. I am not sure that I will take the Green Paper away with me during the Recess, as I have a number of other papers to read as well, but I look forward to studying the paper, particularly when some of the details, which my noble friend said would be published later, are available.

My Lords, my noble friend was a much respected Secretary of State. I still remember the reasons why business rates were centralised. There is no intention of allowing local government to set the business rate; businesses will in effect see no change. The business rate itself will be set nationally, as it is; the discounts, the valuations and the rates that are paid will be the same, so in effect they will be unaffected. However, the area in which we hope and expect to see change is in encouraging local authorities to make sure that they are well in tune with their local businesses, that they try to see their businesses grow and that enterprise and employment follows from that. If business grows, local authorities will be able to benefit from that. I hope my noble friend will understand that the business rate will be as he put it—set nationally.

My Lords, given the responsibility of Governments to promote balanced economic growth across the country, will the Government give a commitment that the north-south divide, and indeed the gap between the less well-off and better-off areas, will not be allowed to widen as a result of these measures? Could I tempt the Minister to disagree with the Secretary of State in another place, who is reported as saying that at the moment there is no motivation for councils to support local firms or to create new jobs? Gateshead, the council that I have had the closest involvement with in recent years, has been a splendid public entrepreneur in working with private industry to do precisely that. There is therefore a great motivation simply to promote the economic well-being of the area that local councils represent.

My Lords, with reference to the noble Baroness’s last question, of course there are local authorities that have been working assiduously to promote economic growth all over the country. Authorities both north and south have worked very hard. On the other hand, they are not really benefiting from that because they are getting nothing back from the business rate. The spending totals remain the same; the control totals stay the same. If they can encourage more enterprise, or more firms into their areas, they will get some of that growth back above the tariffs. That will be helpful because they will be able to reinvest that and to promote the economy better. There is an advantage, but I would certainly not underestimate the amount of work that local authorities have already done. I have seen quite a lot of it during my year as a Minister, so I am grateful for it.

Within the spending review, the control totals will remain the same, although, as I have explained, between the tariffs and the top-ups there will be a switch of resources from those that have more business rate to those that have less. I do not think anyone will be any worse or better off as a result for the time being.

My Lords, the Minister will not be surprised that as well as welcoming the announcement of this Bill in general I am particularly delighted that tax increment financing is included in the Statement. I have two things to ask her. First, could she ensure that, during the consultation, there will be the widest possible definition of tax increment financing rather than the sometimes very narrow definition that gets touted around, since the purpose of this is to ensure economic growth and maximum advantage for developing business in local communities and regeneration?

Secondly, I ask her to look favourably at the amendment which the noble Baroness, Lady Valentine, will move on Wednesday that would allow tax increment financing to go ahead much more immediately in London, thereby providing a good pilot for this new approach in the UK to financing and encouraging economic growth at a time when it is so highly valued.

My Lords, I know of the noble Baroness’s interest in this. A consultation is a consultation, and if people have ideas about how wide they want the tax increment financing to go they will be able to say so in the consultation. I do not think there is anything in the consultation questions that would prevent that from happening. I am not in a position at the moment to say what my response will be to the amendment tabled by the noble Baroness, Lady Valentine.

My Lords, while welcoming the Minister’s announcement, it is important not to misinterpret what is being proposed. While this is being billed as being about the repatriation of business rates from 2013, that is strictly speaking not the case because firms will see no difference in the way in which they pay tax, or in the way in which the tax is set, as a result of these changes. In this sense, therefore, this is not about repatriation. However, for all the reasons that my noble friend Lord Jenkin identified, it is very important that the repatriation of business rates is seen to be fair by the firms and businesses that are paying these rates. For this to be maintained at a national level is, at least for the foreseeable future, the right thing to do.

What matters in this proposal is that it encourages growth and enterprise. For this reason, it is important that the deal that has been announced is seen to be fair and does not simply redistribute from poorer areas to richer areas. Setting an insurance scheme against shocks enables poorer areas to do more for themselves and to generate income that will make them richer. In that sense, a virtuous circle can be created.

The consultation is very welcome. I have been a firm advocate of the repatriation of business rates now for many years, so I welcome the direction that the Government are setting.

Finally, I have one question about tax increment financing. There is no date in the Minister’s Statement for when tax increment financing will come into play. I assume that it will be in 2013, but it is very important that, as part of the whole package of repatriation of business rates from this date, tax increment financing is part of it.

My Lords, the answer to the noble Lord’s final question is that the Government are committed to introducing tax increment financing as soon as possible and will move as quickly as possible to deliver it. It is being introduced through the local government finance Bill alongside the local retention of business rates. Once again, I thank the noble Lord for his support for this.

On the repatriation of tax revenue for business rates, while businesses will not see an immediate change to the way they pay the tax, they will see a greater interest from local authorities in the rates. They are important anyway, but I expect and hope that they will be even more important because there are lots of incentives for business not only in the Localism Bill but in the consultation that has been announced today. Yes, this is absolutely all about encouraging growth and enterprise, and the expectation and the ability to keep extra business rates in areas that need to do more to encourage business will do exactly what the noble Lord, Lord Shipley, has said: they will help the poorer areas perhaps to try to generate a little more business activity in the areas they represent.