Tuesday, 3 July 2012.
Arrangement of Business
Good afternoon, my Lords. As your Lordships will know, if there is a Division in the Chamber while we are sitting this Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Local Government Finance Bill
Committee (1st Day)
Clause 1 : Local retention of non-domestic rates
1: Clause 1, page 1, line 19, at end insert—
“( ) paragraph 6 (regulations about non-domestic rating income);”
My Lords, I shall speak also to Amendments 2, 3 and 4. At the start of our deliberations, it might be helpful if I set out our approach to these Committee proceedings. This is a framework Bill. A tremendous amount is being left to regulation-making powers in the Bill—at least a couple of dozen powers on my count—which comprises just 19 clauses. We accept that the framework has been filled in in part by recent statements of intent and that there is a plethora of technical and other papers, but that is not the same as having a complete set of draft regulations. We will therefore use the opportunity of this Committee to probe the detail of what is intended and get as much as we can on the record. We will also seek to insure, where appropriate, that those regulation-making powers give the maximum opportunity for parliamentary scrutiny, hence these amendments.
Clause 1 introduces new Schedule 7B, which contains the nuts and bolts of the business rate retention scheme. It provides, among other things, for certain of the new regulations to be by way of the affirmative procedure and the rest by the negative process. This group of amendments adds to those that should fall into the affirmative category.
Amendment 4 concerns paragraphs 37 and 38 of the schedule. The Delegated Powers and Regulatory Reform Committee recommended that regulations made by virtue of paragraph 39 should be subject to the affirmative procedure because they impose a liability on a billing authority. This is what the amendment seeks to achieve. Paragraph 39 refers to regulations under paragraphs 37 and 38, and it is presumably those that should be subject to the affirmative procedure. Although we will want to discuss the detailed provisions later in our deliberations, we assume that the Government accept the Delegated Powers Committee’s recommendations on this matter, even if not our precise wording.
Amendment 1 deals with paragraph 6. This requires, following a local government finance report, payments of the central share of non-domestic rates to the Secretary of State. However, the regulation-making power includes the power to define what non-domestic rate income is and what adjustments can be made to amounts payable. We will discuss some of the detail of this later, but the power to define what income is for the purposes of the local/central split, including judgments about authorities acting diligently, is, we suggest, significant and should be subject to the affirmative procedure, at the very least on its first use.
Amendment 2 seeks to bring the provisions concerning payment on account under the safety net arrangements within the affirmative procedure. Again, we argue that this is much more than a mechanistic provision concerning calculation. It is potentially very significant for some authorities. It covers the circumstances in which safety net payments might come about. We welcome the fact that other regulations relating to the levy and safety net are to be subject to the affirmative procedure and consider that the same should apply to paragraph 26. So far as we can tell, the issues around payment on account are not covered in the statement of intent or in the government response to the resource review consultation. The consequences of catastrophic reductions in year of a business rate base, likely to be accompanied also by an upsurge in eligibility for council tax support, need serious consideration and should be subject to the affirmative procedure.
Finally, Amendment 3 focuses on paragraph 30, which deals with transitional protection payments. These are existing arrangements designed to dampen the effect of changes to business rate liabilities arising from revaluation. This could have a significant implication for the business rate retention scheme, and it is proposed to take the effect of this outside of the scheme. This requires regulations concerning calculations of a billing authority’s deemed rate in income and actual rate in income, including judgments about whether an authority has acted diligently. This is, again, a very significant provision, which should be subject to the affirmative procedure. We are in uncharted waters over lots of these areas, on a range of key issues, and we should do all we can to strengthen the parliamentary scrutiny. I beg to move.
My Lords, as the noble Lord, Lord McKenzie, said, this is framework legislation—as indeed is Local Government Finance Act 1988, which precedes it. It is therefore to be expected that there will be a number of detailed matters which will be dealt with in regulations. The appropriate level of parliamentary scrutiny for each set of regulations will differ depending on the precise subject matter at hand, and we have carefully considered the appropriate level of scrutiny for each of them.
This is why provision is already made for a number of regulation-making powers in the Bill to be subject to the affirmative procedure, as the noble Lord acknowledged. Regulations under paragraphs 8, 20 and 23, for example, which all deal with the calculation of various payments under the scheme, will be under affirmative order. The Government have made these regulations in particular subject to the affirmative procedure in recognition of the need for the highest level of parliamentary scrutiny over such types of finance provisions, given their significance and impact within the rates retention scheme.
Similarly, the tariff and top-up payments that will flow to and from local authorities will be determined by the local government finance report for a year, which must be approved by resolution of the House of Commons. That again affords the appropriate level of parliamentary scrutiny over key payments within the scheme.
All other regulation-making powers in connection with the non-domestic rating in the Bill are subject to the negative resolution procedure, as the noble Lord said. This is in line with the approach that is currently taken in the existing Schedule 8 to the Local Government Finance Act 1988, and also reflects the more technical or administrative nature of those powers. These include the regulations specified by the noble Lord in his Amendments 1 and 4.
The Delegated Powers and Regulatory Reform Committee, as the noble Lord has acknowledged, has carefully considered the Bill in advance of our debate today. The fourth report of the Committee, published on 21 June, considered that not only is the balance in new Schedule 7B between provision in the Bill and provision in delegated legislation “about right”, but also that the level of parliamentary control over regulations set out in the Bill is, subject to one exception which I will come on to in a moment,
“appropriate according to the relative significance of the various powers conferred”.
Noble Lords will not therefore be surprised when I say that I agree with the conclusions of the Delegated Powers and Regulatory Reform Committee on this point and therefore cannot accept their amendments.
We have carefully considered what the appropriate level of parliamentary scrutiny should be for each regulation-making power in the Bill, and our approach is supported by the findings of the Delegated Powers and Regulatory Reform Committee, whose responsibility it is to consider such issues. However, I hope that the noble Lord’s disappointment in my response will be tempered by my confirmation that we will bring forward an amendment at Report to make those regulations made by virtue of paragraph 39 subject to the affirmative procedure. I think that that is what the noble Lord was looking for. This is the exception to which I referred earlier, and in line with the recommendations. With those explanations, I hope that the noble Lord may feel able to withdraw the amendment.
My Lords, I thank the Minister for her reply. Of course, I will withdraw the amendment given where we are. I am pleased that the Minister has confirmed that government amendments will be tabled to deal with the recommendations from the Select Committee. But I shall dwell for a little on two provisions to try to explain further why we believe that their significance is such that they should be subject to wider parliamentary scrutiny.
On payments on account of the safety net, the provision was put in the Bill, as the Minister knows, to give local authorities that are suffering in year from a significant downturn in their business rates an opportunity to get support during the year rather than wait until after the year, which is the general structure of the scheme. In the circumstances in which those opportunities present themselves, it is of crucial importance to local authorities to know what the rules of that provision are. I would have thought that it was also important for our scrutiny of something of that magnitude, which is not simply an issue of narrow accounting but an issue of real substance as to how a key part of the business rate retention scheme will work. I shall not dwell further on the paragraph 6 issue, other than to say that this is not just about accounting for the debits and credits; it is about a definition of income for the purposes of these provisions. I am sure that I will not manage to change the Minister’s view on the matter this afternoon, but we would like to reflect on it because these are significant provisions that deserve wider parliamentary scrutiny. I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
Amendments 2 to 4 not moved.
5: Clause 1, page 2, line 14, leave out from “1” to end of line 15 and insert “shall have effect in relation to such financial year as is approved by a resolution of both Houses of Parliament (“the initial financial year”) and subsequent financial years, and the initial financial year shall be no earlier than the financial year beginning 1 April 2014”
My Lords, in moving Amendment 5 I shall also speak to the other consequential amendments—Amendments 55, 57, 58 and 60—in this group. The amendments would defer the introduction of the business rate retention scheme for at least a year, as determined by a resolution of Parliament. We recognise that the Secretary of State already has power in the Bill to defer its introduction until a later year, but all the indications are that he has no intention of doing so. The Minister will no doubt confirm that.
My noble friend Lord Smith’s Amendments 6 and 7, which we support, are very much an alternative formulation. If passed, they would require the Secretary of State to defer the introduction.
This is not about seeking to wreck the proposal or to kick it into the long grass. We support a localist approach and the concept of a business rate incentive scheme, so why should we defer? First, and very importantly, we do not yet have legislation; it will be October or even November this year before the Bill becomes law. I am bound to say that it seems somewhat discourteous of the Government to prejudge what might come out of your Lordships’ deliberations. To be clear, we are intent on proper scrutiny of the Bill but are not trying to slow it up. The Localism Act, of which I am sure we all have fond memories, ended up in a completely different place after it had been through your Lordships' House. I do not predict quite the same rate of change on this one. However, it seems to me that we should wait to see the final shape of the legislation—to pre-empt it would be unfortunate.
There is still a lot that we do not know about the detail of the scheme and may not know even at Report. Let us look at some of the gaps. They include: the precise definition of income for the purposes of calculating essential share payments, the definition of income for the purposes of the levy and safety nets, the safety net thresholds and the principles and bases on which the central share will be returned to local government. That is perhaps the biggest gap in what we are going to consider. We also do not know how surplus levy payments have been distributed, the methodology for establishing the forecast national business rates or how many surpluses in the new homes bonus deduction from the forecast national business rate are to be returned to local authorities. A number of questions are indeed raised by the amendments before us for our Committee stage. We need to know the basis for averaging business rates in order to determine business rates collected for tariff and top-up calculations. They are all significant issues—all gaps in the knowledge and what we know about the Bill.
Of course, the effect of the proposals is to place risks around the business rate collections on to local authorities. Local authorities are having to make judgments about reserves at a time when finances are already stretched and services are cut to the bone. The more gaps in the detail the greater the likelihood of the council’s increasing reserves, adding yet further pressure. Uncertainty will mean greater restrictions on services and higher council taxes.
There is also the need for time to reflect on whether the scheme as proposed will deliver the incentive that the Government seek. Several organisations, not least London Councils, has commented on the complexity of the scheme. The term used is “fiendishly complex”. To quote from its briefing to this Committee:
“London Councils believes that the Government needs to urgently rethink the business rate retention scheme it has set out in the Bill. Failure to do so will not result in the desired radical shift in the structure of local government funding, nor the anticipated revival of economic growth, that the Government was seeking to achieve”.
Surely one feature of an incentive programme should be having confidence in the consequences of one's actions. Concerns have been expressed about the quantum of the potential incentive and the peeling away of 50% for the central share; the number of levers; the ability of the Secretary of State to change these levers; and the length of the reset period. It is true that the Government have had an economic-benefits analysis undertaken, but this is heavily caveated and their assessment has a wide range of possible outcomes.
The amendment of my noble friend Lord Smith sets down a deadline of 30 November for all the relevant statutory instruments to be in place. I hope that when the Minister responds she will be able to give us a clear timetable for those. None of them can be laid before the Bill becomes law, so it looks unlikely that any of them will be in place by 30 November. Even when laid they will have to be considered according to the timeframe under the affirmative procedure, or following the passage of 41 parliamentary sitting days, before they come into effect. That is an extremely tight timetable covering a vast array of issues which are at the heart of these proposals. Local authorities are entitled to know the answers and have the security of the legislation if they are going to act and proceed on them. I beg to move.
My Lords, I will speak to the amendment in my name. I am glad to follow my noble friend Lord McKenzie and support the arguments that he used. Before I come to the detail, I declare my interest in this matter. I am leader of Wigan Council, chair of the Greater Manchester Combined Authority, vice-chair of SIGOMA and vice-president of the LGA. I can see that I am not alone in that.
Looking in detail at the Bill, Clause 1(7) clearly gives the Secretary of State some flexibility to defer introducing the Bill. Therefore, I tabled my amendments for two purposes. One was simply to try to understand—and I hope that the Minister can help me in her response—under what circumstances and when the Secretary of State may use the power under this clause. More importantly—again, I want to follow up the points raised by my noble friend—if local authorities want to change the funding system, they want to do it well. However, we have to accept that if we do not let them know what the new system of funding is by a certain point during this year, it will be difficult or impossible for them to implement it by 1 April next year.
I have chosen 30 November as the cut-off date as that gives local authorities four months in which to plan and make sure that computer programmes and so on are able to cope with the technical aspects of the Bill. Those are not yet in place and cannot be until all the details and statutory instruments are available. If we leave it much later than that, we will be getting towards the end of December, although as far as government is concerned the middle of December will probably be the latest date because Christmas will intervene and not much will be done then. If we respect the fact that local authorities will have work to do on this part of the Bill, and probably more informally on some of the later parts of the Bill, then we need to be honest, say that we cannot achieve what this House needs to achieve by a certain date and not go forward.
My Lords, before my noble friend replies to the debate, I should like to add a word. The noble Lord, Lord McKenzie, quoted a passage from London Councils’ briefing, which we have all received. I and my noble friends have tabled a number of amendments—to which we will come later and to some of which the noble Lord has added his name—which recommend a marked change in the structure of this division of the business rate. London Councils—I should declare an interest as one of its presidents—has indicated to me that on balance, with regard to this part of the Bill dealing with the business rate retention scheme, it would be a little upset if the date were postponed.
A lot of work is being done on this by London Councils and there has been a good deal of discussion about the pooling arrangements that may be appropriate. Although it is not put as a very firm and immutable point of policy, its view is that 2013 for this part of the Bill is right, and I think it would regret it if the date were changed. I draw a very clear distinction between this and the later part of the Bill dealing with the council tax, where there is still an enormous amount of anxiety that councils will simply not be ready with their own local schemes. However, we shall come to that later. I think that I should let the Committee and my noble friend on the Front Bench know that on balance London Councils would regret a postponement of Part 1.
My Lords, I suppose that I, too, should begin by declaring an interest. I am simply a councillor in the London Borough of Sutton. I am not a vice-president of anything, or at least not yet—I see that the noble Lord, Lord Beecham, is disappointed with that declaration.
I listened to the noble Lords opposite making the case, with which I am sure many in local government would have some sympathy. I think that all of us, on both sides, would wish to be a little further ahead than has proved possible. However, I suspect that as we will say time and again with this Bill, we are where we are now and we have to consider the question of postponement. My noble friend Lord Jenkin is right to draw a distinction between postponement of the business rate retention proposals and a possible postponement in implementing the localisation of council tax support, to which we will come later. There will be many in local government who have sympathy with what has been said on the other side of the Committee and perhaps more so when we get to council tax support.
As a councillor, I have thought quite hard about this in respect of my own authority and more generally. I do not support postponement. I would rather we were not where we are. Until relatively recently, it was expected that this Bill would be enacted by the end of this month but clearly that will not happen until much later. I hope that, in reply, the Minister will be able to give us a clear and firm commitment that by Report stage, in October, all that is required to be published will have been published, albeit in draft form. I take the point that until the Bill is enacted, it cannot be in an absolutely final form. However, if local authorities know all that they need to know by October at the latest, and I hope a little before that, and if the Minister is able to give a reassurance, I believe that most local authorities will share my view on business rate retention that we are so far down the road and there is so much expectation that this will happen—there has been so much wish that it should happen and we shall come to that later—that postponement now would not be welcome, particularly to me. I hope, with some confidence, that the Minister will resist these amendments.
My Lords, my noble friend Lord McKenzie alluded to some of the difficulties that surround next year’s council budgets, to which these amendments refer. In particular, he mentioned reserves and the uncertainty about the timetable, as well as general uncertainties that are leading councillors to take a more conservative view about the level of reserves that should be held. I declare an interest as a member of Newcastle City Council and as a vice-president of the Local Government Association, a position that I hope to share with the noble Lord, Lord Tope, as soon as possible. The president is here, so perhaps he can take that message back to the association.
In my council, we have been accustomed to running on a very modest level of reserves. The treasurer is concerned about the degree of uncertainties not only because of legislation and the general financial situation but also because of the growing number of outstanding valuation appeals in the commercial sector. Of course, that goes very much to the heart of what the business rate will deliver. It seems that these appeals are growing in number. The noble Earl, Lord Lytton, mentioned to me recently that they are taking about two years to be settled. I am not suggesting that the programme be held for two years, but it is an indication of the growing levels of uncertainty about what might ultimately be the yield, let alone about how the Government would handle the business rate when it is collected. In addition to that, a new category effectively of precepting authorities will arise in November when a handful of electors up and down the country will choose their police commissioners, who will have responsibility for 11% of the council tax. Clearly, that will relate to the business rate income. That is another element of uncertainty. In my submission, all this suggests that it would be sensible to ensure that the legislation is firmly in place, is absolutely clear and takes into account these other factors.
I suspect that we shall be debating at some length, as the noble Lord, Lord Jenkin, has pointed out, the position arising in relation to council tax benefits or council tax support, as it will be known, and the new systems that will apply. I would have thought that it would make more sense to take those together against the background to which I have referred, a background that the Secretary of State apparently referred to at the LGA conference last week, when he made what he described as a jocular reference to tackling councils’ reserves. By the word “tackling”, I take it that he means requiring that they should be used. Against the kind of uncertainties that we are talking about, such an approach would surely be highly risky and damaging.
I do not know whether the Minister is aware of quite what the Secretary of State said; if she is not, I would not ask her to respond at this point. However, I would be grateful if the situation could be clarified, perhaps by a letter to Members of the Committee—and perhaps wider than that, because it will also send a shiver up many a treasurer’s spine, on top of all the other uncertainties that we have. We will certainly be pressing hard for a deferment of the council tax benefit side, as it seems sensible for the system to change at the same time and not in parts, particularly given the other uncertainties that I have mentioned in relation to the amendments before us.
My Lords, may I pick up on the point made by the noble Lord, Lord Beecham, about reserves? I hope that when the Minister replies to that point, as she was asked to do, she will include within it how the strong reservations of the accountants’ organisation CIPFA about how much local authorities should hold in reserves will fit in with what the Secretary of State has apparently said. I hope that she will talk about specific reserves as well as unallocated reserves. It would be great if this could be clarified at some stage.
My Lords, before the Minister replies, perhaps I might return to the reference made by the noble Lord, Lord Jenkin, to London Councils. I accept entirely that London Councils has changed its position on deferment of the business rate component of this Bill—the briefing that we had a month ago certainly put us in a different slot—and I was not seeking to suggest otherwise. However, I was seeking to relay what is still its current view, as I understand it, which is that the scheme needs to be urgently revamped if it is to produce the radical shift in the structure of local government funding that the Bill proposes. I do not know what process the noble Lord might feel there is to achieve that if there is no deferment of the Bill. Are we going to follow up with an amendment Bill next year? How is it actually to come about? What is there within the Bill that would enable that radical restructuring that is apparently wanted? I do not know whether that is what the noble Lord supports.
I am grateful to the noble Lord for giving me an opportunity to explain. I referred a few moments ago to the number of amendments tabled on the first part of the Bill that would make quite substantial changes, particularly about the division between the central and local shares of business rates revenue. That would be a change that, if my noble friend Lady Hanham could persuade her colleagues that it might be accepted, would go a long way towards meeting the concerns not only of London Councils but of the Local Government Association and local authorities generally, which are anxious to see a faster process of the localisation of business rates revenue. I will no doubt have an opportunity to talk about this a little later, but I do not think that the questions of timing and of the changes that we are proposing are in any way inconsistent. As my noble friend Lord Tope said, there would be some regret if this were to be delayed. I think that both he and I were making that point. Perhaps that is a way of explaining to and satisfying the noble Lord, Lord McKenzie, that there is no inconsistency in what we were arguing.
My Lords, the noble Lord, Lord Beecham, made a perfectly correct reference to some comments that I put to him. Indeed, I have made comments in the context of this Bill before. Before I go any further, I ought to declare various interests: as a practising chartered surveyor, a member of the Rating Surveyors’ Association and a member of the Institute of Revenues, Rating and Valuation, which explains my interest in the valuation aspects of business rates.
There is a growing issue that creates a greater than usual level of uncertainty with regard to the yield of business rates. I referred previously to the number of outstanding non-domestic rating appeals. I believe that the current total is around 144,000 or 146,000. Even if you get rid of the repetitious ones, the true total probably sits at around slightly more than that—so, 80,000 or 90,000 appeals. Some of these go back to the 2005 rating list.
Business rate payers are getting increasingly concerned that access to justice is effectively being denied to them. A typical lead-in period from the time when an appeal is lodged to the time when the Valuation Office Agency is able to make any sort of substantive comment, I am advised, is in the order of two years—and that is not to the time when it actually gets before the valuation tribunal, when the valuation officer can actually open his book and address the issue. I do not blame the Valuation Office Agency for that. I think that the Committee should be aware that this is fundamentally to do with the agency being starved of the necessary resources. It is being starved of the personnel and starved of the resources to upgrade its computer technology; its computers do not interleave with the valuation tribunal’s computers, and so on and so forth.
Businessmen are particularly concerned because the non-domestic multiplier—that is, the multiplier that is applied to the rateable value in order to provide, as it were, the gross amount of the rates payable before transitional relief and other things—contains an element for potential losses to the tax base arising from successful appeals. So businesses up and down the country are bearing the cost of this contingent risk factor which is implicit in the fact that we are dealing with a system that is lacking in the necessary resources.
My point in raising this on Second Reading was to outline that this is the nature of the animal that is about to be bestowed—or, rather, its risks are about to be bestowed—on to billing authorities. I think that this needs to be addressed. I do not know how this relates to whether the Bill should be brought into force in 2013 or subsequently—I make no comment about that. I just say that there is an in-principle issue about the maintenance and management of the tax base that, if you do not get it right, will be in the nature of passing the buck, an issue that the noble Lord, Lord Beecham, raised on Second Reading. This is a risk factor. I think that it would be entirely wrong, although— I declare another interest as president of the National Association of Local Councils—that does not make me unaware of the risks that are being imposed on the principal authorities, which are represented here by their president, my noble friend Lord Best. I think that it is right that, when we are dealing with these matters of principle, we actually address them at this stage. This is part of the tapestry—the backdrop—over which an awful lot of the other bits that we discuss will have to be viewed.
My Lords, I thank everybody who has contributed. I particularly thank my noble friends Lord Tope and Lord Jenkin, who have broadly said what I will say. I do not think that local government really wants us not to proceed at this stage. This has been in the offing for some time; people are well aware of what is coming about and there have been many discussions with them. Therefore, the suggestion that local government will not be able to implement the rates retention system from 2013 is not correct. Local government will have all the information that it needs to implement the rates and retention scheme effectively, before it has to do so. We will be publishing draft regulations before Report in October. Other information in terms of consultation of the technical detail of the scheme is going to be available over the summer and there will be draft secondary legislation in the autumn before the draft local government finance report is due. Therefore, by autumn, all the information necessary for the implementation of the business rates scheme will be out, even if some of it is in draft. Other information will then be available tying in to the local government finance report, which has to be laid, as it is part of the whole system.
The noble Earl, Lord Lytton, has raised a question that I hope we may defer, because he has tabled a major amendment about it for later in the debate. Indeed, some of the points raised by the noble Lord, Lord McKenzie, are also the subject of amendments. We might have a better opportunity to discuss them later. While I understand the noble Earl’s views that this is, or should be, part and parcel of the scheme, we think that that could and should be dealt with separately. As I said, we will come to points on appeals later on, but in setting up the retentions system we will make an adjustment to reflect the cost to local government of outstanding and future appeals, so there will be some amelioration.
We have worked pretty collaboratively with local government throughout the development of these proposals. In March 2011, we published the terms of reference of the local government resource review and in doing so we clearly set out the aims and the scope of our proposed reforms, as well as the timetable for implementation. We have since consulted local government on numerous occasions. In July 2011, we published a consultation on the design of the rates retention scheme and, in August 2011, we published a further eight technical papers to provide more details on these proposals.
We have listened to what local government has said. This was evident in our response to the consultation published in December 2011 and, indeed, that consultation continues today. The Bill that we are debating is the product of this attentive engagement and consultation. It has, of course, received pretty considerable scrutiny—perhaps unlike the Localism Bill—in the other place and there has been a gap since then for people to think about it and to ask for any information that they do not have.
We will continue to work with local government as we proceed. First, there is our working group made up of local government representatives, including the LGA, which is contributing to the policy and technical debate for the information that will be coming out shortly. There is a further consultation later this month on the technical details underpinning the scheme. There is plenty going on still to shape the legislation going forward.
In terms of our approach to the implementation, we believe firmly that the existing timetable should be adhered to. Before the new rates retention scheme is introduced in April 2013, local authorities will be consulted on their baseline funding before the end of this year, and after a debate in the other place they will receive their final settlement in early 2013. That follows the normal practice that has existed for years. I can remember discussions on local government finance taking place: we always thought that it was a bit tight, but it has always been at the end of the year, sometimes in December. That will be there. This means that the timescale for agreeing baseline funding in advance of April 2013 will be the same as happens currently for the first year of a multi-year settlement. Local authorities will be able to use that information to inform their local budget setting in a timely manner, as they always have done.
I strongly believe that we should be able to implement the rates retention scheme from 1 April and that it is desirable to do so, because local government is expecting it. Moreover, the Bill contains provisions to amend the date of introduction to a subsequent financial year should this be absolutely necessary, although I do not think that noble Lords should hang on to the coat-tails of that. It seems inevitable that such a clause would be included in legislation; there often are clauses in case the absolutely extreme happens. I do not expect the extreme to happen over business rates; I expect them to be implemented by 2013 for all the reasons that I have given noble Lords about the consultation, the discussions and the information that has been presented. Broadly, unless there are major changes to the draft regulations—and I suspect that, even if there were changes, we would be able to cope with them—we will be able to proceed as I propose and get there satisfactorily by the beginning of the next financial year.
For all those reasons, I reject the amendments. I am conscious that I have not commented on the intervention of the noble Lord, Lord Smith, but perhaps I can pick up those points later.
My Lords, I welcome the Minister’s reassurances that information will be in the hands of local authorities—we will test that on Report in October when we can see what happens. I do not think that I ever said that I wanted this provision to be deferred; I simply made the point that a stage will come when it is too late. The Minister herself said that, in using the word “extremes”. I would be interested to know what those extremes might be that would delay the provision from 1 April. She also thinks that there could be circumstances that lead to delay. My point was very simple: as long as the information is available so that we can put it into place, that is fine. But we will obviously be able to test that out.
My Lords, I thank the Minister for her response to the amendment, which I will in due course withdraw. I follow on from the wise words of my noble friend Lord Smith, who has incredible practical experience of leading a major council. I was unclear from the Minister’s reply whether we had the assurance that all draft rates will be available by the time we get to Report, or all the information needed. There is not necessarily a position on that; all the information that somebody needs is one thing, but seeing it in terms of regulations that will, we hope, in due course go through the parliamentary process is something else. The Minister said that the timeframe is consistent with the current timeframe of the local government financial settlement. Well, yes—but this is not a routine local government finance settlement. It is a significant change, so aligning it timewise is not necessarily appropriate. The noble Lords, Lord Tope and Lord Jenkin, both said that there would be disappointment if there was a deferment. That may be the view of some but I know that it is not the view of everyone.
I am not sure that we fully covered the issues raised by my noble friend Lord Beecham and the noble Lord, Lord Palmer, about reserves, particularly the issue around CIPFA advice. It would be good if the Minister covered that before we put this matter to bed.
The noble Earl, Lord Lytton, again made a very powerful point. I was struck by his contribution at Second Reading. Summarising the concerns, he said that risks are about to be bestowed on billing authorities but the maintenance of the tax base is with central government. That mismatch is a real issue. Later in our deliberations we will come to some amendments that may enable us to go into that, but I am not sure that there is not a broader issue about having the ability to test the appropriateness of the rating system to bear the weight of this new way of dealing with local government finance. However, we will have to see when we get to those amendments.
Perhaps the noble Baroness would deal with the issue of reserves and clarify whether we are talking about draft regulations or about information in another form. We have had lots of statements of intent, which have been very helpful, but they do not amount to fine detail. If we have draft regulations by Report, when is it expected that they will come into effect? What is the rough timetable?
My Lords, the regulations that are going to be of significance will be in draft form. I guess that that will be most of them and any that are not will not be worrying us. I think that I can give the Committee an assurance that the draft regulations will be available for us to consider by Report. That is what I would want to happen and I take that on board.
I apologise for not having picked up my noble friend Lord Palmer’s comment about reserves. I shall have to write to him about that, although I ought to know how they are interlocking. Unfortunately, I did not hear the Secretary of State’s speech at the local government conference but I am sure that, whatever he said, he was not getting at local government in any way. However, there are a number of aspects of reserves—main reserves and specific reserves—and perhaps I may write to Members of the Committee before the next stage to give them the information that I think they are looking for. I hope that that will satisfy that aspect of their queries.
No, I am not a vice-president of anything. In addition to the comments that I and the noble Lord, Lord Beecham, made about reserves—specific and non-specific—one also needs to take into account the restrictions imposed on local authorities by external auditors. External auditors used to come under the Audit Commission but now they are a stand-alone operation. They require a certain level of reserves on the balance sheet, and it would be difficult if central government were to impose requirements on those reserves. External auditors say that you have to have £5 million, £10 million or £15 million in reserves to make everyone feel comfortable, but I have always said when making speeches that I think they make people feel too comfortable. However, that is what the auditors say and they will qualify your accounts if you do not do that.
I return to the fact that unfortunately I did not hear, and do not know, what the Secretary of State was referring to. Of course, reserves are part of local government finance and part of control systems in local government. I should like to make some further inquiries about how that interlinks, if it does, with what we are talking about—the business rate retention scheme—so that I do not mislead the Committee. I know that the provision and use of reserves—and sometimes councils have large reserves—could potentially be used to help to ease the current financial situation. I shall not say anything more about that because I do not know what was said but I shall come back to it.
I was also asked about the police authority, and again I apologise for not picking that up. As I understand it, and I shall write if I am incorrect, the police authority will make the precept because it will be in place until November. It would be pretty unreasonable to ask a new police commissioner to come in to sort that out in the short time available. Therefore, what he or she inherits from the police authority will be what goes forward for the first year. After that, the police commissioner will set his or her own precept. I am not being prodded from behind and being told that that is incorrect but I will let noble Lords know if it is not correct.
I am sorry to intervene again, but that contradicts what I was told on Friday. Because of the problems of timing, the police commissioners would want to set the budget for the year from 1 April. In fact, I have just written a letter to the Home Office to ask whether we can do something about that because it makes timing very difficult.
My Lords, I thank the noble Baroness for her further explanations on that. I propose to withdraw the amendment. In doing so, I would just comment that I did not refer earlier to the comments of the noble Lord, Lord Jenkin, on deferral of the council tax benefit support scheme. I think that that might be more fruitful territory when we reach that provision. I beg leave to withdraw the amendment.
Amendment 5 withdrawn.
Amendments 6 and 7 not moved.
8: After Clause 1, insert the following new Clause—
“Representations from local authorities regarding a re-set of the system
(1) The Secretary of State shall establish a mechanism to allow local authorities to make representations on whether they believe a re-set of the system is required.
(2) The Secretary of State shall, prior to the publication of the Local Government Financial Report in any year, give consideration to any representations he has received, and must lay before the House of Commons a report detailing—
(a) any representations he has received from local authorities on whether it would be appropriate to re-set the system; and(b) his or her decision on such representations and the reasons for that decision.”
My Lords, Amendment 8 would introduce a new clause concerning a reset of the system. A reset would involve reassessing individual authorities’ baseline funding levels and a recalculation of tariffs and top-ups. The technical paper issued last year on establishing the baseline suggested that a reset might involve a completely new method of assessing relative needs and resources, but the purpose of this amendment is not to stray into that territory. The purpose of this amendment is to cause there to be a mechanism that would allow local authorities to make representations on whether they believe a reset of the system is required. Such a mechanism would include an obligation on the Secretary of State to report to the House of Commons on representations received and decisions made thereon, with reasons.
In their response to the consultation on the business rate retention proposals the Government made clear their aspiration for the reset period to be 10 years, and they have stated that they do not propose to reset until 2020 at the earliest—an aspiration, we should note, that would extend to the end of the next Parliament and beyond. However, they have acknowledged that in exceptional circumstances a reset could be required within the 10-year period. Will the Minister tell us what would count as exceptional circumstances?
We acknowledge that certainty over not only the quantum but the period of an opportunity will enhance the incentive. The longer the period between resets, the greater the likely incentive for business growth, as local authorities will retain the benefit of the growth for longer and it will be more encouraging of longer-term investments. That is notwithstanding the fact that the legislation would permit a reset on an annual basis.
There is, however, another side of the coin. Long periods between resets could lead to circumstances where the baseline funding position of an authority does not reflect its funding needs. Population movements, which the Government themselves identified in their response, could lead to the level of resources diverging significantly from core service pressures. We have a debate next Thursday on funding for adult social care, which is a clear example of pressure on services. Setting needs for a decade based even on an updated formula grant for 2012-13 might not be the firmest foundation.
Absent resetting, how could local authorities address the divergence experienced between needs and resources? With the safety net only being available when the business rate base falls by a certain amount and with restrictions on council tax rises—even if those were possible—where can authorities look? We will soon be debating how the Government intend to deploy the 50% central share of business rate, so I would be interested to know the basis on which that might occur longer term.
This amendment seeks only a modest but formal process for local authorities to propose a partial or full reset of the system. Of course there will always be informal opportunities to press a case, but in the interests of transparency we argue for the amendment. I beg to move.
My Lords, I am grateful to the noble Lord, Lord McKenzie, for introducing this amendment. Within it he raises some other points which we will come to later, particularly regarding the 50% retention issue, which is the subject of later amendments. However, I do not think that this provision is necessary. On a point of principle, the lack of a specific provision for making representations to the Government does not prevent anyone, or any authority, from doing so at any time. Nor do the Government need any particular legislative provision to be able to consider a representation. If an individual authority feels that it is in difficulties, it is perfectly entitled to come to the Secretary of State and say so.
Receiving and considering representations is a fundamental part of the Government’s work and the Government consider and respond to representations from members of the public and from local government every day. Representations constantly take place on local government finance, for example. I therefore do not think that we need this provision. I am not clear that the proposed new clause would bring any additional practical benefit to what will be an already transparent process, and I will explain why.
Under the rates retention scheme, the annual local government finance report will set out the tariff payments that individual authorities in the regime will be required to make to central government and the top-up payments that individual authorities will receive. There will continue to be an annual local government finance settlement and an annual local government finance report. A draft of this report will be shared with local authorities before it is laid before the other place. The report may be implemented only if it is approved by Members of the other place.
The Government intend to fix tariffs and top-ups at the start of the scheme and then link them in future years to the retail prices index. In future, the Government intend to fully reset the scheme only to reflect any reassessment of authorities’ needs, with the exception of the first reset period, at intervals of about 10 years to create the strongest possible incentive effect. I think that the noble Lord supports that view although he is concerned about individual authorities, but I think that I have addressed that point. In years where a reset does not occur—anywhere between one and 10 years—tariffs and top-ups will change only by RPI. At the very least, therefore, it will be clear to all, from the calculation of tariffs and top-ups in the annual local government finance report, whether a reset has taken place. It will be open and clear.
In practice, of course, we would expect to let local government know well in advance when the Government intend to reset the system. We have done this already by signalling the intention to reset the system for the first time following implementation in 2020. That is in seven years’ time. However, it remains the case that in any year, during the course of the debate on the annual local government finance report, Members of the other place would be perfectly entitled to ask the Secretary of State what representations he had received during the course of the year about whether it was appropriate to reset the system and why he had chosen not to act upon them.
Specific provision is not needed here for the Government to be held to account properly about resetting the system. It is an inherent part of the system through the transparent annual local government process. I therefore believe that the amendment is unnecessary and I hope that the noble Lord will withdraw it.
The noble Lord asked what would count as an exceptional circumstance. That is slightly difficult to see until you see it, although such a circumstance could arise if resources became significantly out of line with needs. The noble Lord asked me previously what the safety net will cover. It will cover situations such as a major company collapsing with the consequence that the business rate is wiped out. That goes back to the previous amendment, and I apologise for not picking it up.
I hope that the noble Lord feels able to withdraw his amendment.
Will the Minister look again at subsection (2) of the amendment to which she implicitly referred? The amendment would require the report in any year to refer to,
“any representations ... received from local authorities on whether it would be appropriate to re-set the system”,
and to the Secretary of State’s decision and the reason for that decision. The Minister rightly says that people could ask a question or a succession of questions about that. This amendment systematises that process so that it is clear and seen as an integral part of the annual financial report. I cannot see the difficulty in the Government accepting that it should be part of the information base to be considered alongside the whole of the rest of the local government finance settlement at the appropriate time. Would it not be more convenient for Ministers to do it that way rather than to have to reply to a succession of questions, perhaps over a different period, not necessarily tied in to the process of approving the report?
I should declare an interest as the leader of a London borough and as a member of the leaders committee of London Councils. I hope that my noble friend will maintain the position that she has just set out. I was encouraged by what she said about not ruling out exceptional circumstances. I shall not weary the Committee with my rather unusual local authority, which will be a tariff authority, as I referred to it at Second Reading.
It seems to me that we have a very open system. In all the years that I have been following local government I have never noticed the noble Lord, Lord Beecham, being slow in coming forward to make representations either public or private. Indeed, many of us in local government have often been very grateful for those representations.
I am sure that the noble Lord, Lord Beecham, was extremely successful in secret with that one Government with whom he had a good relationship once upon a time.
I do not wish to detain the Committee. I would simply say that surely the problem with a system like this one is that you will then have emulous enthusiasm, so that if the authority of the noble Lord, Lord Beecham, makes representations and they are going to be published in a report before Parliament, someone will come to me or to my noble friend Lady Eaton and say, “Why has your authority not made representations?”. So we will have lots of local authorities asking directors of finance to put in their representations so that they can be published and ticked off in a report to Parliament. I do not think that we should bureaucratise this too much until it seems, with experience, that the Government are suddenly not prepared to hear representations on the system. Then we can look at it. However, I think that there is a risk of overbureaucratising this and that it could be a make-work rather than provide a solution. I appreciate the intent with which it is offered but I hope that my noble friend will stick to the position she set out.
Yes, I will. We feel that this would be overly bureaucratic. As I laid out in my response, this can happen. If somebody has a reason or a need for a reset, or they think that they have, they can make representations. I do not think that that requires legislation. I do not intend, unless I am pushed at another stage, to accept that it is necessary at all, as such provision already exists. There is already a process by which that can happen.
My Lords, I am grateful to the Minister. We have probably aired this enough, at least for this occasion. I am grateful in particular for the acknowledgement that exceptional circumstances exist when issues are out of line with need. That begs a whole range of other questions, but having that on the record is useful. We might want to explore it further at a later stage, but for now I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Schedule 1 : Local retention of non-domestic rates
9: Schedule 1, page 20, line 31, leave out “may not exceed” and insert “shall equal”
My Lords, I shall also speak to Amendment 17, which is in this group. In tabling Amendment 9, I was intrigued by the language being used in the schedule. We obviously understand what “may not exceed” means but the implication is that it may on occasions be less than that figure. I am intrigued to know on what occasions it might be less and why. What did the Government have in mind in drafting this? If they did not mean it ever to be less then presumably they would have used the words that I use—“shall equal”. This is a probing amendment and I do not want to speak further to it.
Amendment 17 is more substantial. One thing that I think local government has welcomed over recent years is that we no longer do quite the procedure that the Minister outlined, and that in announcing a settlement for a year, Governments have given indications of what the settlements are likely to be in two subsequent years. The benefit of that to local authorities in terms of future planning and what they need to do is very important. In my own authority, under the current arrangements we now have a four-year plan and have to reduce expenditure by £66 million, which is 28% of our budget. It is not easy and we are trying to make sure that it happens. However, we could not take out the expected sum on an annual basis unless we knew what was intended for subsequent years. We have to plan to remove £20 million-odd this year and £18 million next year, so it is really important.
In keeping with the tradition that has grown up in local government, I am asking in this case that when a particular year’s settlement is announced we will be given indicative figures for future years, or at least for the next two years. That would enable us to plan the system much better than if we were simply told on an annual basis. As I say, this has been a real improvement which I think has been welcomed by all sides in local government, and I hope that the Government will maintain it.
My Lords, the noble Lord, Lord Smith of Leigh, has made a point but I am sure he would agree that it is a fairly narrow one, whereas some of the other amendments in this group raise wider issues. Perhaps I may step back for a moment to remind the Committee of what the problem is that we are talking about. There can be no doubt whatever that when the Government published their position paper, Business Rates Retention Scheme: The Central and Local Shares of Business Rates, there was very substantial disappointment on the local government side at the figure of 50% as the split between the local and central shares of the business rates. The arguments were well rehearsed at Second Reading but I will remind the Committee of the two main arguments.
First, it is recognised that the higher the local share, the stronger is the incentive to encourage development and therefore growth and jobs. Indeed, the Government’s document more or less admits that, and the tables they have produced show that that is the case. One is talking here about a broad feature of national economic policy. The second argument is more specific, and is directed at the consequence of the division. As was said by a number of noble Lords at Second Reading, the result is that priorities are still being substantially determined centrally rather than locally. It has increasingly been the declared policy of the Government to achieve more local decision-making and more local control over their affairs and finances. At Second Reading, I warned my noble friend that she might hear some of the same arguments with which she was assailed during debates on the then Localism Bill. We were able to make a certain amount of progress on that. There were a number of quite significant amendments which strengthened the localist case for more local decision-making. I hope that we might perhaps have a similar result here.
There has been a good deal of discussion within the local authority world of how one could change the position to give the authorities the prospect of an increased share in future. A number of proposals were put up, some of which have found their way into other amendments. When discussing this with the Local Government Association—I ought to have declared a long time ago that I am a vice-president of that—
Surprise, surprise, but there we are. Discussing this with the Local Government Association, it seemed to me that there would be merit in building in some form of escalator. Amendment 12 in this group introduces a limit, as it were, to say that it cannot be less than the previous year. However, that only stops it going down. Amendments 21 and 22, in the names of my noble friends and me, seek to build in a regular process by which the centralised share falls and the localised share rises. I do not for one moment claim that this is the only way of achieving an escalator; obviously, there might be a whole range of different options to do that. With these amendments we are arguing for the principle that the local authorities should be able to look forward over the next few years to a steadily rising proportion, both to increase the incentive to encourage development and more jobs, and to give expression to the increased localism which the Government aim to champion.
Amendment 22 spells out our proposal. I have said that I do not think this is necessarily the only way of doing it, but the proposal is quite simple: one starts at 50%; two years later the central share declines to 45%; two years after that to 40%; and two years after that to 35%. This takes us only up to 2018, and of course one is hopefully looking further forward than that. The corresponding local shares would go from 50% to 55% two years later; then to 60%; and then up to 65%. Therefore, over the period up to 2018, we would move from 50:50 to 65:35. Perhaps we could write this, or something like it, into the Bill. I made it absolutely clear that there are a number of different options for doing this and this was the one that seemed to attract some support in the local authority world. Local authorities particularly want to see some legislative provision setting out that the 50:50 split is not to be permanent or long-term.
As I have made clear—and this is very different from what I said when I was Secretary of State for the Environment in charge of local authorities—I am a huge supporter of the principle of localism. The noble Lord, Lord McKenzie, and others have made the same point. However, I detect the hand of the Treasury in this wish to maintain a 50% share. There is a feeling that it does not want to let go. My noble friend Lord Brooke of Sutton Mandeville and I have both been Treasury Ministers—I was the Chief Secretary at the Treasury—and I recognise that temptation. It seems to me that we have a choice here. Are we really going to encourage an increase in localisation or are we going to maintain a strong central control with some modest shift in favour of localism?
In considering the Bill and this particular proposal for the division of the business rate retention scheme, I hope that the Government will be prepared to accept that their good faith and belief in the principle of localism and localisation would be demonstrated by writing something like this into the Bill. That is what we are looking for. It would give an enormous fillip to the encouragement of local government which would go the whole way back, and local government would come to be seen as a more important area of governance in this country.
There is no doubt that as, over the past 30 or 40 years, the public have seen local government decision-making increasingly being taken over by central government, there has been a great loss of public interest in and concern over lower and lower voting figures. It is to the huge credit of local councillors such as the noble Lord, Lord Smith of Leigh, and others who are here that they have kept the flag flying in these difficult times. We now have a change of direction and I think that this has given local government an enormous boost of encouragement. It can say, “We really do still count. We are still looked to as an important area of government and not just as an instrument of central government”.
To my mind, if we could build into the Bill some form of escalator so that over the next few years there could be seen to be a shift in the percentage from a 50:50 towards a 65:35 split, or whatever it might be in six or seven years’ time, that would send out a very important signal to local government that the national Government are on its side and that they want to make localism work and make it a greater reality. The advantage would be that it would increase local authorities’ incentive to encourage development and so achieve growth and jobs.
If that is not done, it will give the impression that the Government—the Treasury would carry the blame—are giving a higher priority to tight monetary control than to encouraging growth. There has been a huge amount of argument about that over the past year or two but here is one way in which we can fight back on it. I hope that we will be able to persuade my noble friend on this. She will no doubt wish to discuss it not only with her colleagues in the DCLG but with Treasury Ministers—I know that they have a lot of other things on their plate at the moment—to see whether we can do something along these lines. It would be a hugely important signal to send out and a great encouragement to local authorities, as I hope that noble Lords will agree.
My Lords, I would like to speak to Amendment 16, which comes before the amendments in the name of the noble Lord, Lord Jenkin. I declare my interest as president of the Local Government Association. I express thanks to my various vice-presidents, particularly to the noble Lord, Lord Jenkin, for an exposition in very eloquent terms on the point covered by my rather cruder Amendment 16.
The LGA, representing district, metropolitan and county councils of all political hues, as the noble Lord has said, has expressed disquiet that there is to be a division of the business rates that retain so much central control, despite the positive rhetoric of localism. The LGA recognises that central government wants to keep a firm hand on local government finances during the period of deficit reduction covered by the current spending review, not least to impress the international financial markets that deficit reduction is being taken very seriously. The measures in the Bill are likely to last well beyond that deficit reduction timescale and local government at large is keen to ensure that the retention by central government of 50% of all business rates revenues, and indeed 50% of any business rate growth, shall not be maintained after its purpose has been fulfilled.
This amendment calls for central government to discontinue its retention of a share in local government business rates revenue after 2014-15; that is, after the last financial year in the current spending review period. I recognise that the Government may well be keen to extend the period a little longer because their deficit reduction objectives are likely to go on beyond 2015. However, the LGA, London Councils and others representing local government all agree that that top-slicing of business rates revenues by central government needs some clear end date. The 50% top-slicing greatly restrains the ability of local government to benefit fully from its support for any business rate growth and undermines the localism agenda of devolving powers away from the Secretary of State to local government.
In responding, perhaps the Minister could address one aspect of this concept of a central share of all business rates. I know that the Government have stated their intention to return the revenues that they receive through this arrangement to local government. That certainly sounds as though the Government’s intentions are not to redirect resources away from local spending, but it is unclear how the funding received by the Government will be returned to local authorities and what conditions are likely to be attached to it. Clarification on just how that somewhat circular movement of finance will operate would be much appreciated. The underlying point of the amendment is to draw out the Government’s view on just how long this central government control over half the business rates should last. I entirely support the comments on that from the noble Lord, Lord Jenkin.
My Lords, my noble friends and I have added our names to Amendments 12, 16, 17, 21 and 22, which have been very ably spoken to by the noble Lords, Lord Jenkin and Lord Best. I shall not repeat all that they said; suffice it to say that I agree with everything that they said. The noble Lord, Lord Jenkin, made some mention of the disappointment in local government when the 50:50 split was announced. That was profound perhaps because local government was expecting more, given the rhetoric from the Government when the so-called repatriation of the business rate was first announced, something for which all parties in local government have strived ever since my noble friend Lord Jenkin nationalised it some years ago. So there was an expectation. He has repented many times since then—and blessed is the sinner.
There is perhaps an unreal expectation from local government, given the Government’s rhetoric, and perhaps we should have been more realistic and recognised that the Treasury is hardly in the forefront of enthusiasm for localism, even regardless of the financial circumstances now. We all know that. As their proposers have explained, the amendments that we are discussing explore ways in which to ensure that the 50:50 split is not enshrined for ever, or that the proportion does not become even more to the disadvantage of local government, which would be the effect even if it remained at 50:50. The so-called escalator amendment, as the noble Lord, Lord Jenkin, said, is but one way in which to redress the balance. This is one of the very important points of principle in the Bill on which we will certainly want to see some movement during the Bill’s passage. We all recognise that this is not wholly within the possibilities of the Minister and her colleagues, but it is something for which we all have to strive.
One of the intentions of the Bill, to which we all subscribe, is to provide incentives for growth. As the Government have recognised, a 50:50 split considerably reduces that incentive for local authorities. To have that enshrined or implied for ever can only be a disincentive. My noble friend Lord Shipley, who cannot unfortunately be here today, floated a suggestion that he says came simply out of his own head of a 70:30 split. I am not sure that we would necessarily want to enshrine any particular division or split for ever—I do not think that we would—but certainly the balance needs to be more towards the 70:30 than the 50:50. I hope that we would want to provide the incentive and the encouragement that recognises, whether explicitly or implicitly, an escalator whereby, as the years go by, growth returns and local authorities are able to encourage economic growth in their areas, and the proportion of the increased business rate that they help to generate would be retained for local use. The 50:50 split is currently a very considerable disincentive.
Then there remains the concern about the Government’s proposals with regard to the 50% that is being retained. At Report in the other place the Government first made it clear and put into legislation that it would be used for local government purposes. That was very welcome and a very necessary reassurance, but we still need to know how and in what circumstances, not simply for the first year but for the future. These are very necessary reassurances to a disappointed local government at the 50:50 split. I hope that the Minister will be able to give us some reassurance and clarity on those points. In the months to come before Report, we need to have some very serious discussions about how we address this real concern which is felt, regardless of party, right across local government.
My Lords, a key concern of many local authorities, even within the new system, comes from those who are heavily dependent on government funding, the top-up grant or RSG. They are concerned with how that grant will be distributed, what factors are in the formula and whether a damping mechanism will still be retained.
When baseline rates are being calculated, the percentage share will be based on a historic average going back five years, which should help local authorities whose business rates have struggled to keep pace with the RPI. The lower the baseline rate position, the higher the top-up to which the authority will be entitled. There is potentially a small danger that there could be a significant change in an authority’s business rate’s tax base between setting the local share baseline and commencement of the scheme. Has the department recognised that and is it likely to make any allowances for it happening?
Another area of concern is that if only marginal changes are made to the current formula grant distribution model, the formula will not adequately reflect the needs placed on some local authorities, particularly for looked-after children—that is just one example—and local authorities that see a sudden increase in primary school numbers. Those are our concerns. The new RSG gives the Government scope to reduce local authority spending without having to reset top-ups and tariffs. How this reduction will be distributed is not known. For authorities where the RSG element is by far the most important element in their income, not knowing how that mechanism works makes forecasting very difficult indeed.
We have not mentioned what has been referred to on a number of occasions: the suggestion that local authorities should be interested in pooling. In principle, the pros and cons of the impact of pooling can easily be seen. It sounds a very good idea, and it is not hard to judge whether it is going to be good or bad, but if we do not have a mechanism by which to know what the outcomes will be for individual authorities within that pooling, it is very difficult not to have just a clubbing together. If you have more than that, administration and governance matters are going to be of concern because there will be a possibility of risk and reward, and that needs to be ascertained. It sounds a very good idea that we meet as a club to pool things, but the effect will be different on different authorities within that pool, and I would like the Minister to say how the Government think that will work.
It is more important that I made the remark that I made a moment ago. I am not rising to move an amendment, and I think I can give the Minister an assurance that I shall stick to that resolution about not moving amendments. I am grateful to my noble friend Lord Jenkin of Roding for reminding me that I was once a Treasury Minister, although for a reason he may not have expected by his reverence—reference.
I will accept the reverence. My noble kinsman was, like my noble friend, Chief Secretary to the Treasury. In fact, he was the first, so he was allowed by Harold Macmillan to invent the title. In those days, the UGC of semi-beloved memory was a Treasury function for which my noble kinsman was responsible. Two decades later, I became Higher Education Minister. When I entered office, the hand of the Treasury was still in evidence in relation to higher education institutions, particularly in relation to the disposal of assets. If a higher education institution disposed of an asset, it had to hand back to the Treasury the entire financial fruit of its decision to so dispose. I was Higher Education Minister for two and a half years. About halfway through that period I persuaded the Treasury that its policy was not conducive to higher education institutions disposing of assets and it allowed higher education institutions to retain 50% of the assets they sold—a percentage that is germane to today’s debate. Before I left office the Treasury had come round—although it did not execute it until just after I left office—to letting higher education institutions have the whole lot. I say this simply to encourage not only the rest of the Grand Committee but even conceivably the Minister that it may be possible that concessions may be made at some stage in the future.
My Lords, I apologise to the Minister. I would like to follow the point raised by the noble Lord, Lord Jenkin of Roding. Not being a financial expert, but with my experience of the local government finance system, I liken this to that time-honoured competition that used to appear in some newspapers, the spot-the-ball competition, which I am afraid rather dates me. I refer to where the money goes and all these labyrinthine methods of checks, balances, benefits, credits and grants for this, that and the other.
However, I would like to concentrate on the question of the 50% share of the business rates under the business rate retention scheme. I say that as a veteran of development schemes of one sort or another by virtue of my profession. By the time there has been a redistribution to various other precepting bodies, a 50% take of the business rate is hugely unlikely to be any real incentive to a billing authority in terms of encouraging the growth in the tax base. Ultimately, it is the growth in the tax base that is the key to this. Unless the rate of tax per property band or per square foot of business space goes up, with all the consequences in terms of public opinion that that might involve, we have to grow the base. The other thing that will come up later is the question of making the system fundamentally more efficient, on which I have various amendments later on.
The development process represents a great number of hazards in terms of the finance of organising it and, particularly until recently, the growth of the front-loading of all manner of planning applications with a plethora of things related to sustainability and compliance with planning. Local electorates, furthermore, bearing in mind that they tend to be council taxpayers, often view large-scale development, particularly commercial development, in a negative light. So there is a downside to the whole process. A series of political risks has to be underwritten by this, and that requires a careful balance of what the yield will be before one can expect a billing authority to embark on this road with regard to so little a sum as 50%. That has to be reviewed, particularly because I understand that 50% would also apply to new space that comes on stream, so there will be no gain there either unless you happen to be in a son-of-enterprise-zone area, in which case a different set of rules will happen.
One particular question was put to me by the chief executive of the Institute of Revenues Rating and Valuation, a body of which I am a member. I am not expecting an answer to this, but it is worth pointing out at this juncture. The current council tax benefit scheme is financed by the Department for Work and Pensions by way of the subsidy paid to the billing authority. The current amount that I have been given for England is £4.3 billion. That might be for England and Wales and if I have not got the sums quite right, I apologise to the Grand Committee.
Under the new local support for council tax—the LSCT scheme set out in the Bill—the grant for this new scheme is to be paid out of the central share of business rates and the amount is to be the same £4.3 billion less 10%, because we know that the whole process will be scaled back by that amount. If one is doing a spot-the-ball competition, the question is whether and, if so, how will the Department for Work and Pensions reimburse the Department for Communities and Local Government the £4.3 billion—minus the 10% of course—which is being financed by the business rate? I should say straightaway that I do not expect an immediate answer from the Minister.
There are one or two brief things that I would like to say. I apologise to noble Lords for not being present at Second Reading, when I was enjoying myself in France. I declare an interest in that I am a member of a district council in Pendle, in Lancashire, and a member of its executive. I am also vice-president of the Local Government Association. Why my noble friend is not is a mystery.
The noble Lord was sacked. I think further investigations are required, and we will report back.
I was moved to speak by listening to my noble friend Lady Eaton. I support a great deal of what she said, which was in emphasis a little different from some of the contributions made by other noble Lords. In principle, these amendments are right: 50% is a remarkably low figure to be retained by local government, and certainly not what was expected when the scheme was first announced to the world. However, I want to bring noble Lords down to earth with regard to some local authorities. Retention locally of the business rate will not be a financial bonanza for those local authorities at 50% or at any other higher percentage. Many authorities, as my noble friend said, will continue to need to rely on the rate support grant, if it continues to be called that, because they will have great difficulty not only in finding ways in which to expand their tax base by increasing their business rate but also maintaining them at the present level. This is a fact of life, and the localisation of business rates in these areas, including my own region of east and Pennine Lancashire, does not have the rosy glow around it as it does in areas that will find it easier to grow a commercial base. That is not to say that people will not try to do it, but in areas such as my own it will be a matter of trying to hang on to what is there at the moment.
I give an example. A small district might have two or three large mills or factories contributing quite a high proportion of the business rate. It only requires one or two of those to close down and the position will be fairly catastrophic. It is not the same in every kind of area and whatever kind of system we have in future will have to retain a substantial element of redistribution at least for those authorities. I do not know what proportion of authorities that is, but I have heard my honourable friend Andrew Stunell tell me that about 20% will be substantially reliant in future on continued redistribution elements of the grant. I do not know whether the Minister has an idea or can enlighten us after this Committee.
The second thing that causes a certain amount of alarm is the 50%. It is really the argument about what happens to the money that is centrally controlled. How far will this kind of area, which tends to be the old, declining, industrial area—although not all as some are coastal towns that have fallen on bad times, and so on—rely on the traditional kind of government grants, particularly capital grants, for regeneration? We discussed this issue in your Lordships’ House last week in a debate launched by the noble Lord, Lord Mawson.
The noble Lord, Lord McKenzie, and I were making similar points that parts of the country are missing out on the grants that are now available, compared with the past. That is partly as a result of the reduction in funding for capital schemes and the fact, for example, that the regional growth fund is cumulatively less than the regional development agencies used to have available to disperse. It is partly because there is a tendency now to go for growth and to go for the places where growth is easiest and perhaps to go more to the south-east, the Greater London area, the big cities, the city regions and metropolitan areas. There are very exciting and worthy schemes for authorities to work together for economic growth and development in areas such as Greater Manchester. Those places that do not naturally fit into the big city regions risk missing out. I am talking about my own area in Pennine Lancashire, but there are others as well, in the north-east, in west Cumbria, and elsewhere around the country. Our concern is about how much the less fashionable and less sexy areas, or the areas which find growth more difficult and where the return on investment may be less as a percentage, are going to miss out on this 50% redistribution. There are huge questions there.
I ask the Minister whether the Government have an assessment at this stage of how much of this central fund is expected to be used for different purposes. How much of it is expected to be used for council tax issues which the noble Earl, Lord Lytton, was talking about? How much is expected to go on administration? How much is expected to go on straightforward redistribution to the sort of areas I am talking about? How much will go to traditional funds and schemes for capital investment and development around the country? How much will go on regeneration? How the Government will use this money is not clear to me at all. I can see in total the kinds of things it is going to used on, but I do not really know whether they have an estimate of how much is likely to be used for the different elements. I would find it extremely interesting and useful to have that information, if the Government have worked it out.
My Lords, I had not intended to come in on this part of the Bill; I was waiting for council tax to come up. However, the points made by the noble Lord, Lord Greaves, have triggered a set of questions for me. Does the department have a “who pays, who gains” outcome as a result of these changes? If so, can the Minister share that with us? I am very unclear.
I am delighted to see that the noble Lord, Lord Jenkin, has been converted from the error of his ways. Let me remind him that before the business rate was nationalised—I think it was the only thing that was nationalised under the Thatcher Government—authorities like my own, which were no longer unitary after the disaster of 1974, none the less received a business rate. This meant that those who lived outside the fringes of the city area and who did not pay the domestic rate, contributed through the business rate to the city’s well-being. This meant that a city could therefore serve as a regional centre while having only the property rate of a rural district council.
More important still, it meant that the leader of the council—myself—or the chair of finance would take great pains with the Chamber of Commerce. Every year, I went with a prospective budget, and it had a very direct influence over how we constructed our budget. As a result, until the nationalisation of the business rate under the noble Lord, Lord Jenkin, and as there was a direct pay-off to our revenues, I was willing to forego rateable value on new property; I was willing to invest in apprenticeship schemes; I was willing to do the environmental works, the roads and so on, to get small enterprises off the ground; and we were willing to help SMEs to develop through local enterprise trusts. We did all that because there was a direct pay-off. I could never understand the huge folly of a Conservative Government, which is above all expected to be business-oriented, cutting that link with the city authorities—admittedly, they largely tended to be Labour authorities at that time—which gave them an incentive to build their business.
After nationalisation of the business rate, the result was—I did the figures—that my local authority was contributing something like £14 million a year in business rate to the Exchequer and receiving back something like £7 million. The adjacent Conservative authorities, which did virtually nothing, were contributing about £2 million and receiving back about £4 million. In other words, they were piggy-backing off the flow of the nationalisation of our business rate to rural areas, because they had never had a concern to develop business in their areas, partly because they had high property values and did not want to be contaminated by it. It also meant that I no longer had any incentive to do something similar. I forgot to declare that I, too, am a vice-president of the Local Government Association.
I applaud this move, even if it does not go as far as I would like. However, I understand the need for an equalisation grant, otherwise Westminster would retain far too large a share and other local authorities would have very little. As a result, it will be really important for us to see what greater equity there will be now in terms of the statistics between who pays in and who gains and what the return is. Some authorities, such as my own, are district councils trying to do a unitary job with district council revenues—thank you very much to the Government for that—and they will be glad to have that money if it allows them to look after their business economy as well as the wider economy, in terms of building tourism and so on for the whole area.
For the sort of authorities that the noble Lord, Lord Greaves, mentioned, which may well need this money but may not receive it, there is a problem, too, of the distribution between those authorities whose money comes from small but highly valued premises—solicitors’ premises and so on—and those that have relied in the past on large physical premises such as factories, which are now closing due to the shift in the British economy. A reason for this request is that we were screwed the last time around and it was a disastrous policy for government, of whatever complexion, as well as for regional economies. I hope that this time around we will get a more equitable and sensible distribution. If the Minister can help us by promising to circulate some of these figures, it would be very valuable indeed.
My Lords, my noble friend Lady Hollis makes a very good point about the relationship between local government and business. It is interesting that the London Chamber of Commerce and Industry, in its briefing for today’s discussions, makes the point that more than a quarter of a century after the noble Lord, Lord Jenkin, perpetrated his terrible crime, 53% of London businesses apparently think that councils are currently responsible for setting the level of business rates. It says that that reveals a breakdown in communication between councils and businesses. Some of us might think that it simply betrays a complete ignorance of how local government works on the part of those who really should know a little better. However, that does not mean that the situation should not be improved.
I sympathise with the amendment tabled by the noble Lord, Lord Jenkin, because he seems, rightly, to want to rebalance this position. The Government seem to take a rather Augustinian position in respect of localism: “Lord, give them localism—but not yet”, would be one way of putting it. Another way, perhaps more familiar to the Secretary of State in his earlier days as an enthusiastic Marxist, would be to describe it as a form of democratic localism. Democratic centralism was the vogue under the Stalin regime but this is democratic localism, which is to say that all the orders come from on top and are then applied locally. This division certainly seems to portend something of the kind.
In a way, the game is given away by paragraph 9 of the statement of intent on business rates retention. Having previously said that a number of “specific grants”, which I will mention in a moment, will be included in the business rates system, that paragraph goes on to say:
“As a result, the Government is able to set the local share at 50% which delivers our objectives on growth and localism while allowing for future fiscal control to protect the interests of the taxpayer and the wider economy”.
That is a fairly clear statement that the Government are seeking to use this 50% as a controlling mechanism.
Turning briefly to the list of grants included, a noble Lord referred to council tax support grant and the figure of £6 billion was mentioned. That is certainly one of the grants to be included. Others include: the council tax freeze grant; the bus service operators grant; the early intervention grant, except for one element about early education for two year-olds; an unspecified proportion of the GLA transport grant; the homelessness prevention grant, which ought to be expanded because I anticipate that homelessness will be growing apace over the next few years; a proportion of the lead local flood authorities grant, which might be quite timely in the circumstances, certainly in the north-east and other parts of the country; the Department of Health learning disability and health reform grant; and a proportion of the sustainable drainage systems maintenance costs grant. I do not know whether there is a figure for this total. That question has already been asked and I do not expect the Minister to be able to produce it today, but it would be quite interesting to see the aggregate of all those figures. Furthermore, in respect of the lead local flood authorities grant and the sustainable drainage systems maintenance cost grant, apparently details are to be set out in,
“the upcoming summer consultation on business rates retention”.
I do not know—and, again, I do not expect the Minister to be able to answer immediately—how far those discussions have gone and what the conclusions might be, but it looks as though a significant amount will clearly be earmarked for those purposes.
I want to voice a degree of scepticism over the fundamental rationale for this proposal. Its justification is that it will incentivise the growth of business. I certainly hope it does, but I do not see a necessary connection. It is interesting that the London Chamber of Commerce and Industry briefing to some degree shares that scepticism. It says:
“Rateable values must be recognised in the business rates retention scheme”.
Its research shows that,
“businesses want councils to invest in those things that will increase rateable values. We surveyed firms on what they would like to see their council prioritise and the top three answers were investing in local infrastructure, improving community safety—
I suppose that may be a function of last summer’s events in particular—
“and maintaining the built environment”.
One might have thought that something around skills and training, which my noble friend told us she had developed in Norwich, would also have been a factor. Nevertheless, it is clear that it is not simply a question of granting planning permission for, for example, a Tesco supermarket or some other sort of development that might create a certain amount of rateable value but does very little for the local economy.
As I said at Second Reading, the consequences for business rates of retail and service sector development are eightfold what they are for the equivalent investment in manufacturing industry. The temptation is for local authorities to go for, as it were, the easy hit on retail and perhaps other elements of the service sector as opposed to what the national economy needs, which is greater investment in manufacturing, seems ultimately counterproductive. It all depends on what we mean by business growth. What sort of business? What sort of jobs are we talking about? What sort of contribution are we looking at to the national economy? I have doubts about whether this rather simplistic approach that the scheme promotes, quite apart from any other considerations that we are debating, is, of itself, sufficient.
I am bound to raise yet again another possible complication, which is the relationship of enterprise zones to this scheme. I have raised this on a number of occasions and I do not think that I have yet had a satisfactory explanation. First of all, the businesses that go into enterprise zones will not pay rates for 25 years, which is okay I suppose—but does that create an incentive to local authorities to promote enterprise zones as opposed to development elsewhere in their areas? A conflict of interest might develop. Even after the 25 years, I understand that the business rate income will not go to the local authority but to the local enterprise partnerships, if they are still around. There are questions about that in terms of localism in the sense of representative local democracy having the resources to do its job.
Again, this is possibly not for immediate answer, but I would like some elucidation of the position of enterprise zones in relation to this whole scheme from the point of view of the incentive or disincentive to local authorities to promote development within enterprise zones as opposed to other areas. There is also the question of what ultimately happens to that business rate.
Finally, does the fact that rateable value will obviously be created in those enterprise zones, even though the rate income does not go to the local authority, affect the overall distribution—the 50:50 split? It would be helpful at some point to have those issues clarified.
The suspicion in local government is that the statement of intent that I quoted earlier potentially gives the game away. We are not really seeing a restoration of any kind of local determination of business rates, nor a genuine incentive for the kind of growth of jobs and the economy that we want to see. There is some force in the amendment of the noble Lord, Lord Jenkin, in seeking to scale down that 50%, although I do not know whether that will be possible. Indeed, whether that 50% really carries a substantial portion of government grant that would otherwise go as part of the grant distribution formula or revenue support grant is somewhat questionable. There are many questions that we need to explore before we will be satisfied that this particular aspect of the scheme or anything much like it is one that we could support.
My Lords, there are a number of propositions on our agenda concerning the local/central share. We welcome the opportunity to probe all of the issues, as indeed we have done in this debate, and I hope to focus on a consensus for the next stage of our deliberations on Report. I am happy to work with the noble Lords, Lord Jenkin and Lord Tope, to try to achieve just that.
The central share and its application is one of the more troubling aspects of this part of the Bill. It is troubling in the sense of lacking considerable detail, certainly beyond the early years of the scheme. It may be that all of this detail is tucked away in the plethora of documentation provided to us, and doubtless the Minister will point us in the right direction if it is. But there is not much light shed on the subject in the revised statement of intent of last month. Our concern, which has been echoed today, is that the central share will be used in whole or in part to fund matters that would otherwise have been funded by central government. Another concern is clearly the basis on which the central share is to be returned to local government, and there is of course the quantum of the share—the 50:50 split. But these issues about where the money will go and where it will end up clearly troubled the noble Lord, Lord Greaves, and the noble Earl, Lord Lytton, and others who have spoken.
What is driving the local/central split is the Government’s desire to control the overall envelope of local authority spending, routinely determined through the local government finance settlement. What this is currently controlling of course is the formula grant and its distribution. There is a range of other funding available to local government—its own fees and charges and council tax—as well as hitherto a series of grants, some non-ring-fenced and others which are. These grants do not all fall within the orbit of CLG. Such grants are controlled through the usual departments’ DEL processes. Although we have challenged the Government’s draconian cuts for local government—28% in Wigan, as we heard—we were not proposing to open up a broad debate on this aspect except to say that, by the reduction in the control total, the Government have added to the certainty that the business rate in aggregate will exceed the control total.
Of course, currently the whole of the business rate collected is returned on some basis to local government through the formula grant. Indeed central government tops that up with revenue support grant as well as formula police grant. We are now told that for the key year of 2014-15, which has the lowest spending control total, business rates will exceed that total and, therefore, cannot just be left uncontrolled in the hands of local government. A percentage will be peeled away to be applied to local government by central government.
For the record, perhaps the Minister would set down how the 50% has been calculated. What is the forecast of national business rates for 2014-15 and the extent to which that exceeds the control total? How is the 50:50 local control share split derived from that? The technical paper 2 sets out how that will be done and which multipliers are to be used, but some work must have been done to derive the 50:50 proposal. It would be very helpful if we could have that detail. Please can we be given the figures? How much headroom have the Government given themselves between the control totals and the local shares for 2014-15? The intention is that local authorities will be kept whole for 2013-14, based on the application of the formula grant. Can the Minister say whether it is expected to utilise the whole of the central share for that year in this way?
Appendix A to The Local Government Finance Settlement in England: A Guide to the Basics sets out a complete list of grants for the current year. Can the Minister confirm that, at least in theory, any of those could, in whole or in part, be funded from the central share? If you look at it, you will see that it includes, from the Department for Education, the dedicated schools grant, the pupil premium grant, the early intervention grant, the extended rights for free travel, and from the Department for Health, the learning disability and health reform grant. Those are very substantial amounts of money that concern local government in England and, on the proposition that the Government have advanced today, they could fall within the ambit of that description. If not, it would be good to have a denial on the record.
There is a separate issue about the extent to which the local and central shares are calculated after deducting amounts to cover the new homes bonus and other matters. Reading the various documents, I was a little confused about where the funding for the new homes bonus was ending up. Originally, I understood that it came from central Government and was not part of the local government settlement. On the basis of what we have read, I am not sure whether it is now being met from within the business rate total, the top-slice in a sense. If that is wrong, perhaps the Minister could put me right on that.
If the central share is to be used to replace any of these grants, the distribution of it would presumably follow existing rules, but if we prevent that happening, what other options do the Government have for distributing the central share? That hugely important question has been asked by many noble Lords in this debate. We are entitled to know the basis on which the central share will be made available to local government. At one extreme, which we could probably support, it might be distributed strictly by reference to a needs and resources analysis, such as formula grant, which, notwithstanding tariffs and top-ups, could ameliorate the consequences of the distributional effects of the business rate retention scheme. So it might be good for equity but not as good as an incentive. At the other extreme, it could be distributed in a way that is neutral between authorities or as favours the more advantaged authorities. There are no hard and fast rules and we need some clarity from the Government on this crucial point.
I wonder whether I can help the noble Lord. Does he agree that a further question, in addition to the very detailed ones that he is asking about the different grants, is whether any of this money might be distributed through non-departmental bodies—quangos and so on—such as the Homes and Communities Agency, and whether some of the money that they disperse might come from this source?
That is a very interesting question. We have an amendment coming up which is intended to probe the heads under which various categories of institution are counted as qualifying as English local government. It is a possibility but we can specifically probe that when we come to the next group of amendments.
This really is the most troubling aspect of these proposals. Unless I am missing something, it is an area where we do not have enough information. On one basis, we might be happy with a share that is not 50% but 30%, and on another basis we would not want any central share at all. Under Amendment 9, my noble friend Lord Smith probed why we have that particular formulation. I am sure that the Minister has an answer.
Amendment 17 touches on the hugely important issue of not only having information about the current year but being able to project what is likely to happen in subsequent years, particularly in an environment where councils are having to save every penny they can and take painful decisions about cutting back on services.
Amendment 12 in the name of the noble Lord, Lord Jenkin, seeks to ensure that the quantum of the central share will not grow from year to year. Given the RPI increase in rateable values, this should mean that the percentage of the central share gradually declines.
However, we need to be mindful that all these matters could be achieved by central government charging grants against the national business rate collection so that both central and local shares decline in amount— effectively top-slicing. Perhaps we can have amendments to deal with that, as we need to protect against that possibility.
Amendments 21 and 22 in the name of the noble Lord, Lord Jenkin, offer a rather novel approach, which dictates a gradually reducing percentage share of a billing authority’s central share and a gradually increasing percentage of a billing authority’s local share, so that whatever is top-sliced—if anything is—what remains is increasingly skewed to the local share. I think that that approach has some real merit. I should be very happy to engage in discussions to see how it might be developed and made watertight if it is to be included in the legislation so that the Government do not have a way round it. Subject to what the Minister says about the distribution of the central share, we would seek to support that.
Amendment 16 in the name of the noble Lord, Lord Best, seeks to preclude the determination of a local and central share after the financial year ending 31 March 2015. Whether we can support this depends on what happens to the central share. If its application provides a means of redressing possible adverse distributional consequences of the BRRS, there may be an argument for its continuance. Otherwise, it is the business rate scheme that will drive the distribution of the control total, or its equivalent. Even if the rebasing is fair at the point that tariffs and top-ups are established, the dynamic does not mean that it will continue in that way until the reset date.
I shall comment briefly on a few of the contributions to this debate. The noble Lord, Lord Greaves, made the point that whether the figure is 50% or somewhat higher, it will not necessarily change the world for some authorities, particularly smaller ones. I would echo that from Luton’s perspective. My noble friend Lady Hollis reiterated the point about cutting the link between business and local government through the nationalisation. However, we should not berate the noble Lord, Lord Jenkin, any further; I think that he has redeemed himself by his approach, and he has certainly done so with his introduction to this debate, which was very constructive.
The noble Baroness, Lady Eaton, talked about the RSG distribution and the formula grant. I think she was referring to how you set the baseline and the parameters that are going to be used, and we are going to have some debate on that. If the resetting is not going to be for seven or 10 years, getting that as right as possible is hugely important. It might be—we might get some good news from the Minister—that it could be ameliorated in part by use of the 50% central share, but I am not sure that we are going to get that news this afternoon. I am looking forward to the Minister’s reply.
My Lords, so do I. I am grateful to all noble Lords who have spoken to their amendments. They asked a number of questions, in particular, the noble Lord, Lord McKenzie of Luton, at the end. Some of them I will be able to deal with, but some I will not. I think the sensible thing is for me to make sure that we give a written response to questions where there is a need for detail so that we can come back to them at the next stage or have discussions in between, if that is necessary on the full information, not all of which I have today.
I shall start with Amendment 9, which was moved very shortly by the noble Lord, Lord Smith, and seems to require about six pages in reply. I am going to have to skim through this extremely important matter which has clearly shaken the tree a bit. On the face of it, Amendment 9 makes a very simple change to the accounting arrangements for the central share but, as the noble Lord, Lord Smith, probably knows, it has a far greater effect than it may seem.
I shall say a little about how the provisions will work. Paragraph 1 of new Schedule 7B requires a “main non-domestic rating account” to be kept for a year. Most payments to and from local authorities in respect of business rates will be made into and out of this account. The exceptions are levy and safety net payments, which we will come on to later.
Paragraph 2 sets out the payments to be credited to, or debited from, the main account. This includes sums received from local authorities in respect of the central share. We have said that the central share of business rates would be used for the purpose of funding grants to local government outside the rates retention scheme. I shall return to that later. The provisions that enable this are set out in sub-paragraphs (3) to (5).
Amendment 9 seeks to make it clear that the sum that can be debited from the account in respect of the central share shall equal the payments received by the Secretary of State from authorities in respect of the central share. That sounds very simple and sensible, but in fact it does not take account of the Government’s intention to use some of the central share money to fund the transitional protection payments provided for in Part 8 of the schedule. This is because, following revaluations, the Government are obliged by current legislation to put in place a transitional relief scheme, so that business ratepayers whose bills increase significantly can see their bills phased in over a number of years. The transitional relief scheme is paid for by similarly phasing down the bills of those ratepayers who see their liability fall significantly as a result of a revaluation. Earlier, the noble Earl, Lord Lytton, was discussing the effect of appeals on precisely this area.
In the context of the rates retention scheme, this means that some authorities could see lower income as a result of the transitional scheme being put in place for ratepayers and some higher as the transitional scheme unwound. That is clearly an untenable situation. Authorities’ income is supposed to reflect their success in promoting development and not the technical vagaries of the transitional relief regulations, so we have always said that we would take transitional relief completely outside the rates retention scheme and provide for a separate series of payments to and from authorities depending on whether they see more or less income as a result of the transitional relief scheme. Part 8 gives effect to this.
The payments themselves, however, will be credited and debited to the main rating account. I hope that the Committee is following this. The scheme will be set up to balance over time but, in any year, we may pay out more to authorities than we get in. So the current wording in paragraph 2(4), which Amendment 9 seeks to change, demonstrates that if there is a deficit, it can be met from central government’s share. In other words, central government will bear that cost. So while central government could choose to debit less than it has received from authorities by way of central share income, it cannot debit more. On the strength of this explanation, I hope that the noble Lord, Lord Smith, will feel able to withdraw his amendment.
I turn now to the remaining amendments in this group. The noble Lord, Lord Jenkin, explained very clearly and plainly what he is trying to do. Amendments 12 and 21 would effectively mean that the central share could never be increased, since it could never be greater than the previous year’s central share. Amendment 16 would set the central share for the current spending review period only, and Amendments 17 and 22 would fix the central and local share—or a trajectory for them—over a number of years.
The noble Lord, Lord Jenkin, and other noble Lords asked about increasing the local share. We have always made it clear that over time we would hope to increase the local share, particularly once we have the finances back on track. It is difficult to see how legislatively we could allow that bearing, in mind that this whole question of the economy is such a difficult area at the moment.
We have also made it clear that in setting up the rates retention scheme, our aspiration is to provide for a long period between resets of up to 10 years. The corollary of that is that the central and local shares and also the tariff and top-up payments will be fixed for the duration of the reset period. By definition, the 50% rate would go on for 10 years unless there is an amendment. Between resets, therefore, we do not anticipate central and local shares changing from year to year. The 50% will last until 2020. That will give local authorities much greater long-term certainty about their financial obligations to central government and the funding that they can expect to receive from government than under the current three-year spending review process. However, the Government must retain the ability to alter the local share of business rates where it is necessary to maintain affordability and protect the interests of the taxpayer and the wider economy. However, it would be imprudent to presume that there might never be a time when we might need to increase the central share.
The percentage approach to the central and local shares of business rates was adopted in response to views expressed in last year’s consultation about the potential risk of being expected to pay a fixed sum in business rates to central government. By sharing business rates on a percentage basis, some of the reward of positive growth, but also some of the risks of negative growth, will be borne equally by central government. The Government have, and always will have, an interest in public spending, and it is unrealistic to expect the Government to take their hands off it completely and to constrain themselves, as Amendments 12, 16, 17 and 21 suggest.
I will have to write to noble Lords about some of these points because I may not have the answers, but I was asked how the 50% share was set. How did we get there? The Government have considered a range of factors involved. If the information about the setting of the 50% share is not available before the next stage, it will be available in the local government finance report in the figures for business rate totals. That may not be soon enough for noble Lords.
Can I just clarify this? The detail of the clarification is to come but, in respect of 2014-15, is it the case that the local share that derives from that calculation is equal to, or about equal to, the control total that the Government are seeking to apply to local government and that there is no extra in there?
It is going to be based on the base from this year. Every local authority will be equal when it starts on this system, but the tariffs and top-ups will bring that to the equality base when there is too much in one and not enough in the other. So that will be the first shuffle to get the equality base across the piece.
If the Minister could just clarify this, it would be really helpful. As I understand it, the local and central shares have been calculated by reference to the lowest of the control total years. I understand why arithmetically that is so. In respect of that year, is the 50% local share that comes from that calculation equal to the control total for that year? Is it the case that there is no extra in the central share and that just enough has been left for 2014-15 to be able to apply the control total and keep it intact, or has central government taken more than that?
The Government will provide revenue support grants to make up the difference between the local share of the business rates and the spending control totals for local government in 2013-14 and 2014-15, having taken into account the amounts needed. Noble Lords asked about the new homes bonus. In future years, the total amount of grant funding will be determined through spending reviews and the Government will set up the base for distribution in the annual local government finance report. I do not think that that will answer the noble Lord’s question, but I will write to him.
And I had better write to the noble Lord, I think. That seems pretty fair.
I was asked about the specific grants. The funding will be from the central share and the finance for specific grants, and that will include the revenue support grant. I will write on the specific grants that already exist and tell the Committee what is included.
The noble Baroness, Lady Eaton, asked about the local authorities’ pool and how the money gets distributed if they go into one with others. Frankly, that will be a matter for the pool to decide; they will regulate themselves. We would expect there to be a local government lead on that so that they can receive payments and that formal arrangements would be agreed on the operation of a pool, so it will be governed by some sort of constraints.
The noble Baroness, Lady Hollis, asked who paid and who gained, but that rather depends what you mean by who pays and who gains. We have always said that no council will be worse off as a result of its business rate base at the outset of the scheme. That was what I was trying to explain about the base, the tariffs and the top-ups. I am sorry if I did not come across well, but that is what the situation is. The information that the noble Baroness sought will be available at a point of the draft local government finance report. That will be my answer to some of the questions: that the information will be ready for a bit later on, I hope before we consider this matter further. I hope that that covers the points made.
There have been a lot of discussions, some of which we will come to on further amendments. I note what the noble Lord, Lord Tope, said about local government’s disappointment regarding the split. I appreciate that that is the situation, but we ought not to ignore the fact that by making the local business rate stay with local government, even if things are then done to it, we are setting a very sensible principle: giving the business rate to local government and maintaining it with it. That principle can then be worked on in the future, regarding how much is left. However, I think we have established an important principle here. I hope the noble Lord is happy to withdraw the amendment.
My Lords, that was a very interesting grouping of amendments, which received a wide range of contributions. I congratulate the Minister on the scope of her responses. She gave a full and helpful answer on the first amendment that I moved, Amendment 9. I will obviously read what she said in Hansard, and if necessary come back. She was definitely trying to be helpful in understanding it. However, she did not really respond to Amendment 17. She noted at the time that she was not sure whether there would be continuity, but perhaps she would like to write to me on that one.
I thought that the debate was really interesting, because it got some way to the fundamental parts of the Bill. The contributions of the noble Lords, Lord Jenkin of Roding and Lord Greaves, seemed to be a contradiction. We all want the Bill to achieve growth in local areas for the country. However, to use a Lancashire expression, I say to the noble Lord, Lord Greaves, that 50% of nowt is nowt and 100% of nowt is nowt. Therefore, it is not really going to help in those areas where there is no growth.
Yes, you do get the negative. I am afraid that the risk is there as well, but there was a safeguarding scheme. However, if that stays at 10%, it could be very significant. There is a contradiction.
My noble friend Lady Hollis’s contribution was about accountability. That would be the phrase that I would use. She described what happened with the business rate in the old days. There was a real accountability between the levying authorities and local businesses in discussing what was involved. Now, when we have a situation in which 50% of the money is disappearing and there is clearly a lack of understanding about the current system, as my noble friend Lord Beecham said, I suspect that businesses think local authorities set the rate because they collect it. We are the responsible agents in collecting the money, so clearly if the Bill comes in the name of the local authority, businesses will assume that that is where the money is going, and not that local authorities are simply a receptacle for transferring the impact onwards.
One of the Minister’s comments is at the heart of this: she said was that if we get the base, we can try to get people equal against the base. But my contention is that if the base is not right, inequality will just be built into the system. If the issues and the problems that the noble Lord, Lord Greaves, mentioned as existing in his area are not reflected in the base, it will not be fair. I beg leave to withdraw the amendment.
Amendment 9 withdrawn.
10: Schedule 1, page 20, line 35, at end insert—
“(4A) Such an amount should only be paid in place of other grants to local government if the Secretary of State is satisfied that the overall needs of local government will be met.”
My Lords, in moving this amendment, I shall speak also to Amendments 13 and 14. It appears that the effect of the central share is to allow the Government to reduce what would have been grants outside the formula grant—that is, paid for by general taxation—and thus allow the business rates to take up the slack. The Treasury could thus substitute business rates for other taxes. I would like to ask if the Minister agrees that there is a danger of improving central government’s fiscal position at local taxpayers’ expense. That is the crux of this very short amendment.
This would not have an immediate effect; the estimates have been made by various local government bodies that the effect could begin in 2016-17, but it could be a real effect.
The central share will come back to councils, as we have discussed, but not necessarily the same councils, in the form of grants. Other noble Lords have given an example of Westminster and have said that that is why there has to be a reallocation of these moneys. I understand and appreciate that, but the real problem is that one reallocates business rates to give an incentive to local authorities to improve businesses within their areas and improve the economy in those areas. Many of them need that incentive; the current system of business rates whereby you collect the money and keep none of it is not an incentive, which is why this is an improvement. If you take away and redistribute, you lose a lot of that incentive from the places where there could be a great improvement in the economy.
Mention has been made by other noble Lords as to the 50%. I could have come in at that stage, but I thought that I would include it in what I am saying now. There is one other aspect to a 50% share, which has not been broached by other noble Lords—that 50% for the Government and 50% for the local councils is a dangerous percentage. Local authorities will lose, as they have in other instances, the difference between the half-empty and the half-full bottle. You know exactly what it is when it is 50%, but it is more difficult when they start recalculating and the share is 51% and 49%, as has been my experience in local authorities. Measuring the value of local council housing, when the example given by CIPFA was 50:50, when the local authority came to use the calculation they took the wrong half, because it was never 50%—it was always something else. Someone in Whitehall may know how to do it; there is a rumour that that is the case. But there is a danger that when you have 50:50, you will end up with 51:49, which would mean that you would not know which was the Government’s share and which was the local authorities’. I would hope that the larger share would be for the local authorities.
The amendment makes the point that the Treasury will be able to switch grants that have been paid for by general taxation into the rates system and in effect raid local businesses to assist the Exchequer. All this will, of course, be in addition to the cut of £500 million, in terms of the legislation overall. Amendments 10, 13 and 14 seek to protect local councils and central government from that usual thing of temptation, because it is not easy to resist temptation. As Oscar Wilde said, “I can resist anything except temptation”. I do not think that we should put too much temptation in the way of central government. I beg to move.
My Lords, we have Amendments 11 and 24 in this group. Amendment 11 is a very straightforward probing amendment; it refers to paragraph 2(5) on page 20 and is to do with payments to local government in England. Presently it reads:
“The reference in sub-paragraph (3) to use for the purposes of local government in England includes the making of payments under an Act or an instrument made under an Act (whenever passed or made) to”—
then it gives a range of authorities.
The amendment deletes “includes” and substitutes “in” because if paragraphs (a) to (d) are not an exhaustive list of those included, who else ought to be included in it? That is a straightforward question.
Amendment 24 simply requires the local government finance report to set down specifically the payments that are made in respect of each of those types of authorities under Schedule 1 paragraph 2(5)(a) to (d). It also carries the two-year extension which my noble friend Lord Smith dealt with on a previous amendment.
I shall comment briefly on the amendment tabled in the name of the noble Lord, Lord Tope, which was moved by the noble Lord, Lord Palmer. Amendments 10, 13 and 14 seek to establish that the central share can be used to replace other grants only if the Secretary of State is satisfied that the overall needs of local government will be met. The thrust of these amendments is acceptable to us in so far as it is an attempt to prevent resources raised locally through the business rate being snaffled by central government. As a peg for a debate, it is worthy of support, but it obviously raises a number of questions, not least leaving a judgment about the needs of local government to the Secretary of State. Going forward, it raises the question of how the central share is to be applied. Although we have just had a pretty extensive and good debate, I am still far from clear about the rules and the basis on which the central share is to be applied. That is the most fundamental question about this part of the Bill, and we need to have clarity on that. The range of other grants currently payable to local government is extensive. We touched upon this before. It ranges from dedicated school grants—some £37 billion—to the right to control pathfinders worth £500,000.
There may also be difficulty with Amendment 14. We know that for the first two years of the scheme the central share is to be used to pay revenue support grants or Section 31 grants to compensate for what was previously the formula grant so for those two years it would not meet the condition that the amendment seeks to impose. However, this is another valiant attempt to try to stop the leakage of the central share which is going to be the major challenge of this debate.
I thank noble Lords for this short but none the less important amendment. I understand the concerns that prompted the amendments in this group, but I hope that I can persuade noble Lords that they are unnecessary.
Currently, the Government determine how much local government spending the country can afford and set local government grant totals.
Sitting suspended for a Division in the House.
My Lords, as I was saying before I was rudely interrupted by the television screen, currently the Government determine how much local government spending the country can afford and they set local government grant totals—both formula grant and specific grants—accordingly. Redistributed business rates income is then used to fund formula grant and any difference is made up from revenue support grant. That is the situation at the moment. The more business rates there are in the system, the less revenue support grant is needed, and vice versa. Therefore, since 1990, business rates have been used in partial replacement of revenue support grant.
Although the mechanism is different under the rates retention scheme, the principle is exactly the same. The business rates retained through the central share will be used to finance both revenue support grant and specific grants in the same way as they are currently used to finance formula grant. Earlier the noble Lord asked me, although I was not able to answer, whether grants relevant to local government from other departments are included. They will be put into that one pot, so all the grants will be relevant. Therefore, we cannot see why the Government would need to accept Amendment 14, as it would place greater restrictions on central government than currently exist. I hope that, looked at in this way, the noble Lord will agree not to press his amendment.
Amendments 10 and 13 accept the principle that the central share should be used to finance other grants but seek to ensure that this happens only if the Government are satisfied that the overall needs of local government will be met. The overall need of local government will be, as it is now, a factor that, along with the wider economic situation, will inform the amount of specific and revenue support grant that government will provide to local authorities.
At future spending reviews, the Government will have regard to the resources available to authorities from their own resources—council tax and, in future, retained business rates—along with the overall spending needs of local government and the fiscal situation of the country, to determine how much grant should be provided.
I hope that, having reflected on the nature of the spending review and the reality that the overall needs of local government will be fully considered as part of that process, the noble Lord will agree to withdraw his amendment. The Bill contains assurances that any money paid by way of central share will be used by government only for the purposes of local government.
On Report in the other place, amendments were made to the Bill to make clearer what was meant by “local government” in this context. The list set out in paragraph 2(5) of Schedule 1, however, was not intended to be exhaustive. Rather, it was illustrative of the sorts of bodies that would be covered by the phrase “local government”. Amendment 11 would have the effect of making the list definitive—something that it was never designed to be, and therefore I cannot accept the amendment. It could otherwise be added to or detracted from and have something else substituted.
Amendment 24 would require the Secretary of State to set out in a local government finance report what payments the Secretary of State had made from the central share. I have rather more sympathy with the principle of this amendment and, although the details are probably over the top, we have discussed it and I think we have said that it will be available just before the local government finance report. However, I must say to noble Lords that the amendment is unnecessary. It will be clear from government accounts how much revenue support grant and specific grants central government have paid out in any year. It will also be clear how much has been collected by way of the central share and debited from the national accounts. It will therefore be obvious whether the Government have used the central share money in support of local government.
Nevertheless, I am prepared to think about whether, regardless, it would be helpful to set this out in the local government finance report in respect of an earlier year. Because of the timing of the outturn data, that would mean that we could not set out this information except in respect of the two previous years, which might make it a little out of date. However, we will consider that and talk to the LGA about it. I hope that, having heard those comments, the noble Lord will be happy to withdraw his amendment.
The noble Baroness dealt with the question of whether the list in sub-paragraph (5) is complete, and the answer was that it is not. If it were, however, what other bodies would be on there? Would it be a vast range? Can she give us a clue as to which others might have sat on that list?
I think I have said all I can say. The list is not complete and others can be substituted or interposed if necessary. Those will arise at other times but I do not know what they are. If we have information on or a sort of idea of which others we might be talking about, I will let the noble Lord know, but at the moment it is simply left that other bodies may be included.
Amendment 10 withdrawn.
Amendments 11 to 14 not moved.
15: Schedule 1, page 21, line 18, at end insert—
“(2) In Schedule 8 to the LGFA 1988, after paragraph 5(7) insert—
“( ) Appropriate rateable values will exclude a percentage of any increase in total rateable value of all appropriate hereditaments within the billing authority area as laid down by the Secretary of State in regulations.
( ) In setting the percentage, the Secretary of State must take into account the indexed rate of increases in rateable value of all hereditaments of all billing authority areas.””
My Lords, if the wording of Amendment 15 is pretty incomprehensible to most of your Lordships, I assure the Committee that I, too, found it extremely hard to follow. Indeed, officials at the DCLG have suggested that it should refer to Schedule 7 to the Local Government Finance Act 1988 and not Schedule 8, and they may well be right. However, I am anxious not to get bogged down in the incredibly complex intricacies of the Bill’s wording. Instead, I hope that this amendment will open up the debate on one important issue within the Bill.
The point of disagreement that the amendment addresses relates not to any difference on policy but to a divergence on the best way of implementing that policy. It is a difference between the clever people inside central government departments who devised the Bill’s clauses and the clever people inside local government who spot practical deficiencies therein. With this amendment, I think that all concerned are in agreement on the policy objective: that new arrangements should enhance incentives to local government to be more business-friendly and to increase the commercial viability and the wealth generation of the areas they serve. However, those drafting the Bill may not have chosen a route in this so-called fiendishly complex mechanism that achieves the desired goal in at least one important respect.
The problem is that the legislation would see councils rewarded from an increase in business rates that follows from physical growth in the authority’s tax base—that is, an increase in rateable floor space—but not from increases in the rateable value of existing properties. That means that there is an incentive for councils to go for the building of new offices or for larger-scale, out-of-town developments, but there are no incentives for councils to enhance the rateable value of existing buildings—for example, by spending money on the public realm, transport and community safety, attracting more businesses and more customers and users of services to the area. In heavily developed city locations, there may be few opportunities for creating lots of new buildings, leaving aside the kind of intensification that buildings such as the Shard can create. However, councils can be hugely important in improving the environment and the quality of an area, which leads to greater attractiveness to businesses and thence to higher business rates.
As I read the briefings, I am left with the thought that excluding business rate growth that comes from rental price increases at revaluation is simply an omission in the Bill. All of us would want to encourage councils to pursue economic growth policies that attract new businesses that result in such rises in rental values. Clearly, it can take a lot more effort on the part of a council to organise the upgrading of the business district, spending money on green spaces, on transport links, on improving appearance and on enhancing safety and security than simply granting planning consent for an edge-of-town, traffic-generating, environmentally unfriendly shopping centre; yet the former would provide no benefit to the local authority in terms of a share of the uplift in business rates while the Bill incentivises the latter.
I have had a look at several reports that have been sent to me, starting with a useful one from the Centre for Cities think tank, which was published in February. It makes the case for rewarding revaluation of growth because in some areas physical growth is just not where the focus should be if the end goal is growth and jobs. It identifies two types of area in particular—high-density restricted supply areas such as Westminster or Camden and slower growth or right-sizing areas such as Preston and Chatham. It also includes data demonstrating that, in 2007-08, 50% of authorities saw a reduction in rateable floor space, which the authors put down to a reduction in manufacturing, factories and so forth.
London Councils produced a report last year that included a graph detailing the physical expansion and decline of local authorities’ business rate tax base. The overall position for London was a net loss of properties. Some 14 out of 33 London boroughs actually saw an average decline during the period and, of those that achieved reasonable physical growth, the effects of the Westfield development in Shepherd’s Bush and terminal 5 opening at Heathrow had a large positive effect on the two boroughs concerned: Hammersmith and Fulham and Hillingdon respectively.
Then there was a report from the London Chamber of Commerce called Driving Local Growth, which detailed the results of a survey it carried out asking London businesses for the most important areas for prioritisation by local authorities. Interestingly, the result was not that businesses were keenest on planning considerations being improved but that infrastructure was top of their list, improving community safety and the public realm. Those were registered as most important by local businesses.
I know that this is a somewhat London-centric case, but many other towns and cities will also be seeing little physical growth in business premises but real opportunities to make what already exists more profitable for their areas. A system that incentivises councils only to promote physical growth seems to miss the point and is certainly not an environmentally sustainable approach.
It would be helpful if the Minister could take this away and satisfy herself that the Bill has not unwittingly erred in this regard and that an amendment along these lines would not be in everyone’s interest. I note that prior to the last general election the Conservative Party published a report about the business increase bonus, calling for the measures that would incentivise councils to promote economic growth and support businesses by ensuring that authorities directly benefit from enhancing local commercial environments. If the amendment that I propose is defective in that regard, other amendments are proposed by those with a deep understanding of these matters from within local government. I hope that the Minister will accept in principle that this issue is worth pursuing.
My Lords, not having had at the forefront, or indeed at the back, of my mind details of Schedule 8 to the Local Government Finance Act 1988—or indeed Schedule 7, if that be the correct schedule—I am obliged to the noble Lord, Lord Best, for having explained what was to me, frankly, an unintelligible amendment, but it is entirely intelligible now. I find myself in the odd position of already having spoken to it, in a sense, because I addressed some of the same issues and used some of the same terms as the noble Lord, Lord Best, when I spoke to an earlier amendment. I share the concern about the temptation to incentivise what the noble Lord described as new rateable floor space rather than enhanced rateable values. To that extent, I support the thrust of his argument.
However, I am less convinced about some of the other aspects. For example, massive taxpayer investment in Crossrail will presumably generate increased rateable values in the authorities in London that it will serve. Many of them are quite deprived authorities, so in one sense that is a good thing. On the other hand, that was not a decision of those authorities; the decision was taken by central government, funded by all taxpayers, including those in equally deprived parts of the country such as the one in which I live. The London chamber, to which I and the noble Lord referred, was right to say that authorities should be rewarded and incentivised for the decisions that they take. It is not necessarily appropriate that they should benefit significantly from an increase in business rate generated by taxpayers in the way that, for example, Crossrail might be argued to have induced. Presumably, it will take some time for that to happen.
I am also slightly concerned about the basis on which the claim is made that effectively we should be looking at a rise in rental values. I am not an expert in the property market but at the moment I anticipate that, although there are some exceptions, there is no great buoyancy in the commercial property sector. Many of us see empty shops, offices and factories. In my city of Newcastle we have seen the closure of one significant employer in a very modern factory in one part of the city, and we are seeing the almost certain closure of engineering works in an enterprise zone, for which the noble Lord, Lord Jenkin, was originally responsible—I give him credit for that. It was formerly Vickers and is now BAE. It will close with the loss of many jobs and the site will come on to the market. To put it mildly, I think that the anticipation that rental values will rise in the foreseeable future is incredible. It does not seem to me to be a firm basis on which to base these calculations.
Therefore, there is something in this argument—particularly the points that the London chamber raised—about trying to connect the reward to the positive actions of an authority. The converse is that an authority should not be penalised for things beyond its control when the rateable value falls, either because of general economic effects or because of an impact on general levels, leading no doubt to appeals against valuations. I have no doubt that the noble Earl, Lord Lytton, would be able to elucidate on the kinds of effects that might develop.
Therefore, the Committee needs to look at how we can tie the incentivisation to the actions of the local authority in the broad sense that the London chamber and the noble Lord and I referred to earlier—with investment in infrastructure and particularly skills and training, as well as, depending on the circumstances, community safety or other features in the local economy—rather than rely on the actions of the national Government or their agencies. The Highways Agency can transform a situation in certain areas, just as Crossrail might have done, and perhaps other bodies would have the same function or effect.
I take it that the amendment is from the Local Government Association, from which we have heard so much this afternoon. Some of us should go back to the LGA to explore this issue in greater depth to see whether we can come up with something more related to the activities of its members. I should be interested to hear the views of the Minister. I do not know whether the noble Earl, Lord Lytton, proposes to speak on this part, but it would be very interesting to hear his comments on these points, which relate very much to his professional expertise.
My Lords, with that invitation I had better rise to my feet. First I should declare an interest that I have not declared previously and probably should have done—that I have a small involvement with a local chamber of commerce, although I do not know that it especially informs this bit of the debate.
The noble Lord, Lord Best, mentioned a very important factor—that the constant incremental renewal and upgrading of our infrastructure and townscapes, as I believe he was chiefly referring to, is directly related to concepts of added value and therefore has wider application. The confidence to invest in such schemes is clearly dependent on certainty of outcomes. I said previously, on Second Reading, that I was concerned at the lack of certainty of outcomes. Like all uncertainty, it adds to risk and is a highly corrosive factor in getting good levels of net present value, to use valuer-speak.
The Bill’s laudable intentions are to a large degree overshadowed by some very difficult times, with the possible exception of central London. That colours everything, including the way in which these schemes can be financed independently and the sort of risks that you can afford to take with taxpayers’ money, if you are not financing them through conventional means. That obviously applies to central government just as it does to billing authorities and local authorities. My concern is about the migration of commercial floor space to other uses; I refer in particular to losses to residential uses. That may be the only certain outcome that delivers a sufficient return on capital invested to justify the financing. We live in the real world where finance is very difficult. Even if you have retained finance because you are a larger company, unless you can make a robust case to your finance director and the other key decision-makers, it is not going to go ahead. Things which are slow and drawn out and which have long timescales all add to the risk, even if there are no other issues.
I know that the coalition has tried to make sure that the planning process is simplified. None the less, as I mentioned on the earlier group of amendments, there are sufficient uncertainties with all the boxes that developers have to tick. Many of these boxes have to be ticked up front and much of the ticking process costs real money up front. That is the problem that the real commercial world faces. I do not see how the classic role of government, which is to intervene in circumstances of market failure, can be shifted from central government, effectively backed by the political backcloth with central government resources and finance. I do not think that you can move that intervention to overcome market failure to a local government scenario. It will not work. The whole thing is too complicated, the finance is too tight, and matters are too uncertain.
The noble Lord, Lord Beecham, referred to Crossrail, and of course there are other large infrastructure schemes across the country on a wider scale. One thinks of HS2, the high-speed rail system. Many of these create blight. Although in the long term they are considered to bring benefit, they create short to medium-term blight of the most acute nature—in other words, people are unable to sell their properties and business premises are unlettable and so on. This, too, has a highly corrosive effect but, as I see it, it is not in the gift of local government to deal with these large-scale issues of blight.
The real question goes back to what the noble Lord, Lord Best, was asking: how do we deal with the necessary incremental improvements to and upgrading of our infrastructure without this driver of a commercial outturn? In a sense, the commercial outturn is there because value and satisfaction are added. More trade may be brought to an area. For instance, if it is a seaside town the number of beds let per annum in lodging houses and hotels may increase. There can be all sorts of things that go with that. However, it is a slow and diffuse process, and that means that the benefit is not sufficiently directly connected to the investment for the authority to claw that back. It is not a bankable benefit in the authority’s hands, and that is where the disconnect arises.
It may be that this whole consideration goes much wider than the context of the Bill. However, we are transferring duties and powers and supposedly finance streams to local government, and I think that it is right to consider this issue in its wider context. At the beginning of this afternoon’s proceedings, I mentioned that it is part of the backcloth in which we operate. I certainly hope that the Minister will be able to give some comfort that the cause and effect—in other words, the risks and costs of investment and the returns that can be gained from it—will be better looked at and better managed, even if they cannot be dealt with through the business rate retention scheme. There need to be other ways in which this issue is dealt with; otherwise, we will see areas going into wholesale decline with a considerable loss in values and, with that, risks to the loan books of the mortgage sources that have lent against those investments, as well as risks to the whole financial structure. We do not need to do that. Once we start going down that road, huge perils lie there. We really need to make this constant investment in order to make sure that that does not happen. We have to move forward; there is no stand-still position.
My Lords, I support my noble friend Lord Best because there is a need to take into account revalued and increasing rateable values of properties. The analogy used by the noble Lord, Lord Beecham, reminded me of development land tax where when agricultural land got development planning permission its owner had to pay substantial extra taxation. We are in danger of looking at how much individuals, companies and corporations make as a result of Crossrail or whatever. If the land has increased in value as the property has increased in value, it ought to be a factor in the calculation of what the local authority receives. The point made earlier was that local councils such as Westminster would gain by the redistribution. Projects such as Crossrail spread that gain through rural areas and the like. I do not think that the fact that some local authorities may gain because of a national or regional development is a reason not to give that local authority the benefit of having an increased rateable base. If you look at new floor space, there are many places where that will not happen. Some noble Lords showed a degree of pessimism when they spoke about how things will devalue rather than increase in value. We have to look positively at how we should encourage local authorities to do infrastructure and to encourage infrastructure, even if it is Crossrail or whatever, so that the valuations of those properties increase and local authorities can see the benefit. That would incentivise local authorities to co-operate on those matters.
That was an interesting, if unexpected, debate. When it started, I was very touched by the fact that I had a little note that said, “The purpose of Amendment 15 is not entirely clear”. My reply may not be totally applicable either, but somewhere along the line we have clearly raised really important points. We are going to have to look again at the amendment, but in the mean time, I will tell the Committee what we thought it was about, and if it does not quite tie up, we will sort it out, I am sure, between now and the next stage.
I am advised that the amendment in its current form could not stand as it would insert an amendment into Schedule 8 which, as a result of this Bill, will cease to apply for any purpose in England. That is the first problem. Even without this technical deficiency, we have a bit of a problem. We fully respect the noble Lord’s views that under the rates retention scheme authorities should be able to benefit from rental growth as well as physical growth. Westminster has been touched on by several speakers, but for authorities such as Westminster or, potentially, for my ex-authority Kensington and Chelsea, the potential for physical growth is much more limited than for others as there are very constrained sites with developments all through.
The efforts of local authorities to make their areas more attractive to business are not quite as limited as some would like to pretend. Efforts that have resulted in a steady increase in rental values and hence rateable values will arguably go unrewarded under the rates retention scheme. The duty of government is to legislate for a rates retention scheme that is workable for the whole of local government, not just for some authorities. For that reason, we could not devise a scheme that allowed local authorities to keep any part of the growth in rateable values. To explain why, I need to explain to the Committee how the revaluation works, although I hesitate to do that because the noble Earl, Lord Lytton, will understand this far more than I do. Perhaps for the benefit of the Committee we should go through it.
Every five years, the Valuation Office Agency undertakes the revaluation of non-domestic properties and, as a result, the aggregate rateable value of all English non-domestic properties either—amazingly—increases or decreases. In setting the multiplier for the first year following the revaluation, the Government take account of the overall increase or decrease in order to ensure that overall the same amount of tax is raised from business after revaluation as from before. For example, if the aggregate rateable value were to double, the multiplier would have to halve. In that way, it simply redistributes the tax burden between businesses on the basis of their up-to-date property values.
In the new world of rates retention, the system is set up at the outset so that through the means of tariffs and top-ups there is an initial redistribution of resources. That protects the position of those authorities that are relatively resource poor. But if, as I explained, we collect no more money from businesses following the revaluation than we did before, it follows that there is no additional money in the rates retention system. If therefore some authorities are to be allowed to keep additional resources, by the same token, some will have to receive less. Therefore, because of the uneven distribution of the rates base, this would not just mean a cut in funding for those authorities that have seen their rateable value fall. So an authority could see a funding fall, even if its rateable value had risen, if that price was by less than the national average. That could not be fair. In fact the only way to ensure that all authorities see their rateable value rise and see some income benefit is to break the multiplier link and raise the overall burden on business, and the Government are not prepared to do that.
For those reasons, I cannot accept the amendments that seek to allow any part of an increase in rateable values to be retained by local authorities. I hope that that explanation, somewhere along the line, meets the basis of the amendment. If it does not, perhaps we could discuss it between now and the next stage. I am not sure at all that it covers any of the matters raised by the noble Earl, Lord Lytton. Having looked at Hansard, we may need to come back to that. While it was a very relevant aspect to commercial improvements, I am not sure that it necessarily fits in with the amendment, but it may do. I will happily say that if the amendment is to be pursued and if the noble Earl feels that the reply is not adequate or there is something more that needs to be done, we should discuss it between now and the next Sitting and then we might be able to get us both together to decide what we are trying to achieve.
I was intrigued by the Minister’s answer. I fully understand her point about the multiplier effect and all the rest of it, but I did not understand her bald statement that the Government were not willing to allow local authorities to retain any growth et cetera under that formula, if you were to break the link. Why can the Minister not make a distinction, which most of us would expect to operate, between an increase in the value of commercial property—the amount per square foot as affected which runs across a city, which I absolutely accept has to be recalibrated given the equalisation formula—with the additional increase that comes through the efforts of local authorities for either the growth of a particular business or new business coming in? Those are two different sets of flows of money. The Minister did not distinguish between the two. The point about encouraging local authorities in this way was precisely to put a new emphasis and new attractiveness on the second of these.
My Lords, I am grateful to the noble Lords who supported this difficult but fundamentally important amendment. I thank the noble Lord, Lord Palmer, and the noble Earl, Lord Lytton. Perhaps I might respond briefly to the noble Lord, Lord Beecham, by saying that the objections he raises—first, that some places would get a windfall and might not deserve it and, secondly, that some places will see a fall in rental values and therefore of rateable values and income—did not strike me as undermining the case here. Major infrastructure projects require people to buy into them; to accept that Crossrail will come through town, or whatever the big issue is. It helps if there is some financial return to that area for the inconvenience that can elapse, perhaps for several years, when major infrastructure projects come through. However, this amendment is not of course specifically addressing that but addressing the upgrading of a particular part of town by the efforts of the local authority. That is the principal objective.
In relation to the noble Lord’s second point, that some areas may see a fall in values—that factories may close and nothing may happen—this amendment is intended to provide local authorities with a greater incentive to prevent that and to do something about it. If the council makes the area much better for customers to come to and for offices to recruit staff to work there, and if it does some good for the area, that is surely good for the local economy and can revive and regenerate a place. However, if councils have absolutely no incentive to spend that money in times of difficult resource allocation for them, it would seem most unlikely that local authorities would put their backs into trying to drive some business improvement and growth in those places. It strikes me that this amendment still has some heart to it. The technicalities have completely escaped me along the way and I would be very grateful if I could take up the Minister’s offer to explore whether or not her response was helpful.
Perhaps the Minister would also like to consider that question. I come back to the point that the noble Lord, Lord Best, has just made. I have a fair amount of experience in this area of regeneration. When I was leader of my city council, we had two quite different propositions. The first was, initially, to start developing along the riverside in Newcastle and to take advantage of the then Conservative Government’s enterprise zone. It was developed as a business park and we helped an engineering company, Michell Bearings, to move into a new factory. That factory was modern and all the rest of it but, 20-odd years later, it has closed. There is nothing much we can do to get it reopened. It is in an enterprise zone and has that attraction, for what it is worth. It is close to a bypass, which we would like the Highways Agency to do something about but cannot.
Against that, when we were faced with another aspect of enterprise zones, the development of an out-of-town shopping centre, we worked very closely with local business to promote the existing shopping core in Newcastle, just as other authorities did when faced with similar problems. That is one case where we can and did do something by responding to a downward pressure on business. In the other case of the closure of that factory, and indeed of another which we had always supported in another part of town, there is very little we can do. That, it seems, is the dilemma: we could find by accident or design that a substantial benefit is going to areas which have contributed nothing in the way of policy at all, let alone investment, towards the creation of value which they will get not just in the form of a 50% share of the rates that accrue but as the full amount. That is the point. Subject to the tariffs and all the rest of it, there is to be a retention, is there not, of the growth in business rate and not just the core rate. That could be quite accidental, and the product of other people’s decisions to which the local authority may have made no contribution at all. The consequence in the system as a whole is that it could widen disadvantage between one area and another. That is the point that we need to explore further. I have said enough and I leave it at that.
Perhaps I can follow with a much smaller-scale example. I ask noble Lords to imagine an old warehouse that has low-level use and is paying relatively low business rates. There is a joint proposal by the council and its owners, if it is near the centre of town, say, to work together to turn it into a modern retail facility with a much higher rateable value: the same building, on the same footprint, with no change to the shape of the building so there is no expansion. What is the difference between doing that and, for example, demolishing that building and then having a completely new retail building, which would presumably provide an extra rateable value that could come within the scheme and have 50% of it going to the local authority? There seem to be marginal cases here, either on a larger scale—such as the noble Lord, Lord Beecham, spoke about—or just individual things. I think we need an answer to that. In the case I am talking about, there is no difference in terms of the input of the local authority between the new building and the renovation of the old building.
In response to the noble Lord, Lord Greaves—and again I think that we need to look into this—it seems to me that where you have a building which goes out of business, and consequently the rates from it may go away as well, if that building is converted for another use and there is a revaluation then the local authority can keep that growth, subject to the conditions that arise from growth. It contributes to the local authority’s income from the rateable value. I do not see that there is a problem with that in terms of what the local authority subsequently receives as a result of having maintained its proportion of that rateable growth. We can check that through, but I think that is correct.
My Lords, I am thinking about the current process of recording hereditaments, as they are known, in the local rating lists. I call to mind that as a result of the riots last year, one or more commercial premises were totally destroyed. As I understand it, there is a vacant site awaiting redevelopment that is described as a shop and premises, and it is in the list at £1. The Prime Minister had in fact said in the wake of the riots that properties with damage would be taken out of assessment altogether. Now, there is a little wrinkle here. If a site remains in the assessment, effectively as a cleared site, but is still called a shop and premises or a department store and premises, or whatever it was, at a £1 rateable value then it is still in the list. When it comes back into the list again as a refurbished property, it will be at whatever the level is of the new premises. If it was a redevelopment process—not riot damage or anything like that—in which the local authority was a key player, the question is whether it stands to be disenfranchised because the hereditament has not been taken out of the list altogether and is not therefore really a new entry in the list. It is a revaluation of an existing one.
This might be looking for trouble where there is none, but I want to be very careful. As I made clear both in the debate on the Queen’s Speech and at Second Reading of this Bill, there are a number of little wrinkles creeping in because of the way in which Treasury policy now appears to influence the work of the Valuation Office Agency in handling the entries in the valuation list. I want to be absolutely sure that by dint of this business of not taking things out of assessment when in fact they probably should be, we are not going to find that we have disenfranchised the authority from that gain in rateable value, which is undoubtedly the work of its own hands.
I realise that the noble Lord is about to ask permission to withdraw his amendment, but I could see that the Minister and her counsellors were engaged in conversation. If I just add a couple of sentences, it might enable the Minister to conclude her conversation, though I am not in any sense imposing on her.
If this is the last opportunity to give advice to the noble Lord, Lord Best, before his private conversation with the Minister, let me say something in the context of Crossrail, which has been used as an example and which had major constituency implications for me. On Crossrail mark 1, there was massive residential blight involved, about which I am happy to talk to the noble Lord, Lord Best. In the case of Crossrail mark 2, the Corporation of London was deeply involved in the terms that actually enabled the project to take place at all.
Amendment 15 withdrawn.
Amendments 16 and 17 not moved.
Committee adjourned at 7.23 pm.