Baroness Kramer
Main Page: Baroness Kramer (Liberal Democrat - Life peer)Local Government Finance Bill
Baroness Kramer Excerpts(11 years, 7 months ago)
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Baroness Kramer
“37 (1) The Secretary of State may provide for the designation of areas in which certain non-domestic revenues shall be ring fenced to support infrastructure investment financed using tax increment finance and other mechanism, and in order to do so may—”
Baroness Kramer
My Lords, given the speed with which this debate is going, I shall try to be fast, in the mood of the evening. All the amendments in this group stand in my name and those of my noble colleagues Lord Tope and Lord Shipley. They address deficiencies in the clauses in the Bill that deal with tax increment financing, commonly known as TIF.
As your Lordships will know, TIF-type financing arrangements financed much of the infrastructure of our Victorian cities. The structure is widely used in the United States to finance regeneration and development. It is a financing arrangement that is well understood by the capital markets and investors, but it has not been available for many decades as a financing tool for local government in the UK.
First, I acknowledge that the Government have taken an important first step by providing a framework in the Bill for this kind of financing. They have proposed two different programmes, commonly known as TIF 1 and TIF 2, both of which are based on the new right of local government to retain a percentage of the uplift in business rate revenues that results from designated infrastructure investments.
However, the Government have in effect made sure that the use of TIF 1 and TIF 2 will be severely limited. TIF 1 programmes are crushed by the seven-year reset period in business rate retention. In effect, a project started on day one of the legislation must be designed, receive planning consent, be built and financed, and the financing repaid, within seven years. That is limiting enough, but in the second year the time span reduces to six years and then to five years and so on. Clearly, no steady flow of projects can possibly result from this arrangement. TIF 2 enjoys a 25-year guarantee of business rate retention, so that problem disappears, but the programme is capped at £160 million for the whole nation and so is, frankly, a drop in the ocean.
These constraints fly in the teeth of the Government’s commitment to the devolution of power to local authorities. The constraints emasculate a form of financing that could have enabled a host of infrastructure projects at a time when we need economic growth. The constraints delay the development of a real market to fund TIFs. Markets need both volume and a steady supply. Only then will investors develop the skill base and build the marketing structure to invest, and only then will they offer well structured, attractively priced financing for TIF projects.
Amendment 67 would simply make sure that the term “tax increment finance” was included in the Bill. It is just silliness that the programme dare not, as it were, speak its name under the present arrangement.
Amendment 68 would tackle a far more significant problem. The Government argue that they must constrain TIFs because the financing will be added to the national debt figures, even though the national Government are providing no guarantees and no backstops and the project generates the repayment of the financing. Why do the Government take that position? It does not happen in other countries, so no one can argue that it is required by international accounting standards. This amendment effectively removes that self-inflicted problem.
Amendment 69 allows flexibility in designating the start of the seven-year rate retention period for any specific TIF 1 project. TIF 1 would therefore be far more viable. I defy anybody to give me a coherent argument against this, other than not wanting TIFs to happen.
Amendment 71 allows the Government to look at TIF 2 projects on a case-by-case basis rather than set an artificial, national cap. This amendment seems simply good sense and says that we respect the judgment of the Treasury on a project-by-project basis.
Ironically, because financing for infrastructure in the UK has been hard to come by for so many years, there are excellent projects, big and small, all around the country, which could go ahead if the constraints on TIFs were eased. Many would deliver jobs, housing and new commercial opportunities quite quickly, especially the smaller projects, which need little lead time. Many local authorities have been so disappointed by the emasculation of TIFs. The Government have a last opportunity to think again, and I hope that they will.
Lord Shipley
My Lords, I express my full support for the speech by the noble Baroness, Lady Kramer. The amendment is about getting TIF written into the Bill as a financial lever that can generate growth. All the international experience suggests that other countries are well used to using it.
I fully understand the need to ensure that investment and borrowing are responsibly undertaken and I have no desire to see problems arise such as have occurred in Spain with excess local authority and regional spending. However, localism in England has to mean trusting people with power and enabling them to manage their own investment and their own risk. As long as schemes meet the regulations, are genuinely additional and would not otherwise take place, the number of schemes should not be limited by central government, hence our full support for Amendment 71 which gives effect to that.
One of the amendments makes clear reference to tax increment financing, as opposed to there being no reference to those words at all. There is also an amendment that gives greater flexibility in start dates for schemes. Absolutely crucial, however, is the question of self-funding expenditure that complies with accounting standards, and the fact that it ought to be exempt from the public expenditure control framework because its impact on the deficit would be neutral, as the noble Baroness, Lady Kramer, has pointed out. In other words, there is a need to drive long-term growth through tax increment financing rather than through something that counts as an in-year spending decision, as long as it has been exempted from the public expenditure control framework. It seems that the Treasury has regarded infrastructure funded by TIF 2 as part of the local authority self-financed expenditure limits, which contrasts with the policy being followed for enterprise zones, which does not count, even though both mechanisms borrow against future business rate income over 25 years.
This is all about growth. We urgently want everyone to have responsibility for driving growth. This Bill says a lot about devolving business rates to local authorities. However, actually empowering and enabling local authorities to manage investment on the basis of future business rate income, but over a long period of time as opposed to a short one, is a vehicle that will enable growth levels to be enhanced. I hope very much that the Minister will agree with us that we need to do a little more now to promote tax increment financing as a vehicle for growth.
Baroness Hanham
My Lords, I am sad not to be able to satisfy the noble Baroness. I know how keen and knowledgeable she is about TIF and she has been pushing a hard line ever since Second Reading. I understand why, because she feels that this will not be of sufficient benefit.
The noble Baroness has also been pushing the line that it should be off the balance sheet, so I therefore turn first to Amendment 68, as it goes directly to the heart of what we are talking about. The amendment would ensure that TIF is not scored as public sector debt. That is simply impossible. We had a long debate about this in Committee and the facts have not changed. TIF 2 must always count as public sector borrowing. Because it uses tax revenue—business rates—to secure funding for development within a predefined area; and because taxes are uniquely established by the tax-raising power of government, TIF 2 must be recorded as government borrowing, even if a private sector developer is taking on the development risk. The Office for Budget Responsibility, to which the noble Lord referred, has confirmed that that is how the borrowing must be treated in the national accounts.
It is therefore a direct impact on public sector debt which cannot be avoided. The local authorities who were successful in the TIF 2 competition—because a competition it indeed was—are now confirmed as Newcastle, Nottingham and Sheffield, which will be undertaking additional borrowing that they otherwise would not have. Therefore, TIF 2 schemes come at a cost to the Government, as we have to count the cost of the additional capital expenditure that the new borrowing supports.
The Government have been very clear that the amount of TIF 2 has been limited to £150 million at this time—I hope to have an answer for the noble Lord about the £60 million—to comply with our overriding priority of deficit reduction. The £150 million was from topslicing from councils, but it reflects the business rates retention element, not the levy element. I simply have to reject Amendment 68 on the basis that this has to be on the balance sheet.
Going back to Amendment 67, it seeks to ensure that designated areas are identified for the purposes of infrastructure provision in the Bill. This is not necessary; the Bill already allows, under paragraph 37 of new Schedule 7B to the 1988 Act, for the Secretary of State to designate areas within which the ratings income will be disregarded from the business rates retention scheme.
I am not convinced that there is much practical benefit to be gained from Amendment 69. All it would seem to do is to introduce further complexity. It is much easier for the operation of the scheme if the income is disregarded at the beginning of the year, and I am not persuaded that this has a significant detrimental impact on local authorities.
Amendment 71 looks to remove important controls from the system in that it seeks to create a framework where local authorities can advance any TIF scheme. For those reasons, I have to reject the amendments.
However, the noble Baroness talked about local authorities having many projects which they already have available and want to carry out. The point I would make is that if they are so ready, the seven-year reset is not an impediment because they could be ready to be got going in year 1, which would give them the support that they need. I ask the noble Baroness to withdraw her amendment.
Baroness Kramer
My Lords, I thank the Minister for her reply, although we are simply going to have to disagree on a lot of this. I would point out, however, that her comments about the OBR and accounting necessity mean that her Government now have a major problem with their enterprise zones. Perhaps she needs to go back quickly and suggest that the OBR will have to change the accounting programme that has been put in place to cope with the enterprise zones and the financing that will flow from them. That is the only logic of the statement that she has just made.
As I said at the beginning, however, I recognise that this Bill marks a significant step forward and that at least there is now a framework in legislation for TIFs, although it will take some further steps to turn them into vital and vibrant instruments for local government to use. Three at least have been done, for Newcastle, Sheffield and Nottingham. I hope that the Government will continue to follow through on the logic of their own thinking on devolution, infrastructure and joined-up thinking between TIFs and their goals for economic growth. Perhaps at a later point in this Parliament we might see further progress on this issue, but for the moment I withdraw my amendment.