Local Government Finance Bill

Lord Beecham Excerpts

Wednesday 10th October 2012 Lords Chamber

[Lord Smith of Leigh]

We now move to the safety net for local authorities. The Minister said earlier that this is a very significant matter and clearly it is for local authorities. It is recognised around the House that local government finance is going through a turbulent period and that there are likely to be movements of significant amounts while the pressure on local authorities continues to rise, particularly as regards adult social services, as my noble friend Lord McKenzie said earlier. The famous graph of doom is getting closer every time we meet. The Government have talked generally about a 10% safety net being accessible. However, given the discussion we had earlier and the fact that the review will not happen until 2020, we could have a local authority which suffers a reduction in its business rates of 9.9% in year one, would not therefore be eligible for any safety net mechanism and would have to run with that for a period of seven years. That is unsustainable in terms of supporting local authorities. As I previously argued, there is likely to be a lot of change, and we are now making judgments about what is significant in terms of a percentage. I should have thought, given the pressure on local authorities from central government in terms of reductions in spending and local delivery, that 5% would be a much more reasonable figure.

As regards my Amendment 46A, the issue is intriguing because we assumed when the Government introduced the system in the Bill that they would be funding it and the money would come out of central government because of the impact on particular local authorities. We are now led to believe that some of that funding will not come from central government sources but from local government itself. It seems somewhat bizarre that a system that is meant to help local authorities which are suffering from turbulence due to the current funding system are to be paid for by other local authorities. I hope that the noble Baroness can make it clear that the funding will not come from other local authorities and that central government will take responsibility for it. I beg to move.

[Lord Beecham]

My Lords, I shall speak to my noble friend’s amendments, and the amendments in my name and that of my noble friend Lord McKenzie.

My noble friend Lord Smith rightly referred to the concern about the threshold level above which protection would be given. I note that in the debate in Committee, the Minister said that the Government had been carefully considering these issues,

“together with the safety net support threshold in the range of 7.5% to 10% below baseline funding”,

and said that that offered the, “best combination on balance”. She went on to say:

“We will be consulting local government over the summer before any final decisions are taken”.—[Official Report, 5/7/12; col. GC424.]

It would be interesting to know what representations there have been and what progress was made during those consultations because, on the face of it, it looks as though the Government are still on course for that higher figure. My noble friend Lord Smith rightly pointed out the severe financial problems facing local authorities—a combination both of cuts in government grant and the rising demand for and costs of services. Many authorities will find themselves in an unprecedentedly grey financial situation. The noises outside suggest that the heavens appear to echo my sentiments.

The problem is shared by many authorities. I ought to declare an interest as a member of Newcastle City Council and, like others, I am an honorary vice-president of the Local Government Association. In Newcastle, we are contemplating reaching a position whereby we have to find £90 million a year by the end of a three-year period. That is £90 million every year, which is a significant proportion of the budget. Consequently, any diminution of resources from the reduction in business rate income would be a matter of even greater significance.

[Baroness Hollis of Heigham]

Perhaps I may interrupt my noble friend. The staff of the House are getting the engineers to see what is going on. Alas, we do not have any surveyors left.

[Lord Beecham]

I shall endeavour to proceed despite the interesting background noise.

There is a serious question about the extent of the threshold and, as my noble friend rightly pointed out, there is another question about how it is to be financed. The assumption was that the Government would be meeting this cost, and it was a reasonable assumption. Indeed, that was the position put last year by a senior Treasury official in consultation with local government finance officers. We are now faced, apparently, with a safety net cut of £245 million. Originally, it was thought that that would be met from the Government’s AME contingency of around £400 million, topped up with some of the set-aside, which could have provided a potential £700 million. In addition to that source, the Government are, of course, sitting on around £600 million extra in business rates. I slightly anticipate the answer that the Minister may make in response to the question of my noble friend Lord McKenzie: that figure is the extra amount collected by councils for the department last year, and it will probably be more this year.

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[Baroness Hanham]

My Lords, I congratulate the noble Lord on his coolness under fire. I heard most of what he said and I hope that other Members in the Chamber did as well.

Perhaps I may deal, first, with the consultation—which the noble Lord asked me about—because I think that it is most relevant to what I am going to say next. We have been consulting on the threshold over the summer. That consultation has only just ended. There have been 400 responses and so before we make an announcement on the level of percentage reduction, we need to look at those. That will happen later. At the moment, we are still sitting between 7.5% and 10%.

[Lord Beecham]

I thank the Minister for that. What will be the process? Will the safety net limit be prescribed by regulations so that we would then have an opportunity to debate it? Presumably the results of the consultation will be available for us to consider at that time, if not before.

[Baroness Hanham]

The answer on regulations is yes. What comes out of the consultation will either be in the regulations or, if we can make it available, we will. Is that helpful? That probably sets the scene for us on this amendment.

We have always been clear that the levy and the safety net were as one. The reason for the levy is to provide money for the safety net. They cannot be separated. The reason for the levy relates to disproportionate growth, in that people have more than they should have in terms of equalisation and that money will go to the safety net. The safety net is to deal with a sudden collapse of a business or something mega happening that leaves the local authority without finance or as much finance as it needs.

In considering the safety net, we thought that it should not be so generous that authorities cease to care about whether their business rates grow or decline. We want the system to provide an incentive to authorities, first, to maintain and then to grow their business rates. Secondly, the safety net cannot be so lacking in generosity that vital local services are put at risk when authorities see, even temporarily, a decline in the business rates, particularly as this can be for reasons entirely outside the authority’s control—we recognise that—for example, because of losses on appeal. We have discussed what happens on appeal. That can be supported by the safety net. Thirdly, wherever the safety net is set, we need to keep an eye on the scale of the levy that would be needed to fund it. A safety net that requires a very stringent levy might work for the safety net, but if it means that authorities keep next to nothing of any growth that they generate, it will have failed the overall scheme.

I will not pretend that this is an easy judgment about what to do. It is not. It is one that, initially at least, we believe is met by setting the safety net threshold, as I have just explained, somewhere between 7.5% and 10% below baseline funding level; in other words, guaranteeing authorities somewhere between 90% and 92.5% of the funding that they could expect to see from the rates retention scheme. We will want to keep this under review and possibly adjust these percentages in the light of the actual operation of the scheme and certainly as a result of the consultation. Building fixed percentages into the Bill would effectively deny us the opportunity to respond to the concerns of local government, in future, if the percentages turn out to be either too high or too low.

I am not sure that I understand the problems that Amendment 50 seeks to address, and I am not persuaded that the concerns that underpin it are justified. It is undoubtedly true that a major redevelopment to, say, a town centre, could cause a temporary loss of income before the potential benefits of the scheme come to fruition. But if such a loss were significant, it would be covered by the safety net, which, as I explained earlier, would guarantee the authority between 90% and 92.5% of its baseline funding. To create, therefore, a special class of events—redevelopment—where an authority could be guaranteed to secure more than 90% to 92.5% of its funding, as this amendment would effectively do, seems to be wrong in principle. Why just redevelopment and why not other things? I am sure that other authorities could make a case for other one-off events which might, they would claim, be equally deserving of special treatment. Moreover, by providing indemnity for the early-years loss of income, we might end up with the law of unintended consequences and find ourselves simply indemnifying delay in bringing schemes to fruition, with all parties safe in the knowledge that no cost will fall to them. Where there is a redevelopment, obviously there is an initial loss of money, but the expectation is that as redevelopment takes place, the rating potential will come back in. I hope that explanation will satisfy the noble Lord and he will withdraw his amendment.

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[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.

[Lord Beecham]

My Lords, I warmly endorse the amendments moved by the noble Baroness, Lady Kramer, and supported by my fellow Newcastle councillor—ex-Newcastle councillor, I should say now—the noble Lord, Lord Shipley. The noble Baroness is quite right to point out that for all the potential of this scheme, the amount that the Government have decided to allocate to it is, frankly, pitiful. I think that the figure is £150 million. During the mayoral referendum campaigns, which took place earlier this year, much was made of the prospect of city deals for the eight authorities that were subjected to a referendum, and the prospect of tax increment financing was dangled in front of them. However, only three authorities, I think, have now been awarded tax increment financing arrangements. Newcastle, I am pleased to say, has secured I think £90 million of the £250 million, but only two other authorities have been brought in. That is a fairly minimal impact overall.

We have just been treated to the noise of fireworks, which reminded me rather of the spectacular opening of the Olympic Games and the wonderful display there, which of course cost £29 million. That is 20% of the total that is going to be allocated for tax increment financing—for one evening’s entertainment, however wonderful. There has to be something wrong with the Government’s priorities when they afford only £150 million to an imaginative scheme that should incentivise growth. This is a good way to promote growth quickly. As the noble Lord, Lord Shipley, implied, infrastructure investment, which is of course what tax increment finance would essentially be directed to, can take place relatively quickly. It can generate growth in its own terms and blazes the trail for more substantial growth over a period.

In the debate in Committee the Minister prayed in aid the Office for Budget Responsibility as taking a view on these matters. I do not know on what basis that information was conveyed. It may be that the OBR has advised the Government—but the OBR does not take decisions in these matters.

As the noble Baroness, Lady Kramer, pointed out, it is for the Government to decide. On the face of it, it does not appear to be inconsistent with international practice. There has been some question about whether PFI arrangements should or should not be counted for those purposes—certainly, for many years, they were not—but the difference between this and PFI is that PFI was to cover public expenditure. To my mind, the only advantage of PFI arrangements was that they took it off the balance sheet internationally, as it were. It is not comparable when the whole thrust of the TIF proposal is to facilitate private sector development, with the beneficial effect that that would have on the economy. I hope that the Minister and the Government will look at this again and not seek reasons not to accept the amendment of the noble Baroness, Lady Kramer, but find ways to accept and develop it.