Local Government Finance Bill

Lord Watts Excerpts

Wednesday 18th January 2012 Commons Chamber

[Annette Brooke]

I want to place on record, in the debate on clause 1, how important it is to reform local government finance, to do it in a timely fashion and to do it in such a way that it both incentivises and equalises. Those principles are firmly embodied in the framework. We have heard it said that the retention of business rates will not incentivise. I wonder why the previous Government introduced LABGI—the local authority business growth incentives scheme—which rewarded local government for business expansion, but not very efficiently. It was not a built-in system, which has to be better. I therefore found some of the comments odd, in the light of that recent policy.

[Mr Dave Watts (St Helens North) (Lab)]

There is general consensus that the local government system of funding needs to be reviewed, but does the hon. Lady agree that people will be suspicious if that has not been done through independent analysis and by people who can be trusted to make the right decisions? That is what previous Governments have done and is exactly what this Government are not proposing to do. They intend to impose a system that has not been scrutinised.

[Annette Brooke]

I believe the Minister explained earlier how the detailed proposals would be scrutinised later in the process of setting the 2013 terms of the revision. What I want to see in the end is a more transparent scheme. That is extremely important, so that local councils are not continually trying to find little bits here, there and everywhere that they can come up and lobby about. We need clarity. I am pleased with the framework.

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The Bill contains a big change that is being forced through too fast. It is a reform that builds unfairness into the system like a ratchet. It means that in future, essential local services such as care for the elderly and for vulnerable children, street cleaning, waste collection, road maintenance, and fire and rescue services will no longer be funded on the basis of need or population, but on the basis of the ability to raise tax and pay for the costs locally.

[Mr Watts]

If an area faces the wholesale closure of some of its industries, that obviously creates demand for the local authority’s services. Is it not a fact that such a local authority will lose money by the transfer to central Government and through the loss of business rates, and will therefore be less able to respond to the needs that are created by the wholesale closure of those industries, which we have seen in parts of the country?

[John Healey]

My hon. Friend, as a former leader of St Helens council, knows a great deal about the local government finance system and the pressures on local government. He may not have heard my right hon. Friend the Member for Greenwich and Woolwich (Mr Raynsford) in the last debate refer to what has just been described as a double whammy. In other words, there may be a loss of potential income at the same time as, and as a result of, the event that causes a greater need and demand for the services that have to be funded through that revenue stream. That is a concern.

I want to ensure that the Committee is clear that this is a fundamental shift in the basis of our funding calculations and in what local councils in England have to spend. The system will no longer work on the basis of need. It will not take account of the fact that there are three times as many looked-after children in South Tyneside as in Surrey or that there are five times as many children in poverty in Middlesbrough as in Wokingham. It will not take into account the capacity of a local area to raise resources, in particular through council tax. It will not take into account the fact that Bexley and Barnsley have a similar population, but that Bexley raises £37 million more in council tax each year. It will take no account of the fact that Brent has a similar population to Rotherham, but raises £22 million more each year in council tax.

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[John Healey]

The very point that I am making is that the current system, complex as it is, takes account of resources—an area’s capacity to raise revenue, especially through council tax—as well as the needs of the population in that area for the essential services that local authorities provide. The formula covers both and is based on the principle that I outlined.

[Mr Watts]

If the Government were truly serious about taking need and the ability to raise funds into account, they would have had an independent assessment, outside the political arena, to ensure that grants for local authorities in future reflected need. Comments from the Government Members are always about how much one local authority gets compared with another, and always ignore need. The reason for higher funding is that the need exists.

[John Healey]

Whatever side of the House we are on, we should endorse the principle that objective, sometimes independent, assessment is the basis for better decisions. I have never been one for saying that important decisions, which should be taken by politicians, who then are accountable for them, should necessarily be outsourced to independent experts who do not have the direct accountability that we and members of the Government have, but my hon. Friend makes an important point that is relevant to our discussions. It is impossible to make any sensible assessment, let alone a sound, independent assessment, of what the system will mean for the future. That makes our discussions and the decisions that we are required to make as members of the Committee difficult. We are making big decisions, largely in the dark, and we are being asked to give members of the Government significant regulation-making powers that will define the most important dimensions of the way in which the system works and what is available for people in different areas.

I want to underline the point that spending to meet increased need in future will have to be funded by the business rates increase. The council tax freeze and referendum start to remove that as a realistic alternative source of additional funds.

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[John Healey]

My hon. Friend is right. She made that point powerfully last week in her Second Reading speech, which was one of the best that the House heard. Whether for children or councils, incentives need to be simple, and the rewards and rules need to be clear, but the system that the Bill will introduce falls far short of those basic objectives for any system of rewards and incentives.

[Mr Watts]

Is there not another issue here for the local authorities with the lowest business rates take? The Government have indicated that they believe that those local authorities have low business rates take because they are not interested in developing businesses and do not do all that they can to attract businesses to their areas. Does my right hon. Friend consider that perverse, given the problems in areas such as St Helens and many others, including his own? The major concern of local authorities in those areas is to bring in as many jobs as possible, but because of their location, the skills base and other things, it is extremely difficult. It is insulting for the Government to pretend that it is because of a lack of effort by local authorities.

[John Healey]

A number of colleagues have made that point, about local government in general and their local authorities in particular. It is hard to point the finger at any council and say that it has not bust a gut in recent years to see its economy grow and jobs created, because that is to the benefit of their local area and the local people they serve, and that would also be the view of most Members. I still think there is a case for trying to design a system that rewards local people, via their local councils, where they are successful in that. Under the last Government, we attempted to do that through the local authority business growth incentive scheme. The system that we are now discussing is clearly a new way of doing that, but its fundamental flaw is that it tries to fix the whole funding system for local government at the same time as using the same, single tax stream to create that incentive. The new system is trying to do too much with that one funding system, creating contradictions and tensions, which lead to the sort of complexities that the Minister is trying to counter in the design of the system.

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[Mark Field]

I am not entirely convinced that we are debating quite as revolutionary a change in local government finance as the right hon. Member for Wentworth and Dearne (John Healey) would have us believe. As he rightly says, there has been periodic centralisation of local government finance in the post-war period; this Bill is a step, but only a relatively small step, in a different direction.

I am concerned that some provisions will not provide the overall transparency that all of us desire for local government finance. The worry, as we all know, is that council leaders across the country who get and understand the system will then work it to the benefit of their own local authorities, while neighbouring authorities with similar sets of needs will not reap the same benefits. I believe that has been the case since time immemorial, and I suspect it is a problem that exists in any political system. However much we try, it is difficult to discount the articulacy of those who understand and work a system. As I say, I am not as convinced or as concerned as the right hon. Member for Wentworth and Dearne. I hope he will forgive me if I focus my comments on issues that have come from the lobbying of one of the two local authorities in my constituency, and in so far as we work here, we all have a vested interest in this authority—Westminster city council.

[Mr Watts]

Is not the real worry that unless a duty and responsibility are placed on Ministers to ensure that needs are assessed and catered for within the grant system, which under these proposals they will not be, the worst aspects of the hon. Gentleman’s worst fears might come to fruition?

[Mark Field]

There is a duty, although it will apply to potentially different sets of needs. I think one of the most destructive elements of local government has been the almost constant lobbying—whether it be for three-year settlements or the annual settlements of the past. Although we might return, well before 2022, to specific concerns about elements of need that have rightly been referred to, the idea of having a 10-year period is a positive route forward in providing certainty for local authorities.

Westminster city council strongly supports the principle of allowing local authorities to retain a proportion of the business rates generated in their area—no one seriously suggests that either of my two local authorities should retain all their business rates, although there are common councilmen in the City of London, and members of Westminster city council, I am sure, who would rather like the idea, but even I would not suggest that that would necessarily be an entirely sensible way forward. As other Members have rightly pointed out, local authorities have played an increasingly important and integral role in supporting and growing businesses locally.

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[Helen Jones]

It is a pleasure to follow the hon. Member for Cities of London and Westminster (Mark Field), who always has something interesting to say even though I might disagree with him.

My right hon. Friend the Member for Wentworth and Dearne (John Healey) gave an excellent speech, in which he set out the reasoning behind the amendments. Our amendments attempt to deal with important omissions in the Bill. There is no mention of levels of need, of the different capacities of local authorities to benefit from business rate growth, or of the different council tax bases of local authorities.

The Government present their case in a way that suggests that there is no difference among authorities, in that they all have the same capacity to raise income and have the same demands on them, and that if a local authority is struggling, it is its own fault and a result of its being lax, rather than of the conditions it has inherited. Everyone knows that that is a myth, but some people are deeply attached to it.

We must acknowledge that the current, admittedly complex, system of local government finance does at least try to take into account the relative needs of different communities and their differing abilities to raise revenue. The Government have sought to erode that in their current local government finance settlement, and the consequent significant reduction in resource equalisation has led to local authorities no longer being able to provide the same level of service by charging the same band of council tax. As a result, the delivery of core services in poorer areas has been hit particularly hard. Despite the Prime Minister’s repeated reassurances, we are not all in this together.

The point I have made is very important, because it is about the base from which this scheme starts. Let me make it clear that we are not against incentives for local authorities to grow their economies.

[Mr Watts]

Does my hon. Friend agree that her point is one of the reasons that the Government do not want any independent assessment of the implications of what they have already done and of what they now propose to do? An assessment would demonstrate that poorer authorities have got poorer and that the richer have got richer.

[Helen Jones]

My hon. Friend makes a valid point. When discussing the first group of amendments we said that the fact that this Bill is not going into Committee upstairs means that we cannot take evidence on anything. The Government mindset seems to be, “Let’s get it in, push it through and not bother to have any proper assessment of it.”

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[Mr Betts]

We could, but I am not sure that Ministers will be able to give such an assurance. I say to the hon. Gentleman that it is his Government who are taking these measures, so he may have more influence over Ministers than those of us on the Opposition Benches do.

[Mr Watts]

Is it not possible for a future Government to say, “We will use that set-aside money to reduce council tax”? If so, that money would disappear from local authorities’ spending level, and overall they would have less money to spend on vital services.

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[Mr Jones]

I totally agree with my hon. Friend. It is a double whammy for local authorities, really, as even if they could keep some of the money and use it for incentivisation, the huge proposed cut through the 10% reduction in council tax benefit that they will have to administer will fall disproportionately on areas with large numbers of unemployed people and the elderly. Absorbing that will be very difficult for a lot of councils, certainly in the hard economic times we are in at the moment. As unemployment goes up, the pressures on the councils will increase, too.

[Mr Watts]

Is it not the case that if a deprived local authority gets less grant, one way or the other, it will still have to provide the key services that my hon. Friend refers to, which will mean that it will have less money for economic development initiatives in its areas? That will go counter to the Government’s stated intention for this proposal.

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[Robert Neill]

The debate on these amendments has been lengthy and wide-ranging, and I shall do my best to do justice to the points raised. Some of them were specific, technical and helpful, whereas others seemed to seek to reopen elements of the Second Reading debate and, perhaps, the debate on the finance settlement. I am afraid that sometimes they were rather wide of the mark. In general, I regret to say that I shall ask the Committee to reject all these amendments if they are not withdrawn because they seem to miss some fundamental points. First, the system already recognises a balancing of need and resources: that happens now and will continue to happen. Secondly, if we are to move away from a system of excessive dependency by local government on central Government grant in order to reduce reliance on central Government grant and create incentives for growth at a local and national level, we have to move away from the current, highly centralised system. Nothing has been advanced to suggest that the current system produces the transparency—

[Mr Watts]

Will the Minister give way?

[Robert Neill]

The hon. Gentleman has been very vocal, so I shall make a little progress and perhaps give way in due course. Serious points were raised in debate, and I will do my best to respond to them, if I may.

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[Robert Neill]

Let me finish the point and hon. Members may find that their intervention falls into place better.

Local authorities’ baseline funding levels are set on the basis of the 2012-13 formula grant. The calculation of the tariffs and the top-ups will then ensure that the funding at the outset of the scheme is in line with that assessment of relative need and resource. That is in our system. After that, the baseline levels, tariffs and top-up funding remain fixed and the budgets grow in line with the incentive.

If the system is reset too frequently, that undermines the incentive that we wish to achieve, and in particular it severely diminishes the value of the important introduction in the Bill of tax increment financing. For tax increment financing, which the local government world has wanted for a long time and which the Lyons review advocated introducing, it is important to have a reasonable degree of certainty about the income stream against which we can securitise. That is undermined if interference and change in the system are too frequent.

I understand the point made by my hon. Friend the Member for Cities of London and Westminster (Mark Field) about uprating in line with the RPI, and I accept that there has to be a degree of trade-off in this. It means that top-up local authorities will have a degree of assurance throughout the period of the reset that their income levels will grow by inflation. That is particularly important in the case of two-tier areas, where the county councils responsible for a large number of personal services will be predominantly top-up authorities. Much the same will apply to other precepting authorities, such as the combined and stand-alone fire and rescue authorities. I accept that arguments were made on either side, but, as is always the case, a balance has to be achieved, as I know my hon. Friend will recognise.

[Mr Watts]

I accept that revaluation too often can cause a problem, but does the Minister agree that the valuation process has not been changed for many years and the longer the period without a revaluation, the more likely it is that no Government will do it because it will make such a difference and there will be winners and losers? There has to be some sort of judgment between how long is too short and how long is too long for a review, and is not 10 years too long?

[Robert Neill]

I do not think that 10 years is too long. We think that it gives a sensible balance. But it is a good reason not to put such matters in primary legislation and to say instead that they should be developed through regulations, which, as we know, will be subject to scrutiny by the House. I should have thought that that meets the hon. Gentleman’s point. An assessment is built into the system, which is then taken forward. That is why the updating report is there.

A second point concerns the question of the central share and the set-aside. I am sure that when hon. Members reflect upon this they will realise that we have always made it clear that over time, particularly when we have put the public finances back on track, we would hope to increase the proportion of business rates to the part of the rates retention scheme. But it would be imprudent to suppose—Opposition Members would not have done so when they were in government—that there might never be an occasion when the central share might need to be maintained, or on occasion, heaven forbid, increased. I believe that the economic policies of the Government will mean that it is not necessary, but legislation has to cater for various eventualities. As I say, it is our aspiration that that should increase, but equally, as hon. Members will know, the Government have, and will always have, an interest in the totality of public spending. To expect the Government to have no control over local government finance, when it is such a significant percentage of public expenditure, would be unrealistic. That is not the case under the current scheme, and it would not be realistic in future. In that regard, some of the amendments would constrain the Government unrealistically, and I hope hon. Members will understand why.