Local Government Finance Bill
17:02 - Division on Amendment 4A - Ayes: 198 / Noes: 220 - Amendment 4A disagreed.
Baroness Hanham
“( ) paragraph 9A (regulations about payments by billing authorities to major precepting authorities out of deductions from central share payments);”
Baroness Anelay of St Johns
My Lords, I know that we have just returned from rather a long recess, but may I remind noble Lords that, in order to enable the Minister to move her amendments, it may be helpful to leave the Chamber rather quietly?
Baroness Hanham
My Lords, the amendments in this group concern the funding of business rate relief in enterprise zones. Enterprise zones will contribute to the growth of the local and national economy through a range of measures and financial incentives. One of those incentives is a discount on business rates. The discount will apply for five years and be available up to the state aid de minimis level for businesses that move into an enterprise zone before April 2015. The Government have committed fully to fund these business rate discounts and the amendments in this group will ensure that, through regulations, we are able to deliver on that commitment.
Amendment 25 will give the Secretary of State powers to provide for the deduction of a particular amount from the central share, including by reference to amounts of rate relief awarded. This will allow billing authorities to deduct the cost of discounts in enterprise zones from their central share payments to the Secretary of State, thereby compensating them for the cost of those discounts. As this will reduce the revenue received by the Government, Amendment 25 also provides that the regulations will require the consent of the Treasury. Amendment 36 will then allow us to ensure that the compensation for the cost of the enterprise zone discounts is shared as appropriate between the billing authority and the major precepting authorities. It does this by allowing us, in regulations, to require the billing authority to make payments to major precepting authorities so that, where appropriate, those precepting authorities are also compensated for their share of the cost of the discount.
The remaining amendments in this group are consequential on these amendments and, with this explanation, I hope noble Lords will be prepared to accept them.
Lord McKenzie of Luton
My Lords, I thank the Minister for her explanation of this group of amendments. I will just say at the start that we are of course faced on Report with quite a lot of government amendments—I think more than 50 to date—and not all of those flow directly from our Committee deliberations. We have absolutely no problem with the Bill being in the best shape it can be by the time it leaves your Lordships’ House but, following our discussions today and the further reflection we can have before Third Reading, we reserve the right to pick up further issues if we have missed them in the deliberations to date. I have no problem with the particular thrust of these amendments but would just like clarification on one point. The noble Baroness referred to the off-sets in relation to enterprise zones, which is clearly sensible, and the off-sets in relation to discretionary rate relief. Do these provisions potentially cover off-set in any other circumstance?
Baroness Hanham
My Lords, these provisions are entirely to do with enterprise zones.
Lord McKenzie of Luton
I do not want to start Committee proceedings but do they not also cover, as the noble Baroness has said, discretionary rate relief?
Baroness Hanham
My Lords, these amendments deal with everything to do with the rate discount and how it is handled in enterprise zones. The discretionary relief comes into that as well.
Lord Ahmad of Wimbledon
“( ) paragraph 37 or 38 (regulations about designated areas or classes of hereditament), if the regulations contain provision within paragraph 39 (payments to relevant authorities).”
Lord Ahmad of Wimbledon
My Lords, government Amendment 2 delivers on a promise made by my noble friend the Minister in Committee. It gives effect to the recommendation made by the Delegated Powers and Regulatory Reform Committee that regulations that include the provision under paragraph 39 should be subject to the affirmative procedure. Paragraph 39 allows regulations made under paragraph 37, and indeed paragraph 38, to make provision for a billing authority to pass retained income to relevant precepting authorities.
Noble Lords will recall the debate in Committee about the appropriate level of parliamentary scrutiny for the detailed matters that will be dealt with in secondary legislation under this Bill. They may also recall that our careful consideration of the matters at hand in each of the sets of regulations expected under this Bill resulted in our making, from the outset, a number of regulation-making powers in this Bill subject to the affirmative procedure, in recognition of their significance and impact within the rates retention scheme.
Our approach was supported in all but one case by the Delegated Powers and Regulatory Reform Committee, whose role it is to consider such issues. It has found in all but one case that the level of parliamentary control over regulations set out in the Bill is,
“appropriate according to the relative significance of the various powers conferred”.
Today, Her Majesty’s Government are pleased to remedy that one exception identified by the Delegated Powers and Regulatory Reform Committee by bringing forward this amendment, which gives full effect to the committee’s recommendation on this point.
Amendment 3 goes further than the DPRRC’s recommendation, as it would require any regulations prepared under paragraphs 37 or 38 to be subject to the affirmative resolution procedure, irrespective of whether paragraph 39 were applicable. That was not the intention of the DPRRC, and I do not consider it necessary. With that confirmation of the Government’s positive response to the DPRRC recommendation, I beg to move the government amendment and ask the noble Lords, Lord McKenzie and Lord Beecham, not to press their amendment.
Lord McKenzie of Luton
My Lords, I start by welcoming the noble Lord, Lord Ahmad of Wimbledon, to the Dispatch Box and our deliberations on matters of local government. We have no problem with Amendment 2, which we are happy to support. We tabled Amendment 3 because at the time it was drafted we had not seen the colour of the Government’s money and their commitment to this, but we entirely accept that they have fulfilled the commitment that they gave in Committee. We are happy to support that and happy not to move Amendment 3.
Lord McKenzie of Luton
“( ) The Secretary of State must by 30th November 2012, and after consulting representatives of local government as he thinks appropriate, form a view on whether local authorities—
(a) have been provided with sufficient detailed information regarding the business rates retention scheme; or(b) are likely to be provided with such further information on a timely basis before, or when receiving, the local government finance report;in order to enable all local authorities to set an informed budget and council tax for 2013/14. ( ) If the Secretary of State forms the view that all relevant information has not or will not be provided on a timely basis then he must make an order under section 1(7) of this Act.”
Lord McKenzie of Luton
Amendment 4 would impose on the Secretary of State a specific obligation to check the readiness of the business rates retention scheme. It requires the Secretary of State, after consultation with representatives of local government, to take stock of where deliberations have reached, the information provided to date to local authorities and that yet to be provided. It requires that to be undertaken by 30 November. The test is whether local authorities will each be in a position to set an informed budget and council tax for 2013-14 in due time. If—perhaps surprisingly—the Secretary of State is not satisfied that sufficient information is or will be available to local authorities in due time, it requires him to use the powers under the Bill to defer introduction of the system.
That picks up the theme of an amendment moved in Committee by my noble friend Lord Smith and is by way of a reality check. It is specifically designed to enable the Minister to give us a full update on where things stand and the timetable for completion of the process. We trust that she will be able to satisfy us on this, as our alternative would be to press for a deferral at Third Reading.
Noble Lords will note that we have a number of technical amendments on the Marshalled List where we are, our main areas of concern on which we seek to focus at Report are: the readiness of the system; the process of resetting; the level of the local share of business rates; and how the central share is to be deployed. We acknowledge that a considerable amount of work has been undertaken in recent months. Following the 155 pages of a simplified default council tax support scheme, we have had 252 pages of a technical consultation on the business rate retention scheme, which—alarmingly, as it turned out—flushed out a lot of the detail of the scheme. We have also had the benefit of seeing the presentation material used in the department’s roadshows.
However, the technical consultation—a truncated consultation—ran until two weeks ago, until 24 September. It poses 83 questions on which views are sought. Some of the matters for discussion at the end of the consultation are: changes to the number of components used in the formula grant process; the methodology of calculating the local government spending control total; what happens at the end of the current spending review; the model boardings approach to concessionary travel; changes to the use of population scarcity indicators; changes to the relative resource amount within the formula grant; distribution of grants rolled in; methodology of rolling in council tax support grant; the approach to floor dampening; police funding; determining business rate aggregates; determining proportionate shares; and determining major precepting authority shares—as well as the levy and safety net criteria.
Some of these issues may be seen as routine and no more than the usual process leading to the local government finance report, but some are clearly not and relate directly to the transition from the current basis to the new retention scheme. However, they have a particular significance because, as we know, if left to this Government there will be no resetting of the system until 2020, so the consequences of some of the decisions to be made will endure for at least seven years. The issues raised in the consultation do not all lend themselves to a ready approval of the varying propositions. Different councils will be affected by them in different ways and some are more controversial than others. The challenge of distilling and considering responses, if undertaken genuinely, will take some time. When will the Government publish their full response?
The Minister will be aware of the major concerns expressed by the LGA about aspects of the proposals in the consultation and she may be able to comment on the substantial improvements that, even at this stage, it says are essential to be made. Its concerns include the initial holdback of £345 million to fund the safety net and capitalisation, which is effectively a further £345 million cut in local authority spending for 2013-14. Will the Minister release before Third Reading the details of the calculation which support this level of holdback? Its other issues are: the arbitrary further topslicing of the early intervention grant; including an element of growth in the business rate forecast for 2013-14; the impact of the 80:20 split for shire districts; and the funding of adjustments, particularly those relating to the settlement of appeals against rating valuations for periods prior to 2013-14. There are of course further amendments on that issue on the agenda.
Further issues include: how the AME money from SR2010 is to be applied for the benefit of local government in 2013-14 and 2014-15 and the prospect that the proportionate shares of business rate income calculation should be revised to mitigate the serious risk that large numbers of authorities will face a significant loss of funding on entry to the new system. The funding removed in respect of academies’ central functions is, it is suggested, too high and the per pupil handback for academy pupils too low. The establishment of pooling arrangements should be more flexible. Can the Minister tell us when and how each of these issues is to be addressed? Can we know that before Third Reading?
Councils are, of course, faced with the practicalities of these proposals: having to set budgets, face cuts and set council tax collection systems in place to ensure collections. The greater the uncertainty, the greater the likelihood of their building reserves to cover those uncertainties. There is also a raft of regulations, which are due to underpin the new systems—regulations which, for example, define non-domestic rating income, cover payments between billing and major precepting authorities, provide for levy and safety net payments and determine the basis on which any levy account balance is to be distributed. When will these be ready and when will they be laid? When will local authorities know their baseline funding levels, tariffs and top-ups?
We have received—yesterday, I think—an indicative timetable for regulations but virtually none of it will reach us before we have finished Report. Of course, we all know what indicative means: something to put out when we do not quite know the detail. There are also uncertainties around council tax support, which will of course affect council budgets. Some councils will respond, and are responding, to the underfunding of this support by yet further restrictions on services. Yet apparently at almost the 12th hour there is, we understand, the prospect of a new transition grant if councils seek to protect the poorest. Perhaps we can know the current position on that. The explicit purpose of this amendment is to cause the Secretary of State to take stock before proceeding with all of this in April 2013. More particularly, it is to give the Minister the opportunity to explain to us in detail today how everything is to be in place for local authorities in time for them to set their budgets. We have drawn back from seeking to insist on a deferral of the scheme but we are entitled to have the detail if we are not to see this through to Third Reading. I beg to move.
Lord Smith of Leigh
My Lords, I support my noble friend’s amendment and thank him for taking up the amendment that I moved in Committee. I need to declare my interest as leader of a local authority. I must say that I have been dealing with local government budgets for about 30 years now, and the current year is the most difficult one that I can recall. That would be so even if this Bill were not around, because already we have huge challenges with the economic circumstances. As my noble friend said, police budgeting has changed and not until after 15 November will we know whom we are going to face as our new police and crime commissioner or what their views will be. The settlement date seems to be getting later every year; the last that I heard was that we may get it in the post as a Christmas card. For those people interested in what is going on in Birmingham this week, we understand that there is going to be a new council-tax-freeze grant in the system. How might that work? We read in the papers that there are probably going to be further cuts to public spending and that local authorities will perhaps bear more than their fair share, as has happened in the past.
I thought that my noble friend dealt with all the issues in the Bill itself. However, each authority is also out to consultation on local government tax support schemes. The timescale for that is three months, and most put it out over the summer period and therefore will come back to it probably in November, or before the end of the year. Obviously we will need to respond to comments made as part of the consultation and reassess what we are doing. We have technical problems with making sure that our computers work with the new systems, whether on business support or on council tax, and we need to ensure that we have the information that my noble friend asked for. It was helpful in a sense to see the timetable that the Minister sent round, but government timetables have been known to slip in the past. As the House was hearing earlier, government departments have also been known to get things wrong, and we may need to review some of this system.
Time is becoming critical and I hope that the Minister will seriously consider the points that we are making; we are not making them simply to defer the Bill. If the Bill is going to be successful, as presumably the Government hope that it will, then we need to get the system in place properly. We need answers to some of the questions that we are raising.
Lord Tope
My Lords, as this is the first time that I am speaking on Report, I suppose that I, too, should declare my interest as a member of a London borough council and indeed as one who has had to deal, as leader of the council and leader of the opposition and before that, with budgets for probably even longer than the noble Lord, Lord Smith. He says that this year is probably the most difficult that he can remember; my only response to that is to say, “So far”. I am not sure that it is not going to get any better or easier.
I understand why the noble Lord, Lord McKenzie, has tabled this amendment; indeed, I am grateful to him for doing so. As he has rightly said, it follows on from the amendment moved by the noble Lord, Lord Smith, in Committee to seek a postponement. We on these Benches did not support that amendment and still do not. I think that we would all agree by now, whatever our views about this legislation and the position that we are in, that it is in no one’s interest at this stage to postpone. I therefore hope and believe that when the Minister comes to reply, she will be able to give us the reassurances that have been requested that, late though the process is—we all acknowledge that it is later than originally intended and certainly later than any of us would wish—we are as confident as one ever can be that it will run as smoothly as it can. If she is not in a position to answer today the very detailed questions that the noble Lord, Lord McKenzie, has put, I ask her to undertake to do so as soon as possible and, obviously, before Third Reading.
Baroness Hanham
My Lords, following on from what my noble friend Lord Tope said, the noble Lord, Lord McKenzie, has a happy style of producing a long list of questions that he peels off at a fast rate. It is not always possible to answer all of them at the same time. I readily agree with my noble friend Lord Tope that if we miss anything, we will write directly afterwards.
Like others, I am grateful to the noble Lord for explaining his amendment. It is probably worth saying that as a former leader of a London local authority, I understand the complications of late publication of the draft local government finance report and the implications it has for the budget process. However, as has been said, there is late and there is late and, while this may be slightly later than some, it is not that far out of kilter with the other announcements. I recognise that delay in the publication of the draft local government finance report would make it more difficult for local government regardless of whether the rate retention scheme did or did not exist. The existing formula grant and the new arrangements for rates retention both rely on our being able to determine how much funding local authorities are entitled to. Indeed, I think that the noble Lord said that. In the old world, the one we are passing at the moment, that means how much formula grant authorities are to receive, and in the new world, how much revenue support grant they will get and how much funding through the rates retention scheme. Under either system, the answer to the question depends on changes to formula, and potentially on decisions that might be made in the Autumn Statement, so authorities face the same delays and the same problems.
I do not pretend for a moment that any of this is ideal, but delaying the implementation of the rates retention scheme, which potentially could be the outcome of Amendment 4, although I know that the noble Lord has said that he does not want to hold anything up, would not provide authorities with any greater certainty about the funding they would receive. Whichever way we do this, either in the old way or in the new way, they still need the information. Also, it will not assist them greatly as they plan their budgets for 2013-14. So while I understand the concerns of local government and of noble Lords, we would be kidding ourselves if we thought that there would be any difference if we were still in the situation of the formula grant. As I have said, the noble Lord has put a string of questions, some of which will be answered when other amendments are moved; they will pick up on some of the issues. Perhaps I may come back to those later.
While we are not able to confirm funding levels for individual local authorities until the start of the consultation on the provisional local government finance settlement, the Government have actually provided a lot of detail and supportive information. It has been pouring out all summer. Discussions have taken place with local government representatives, including the Local Government Association, and we will publish very shortly an additional exemplification on overall funding to enable individual local authorities to develop their modelling for the budget processes. In mid November we will also start a consultation on the data that the Government propose to use when calculating the settlement. This is an integral part of the settlement process that will throw light on some of the points raised by the noble Lord. We will also be publishing in draft all the key regulations that authorities will need to take into account later this month or early next month, and indeed I think that the noble Lord has probably seen those that have been done already.
The noble Lord, Lord Smith of Leigh, returned to the attack on council tax support. Perhaps I may duck that for the moment because it is going to be very relevant to the next part of the Bill. We will be able to discuss the issues at length when we reach that point.
The noble Lord, Lord McKenzie, also asked about a timetable for responding to the consultation. The Government’s response to the consultation exercise will form part of the local government finance report. It will set out how we will set up the rates retention scheme and the detail of elements, including the tariffs and top-ups. While what we are talking about will be later than is ideal, the system stacking up behind it is that local government will have practically all the information it is going to need, just not the dots and crosses, by the time the settlement is announced. As I say, I do not take any exception to the fact that it has been drawn to our attention that the settlement will be late. It will be.
Lord McKenzie of Luton
My Lords, I thank my noble friend Lord Smith for his support for this amendment. He and the noble Lord, Lord Tope, and, indeed, the Minister are the voice of practical experience on local councils and are therefore particularly valuable. My noble friend Lord Smith referred to the fact that just this week we had further input into the system with the council tax freeze grant. It is interesting that the Secretary of State can find the money for a council tax freeze grant at the same time as lopping the best part of half a billion pounds off council tax support, but these are issues that I am sure we will come on to. The noble Lord, Lord Tope, said that it is the most difficult so far. I think we have to watch this space under the new system.
I accept that the noble Baroness has given us some further information on timing, but I would appreciate it if she would pick up the point made by the noble Lord, Lord Tope, about reviewing all the issues that we have raised so that we can have as complete an answer as possible before Third Reading, which is our last opportunity to deal with this.
The noble Baroness said that it would be as bad if we were staying with the current system and were not changing the system. The crucial difference is that what is happening under the new system is, if the Government have their way, going to be set in stone for the best part of seven years. I genuinely suggest that that is a different perspective and a particular challenge for all local authorities. Having said that, and on the assurance that we will be getting further information before Third Reading, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“Independent review of the local retention of non-domestic rates
( ) No later than three years after 1 April 2013 the Secretary of State shall cause to be undertaken a comprehensive independent review of the application and outcome of the local retention of non-domestic rates provisions.
( ) Such review shall include an assessment of the extent to which available resources are meeting the spending needs of individual authorities, whether baseline funding levels and tariffs and top up, remain appropriate and fair, and the extent to which the system is incentivising growth.
( ) The review shall include a recommendation as to what changes, if any, are required under Part 5, Schedule 7B LGFA 1988, in order to ensure local authorities have adequate resources to meet spending needs.”
Lord McKenzie of Luton
My Lords, this amendment requires the undertaking of an independent review of the business rate retention system within three years of its introduction. It specifically requires a recommendation about whether there should be a resetting of the system. We have later amendments—Amendments 79 and 81—that propose additional and alternative approaches to resetting. We recognise that the changes introduced by the business rate retention scheme represent a major change to the system used for the funding of local government, and it is, in part, a step into the unknown. The changes are being introduced at the same time as the localisation of council tax benefit, together with a cut in its funding, and so far as the overall resources for local government are concerned, the change is taking place against the backdrop of a sharp reduction in the overall local government spending control total, given a further twist in July’s proposition that government should hold back substantial funds to pay for the new homes bonus capitalisation and the safety net, not to mention the early intervention grant scheme.
There is a fundamental switch in method. Under the current system, the formula grant largely determines the extent of shares of government funding for local authorities and, while accepting that it is somewhat opaque, it has the considerable merit of reflecting local needs and resources in the allocation of grant. In the new world, the revenue support grant will play a diminishing role with the retention of 50% of the business rates being the driver of resources. Of course, not all local authorities have an equal ability to grow the business rate base. Areas such as Luton, which is highly developed with tightly drawn boundaries and significant unmet housing need, simply do not have the land available for the continuous development of additional business. It is accepted that the Government are seeking to rebalance resources at the outset of the scheme through the system of tariffs and top-ups, essentially comparing business rates collected with formula grant allocations. However, once set, it is proposed that tariffs and top-ups will not be changed or reset, other than uprated by RPI, until 2020 at the earliest.
The review which this amendment would introduce could cause an earlier reset than 2020, but would not inevitably lead to one. In that sense, it is more modest than Amendment 81, which would actually require a reset every three years to coincide with each spending review period. The Government argue that the longer the period between resets, the greater the certainty in the system and the greater the incentive. All other things being equal, there is of course some merit in this argument. It begs the question of how much incentive there is in the system in any event, given the complexity of its diverse components, and whether that incentive presents itself to all local authorities equally. Conversely, the argument for an earlier and shorter period between resets in part expresses the concern that the setting of the tariffs and the top-ups in the first place may not be fair to all authorities. Each authority’s starting point under the new system will be based on what their share of the overall funding available for 2013-14 and 2014-15 would have been under the current formula grant system but, of course, the formula has been flexed, for example, to increase allowances for sparse areas. We know that the LGA has expressed strong reservations about how the proportionate shares of business rates are determined, another key component of the calculation.
However, even if we accept for the purposes of debate that, at the start of the system, the Government have achieved their objective of no local authority being worse off as a result of its business rate base at the outset, and that there are adequate protections to ensure that all authorities can maintain services for local people—an assertion we reject—why would it follow that this position can be maintained by just uprating the tariffs and top-ups by RPI until a reset? The proposition would seem to take no account of changes to the data which feed the formula in the first place, population movements being but one. It is of course possible that the manner in which the central share is to be deployed will counter any negative redistributive effects of the system, but we have only silence on this issue beyond the first two years. I am not optimistic about that.
Faced with the prospect of limited opportunities for raising extra revenue from council tax, a further freeze, a 2% threshold on referendum provisions, increasing restrictions overall on local government expenditure control totals, the central share of business rates being increasingly deployed otherwise than through formula grant and therefore, inevitably, on the basis of needs, poorer local authorities will only be able to look to their top-up, which is fixed in real terms, and any growth that they can muster in their business rates to meet their expenditure needs. For some, the retention of a share of the business rate growth will be fine, but for those who do not have the same opportunity, due not to ambition or leadership, but perhaps just the geography of an area, and those who also have a higher percentage of their spend currently met from grants—the more highly geared councils—the problem will be compounded.
We know that draconian cuts are already making it near impossible for many councils to deliver adequate services. The growing demand for some of those services, adult social care in particular, will make matters worse.
I stress that the amendment also requires the review to look at the issue and the extent to which the business rate retention scheme is actually incentivising growth. There are concerns that the level of the local share, at 50%, is too low, and that the overall scheme, as I said, is far too complex to produce a real incentive.
Under the Government’s proposal that there should not be a reset until at least 2020, these challenges could be left unaddressed for at least seven years. This, I suggest, is far too long. We should at least be taking stock after three years of the system so that, if necessary, it can be recalibrated. It will doubtless be argued that the Secretary of State has the ongoing power to do this anyway. I accept that there is the technical power, but some independent review of how it is working should be a necessary safeguard. This is all we seek by this amendment. I beg to move.
Lord Smith of Leigh
My Lords, again I support my noble friend’s amendment. This Bill is a huge gamble. It is the most radical shake-up of local government finance since the poll tax. Noble Lords may think that if there had been a review of the poll tax, we would not have had the riots and the other problems which led to getting rid of it. My noble friend identified two fundamental issues. First, will the proposal enable the system to be fair? Will top-ups and tariffs work fairly for all authorities—those paying the tariffs as well as those which might be in need of top-ups? We need to know that. Secondly, will it be flexible enough to meet adjustments in the system when the pressures are bound to rise?
As my noble friend has said, this proposal is being introduced at a time of extreme turbulence in the world of local government. We have the reductions in public spending, which are bearing heavily on local authorities. The timing is not brilliant for that. We also are in a period of economic uncertainty. In Committee, the noble Earl, Lord Attlee, mentioned that local authorities should try to encourage business in their areas. Perhaps I may remind the House that that is what most local authorities have been trying to do for many years but under current circumstances it is very difficult.
Over the summer, noble Lords probably heard about the problems of JJB Sports plc, which is located in my authority, Wigan. It was once very profitable and employed a large number of people across the country. The head office and its staff were in my authority but clearly it will not be an employer for very much longer.
Again in Committee, I mentioned that the impact is not just on the private sector where fundamental changes are going on. In Greater Manchester, we have learnt of a review of the provision of acute hospital places. That will almost certainly lead to the closure of two, if not three, district general hospitals. District general hospitals are not only big employers in local areas but, through their ownership of land and property, they are major contributors to business rates.
Therefore, things can change by government policy. If we wait until 2020 for this review, there could be some significant shifts. An independent review is called for. The Government have put down some noble objectives behind the Bill. Let them see whether those objectives are being met and not run away from them.
Lord Williamson of Horton
My Lords, in this House we are perhaps tempted to call for reviews of many things that we have slight doubts about, and sometimes we have too many of these reviews. However, in this case I support the amendment. I note that later on the Order Paper we have Amendments 79 and 81, which go further than this. They would involve a three-year repeating look at the situation, whereas this amendment proposes that there should be an independent review after three years.
I support Amendment 4A because, as the noble Lord, Lord McKenzie, made clear, the situation between local authorities is not even. They have a differing ability to generate more resources from business rates. This is determined by a lot of factors which they do not control. The most obvious factor is geography. Another is that the business rates relate primarily to buildings and structures, whereas some authorities, if they were doing their best for the economy, might put their emphasis on economic activities such as IT and particularly tourism where they will have expenditure but will not necessarily generate more in the form of business rates. They will spend money on advertising, communications and transport and so on, but they will not get back much in the way of business rates because they are not putting up big buildings and nor are their citizens.
The result of what we have here running for seven years would be changes in local authorities’ resources, which would in due course have consequences for their services and council tax payers. That would vary considerably between the local authorities. I know that there is a biblical precedent for seven lean years and seven fat years, but if I was in the local authority and had seven lean years I would be pretty unhappy about it. It is therefore perfectly reasonable to have an independent look at this. The terms of the amendment are pretty moderate, and I hope that the Government will accept it.
The Earl of Lytton
I support this amendment in general. In doing so, I must declare an interest, as this is the first occasion on which I have spoken at this stage of the Bill, as a practising chartered surveyor and a member of professional bodies with a particular interest in the non-domestic rating system.
As the noble Lord, Lord Smith of Leigh, pointed out, we are in an era of most unparalleled uncertainty. One of the greatest areas of uncertainty relates to non-domestic property and its valuation. We have at the moment a valuation list that, as I have said at earlier stages in this Bill, is based on the peak year antecedent date of 2008. It is commonly understood that values over much of the non-domestic property world have fallen materially since then. Possibly the only exception is with supermarkets, which are popularly assumed to pay too little in rates—but I leave that to one side. My concern is with the small to medium-sized businesses that are faced with large rate bills. In the course of the last month, I happened to have reason to attend to a property in the Guildford area where the rent had been reduced by negotiation between landlord and tenant from some £15 a square foot to £5 a square foot, so that the tenant, on a 3,000 square foot building, was paying around £15,000 a year, while the rates payable were over £18,000 a year.
Decisions about the occupation of business premises are increasingly being made as a result of that in effect unavoidable impost on the property and the cost of occupation. Businessmen are now looking, as they did in the early 1990s, when we were here before, at the overall costs of occupation—the rent, the rates, the service charges, and so on. So if the one bit of the system that is not negotiable is the non-domestic rates, that leads to inherent instabilities in the process and a strong impetus to try to avoid that imposition by whatever means. It has ever been thus that when businesses or any other taxpayer feel that they are being unfairly treated and there is an unreasonable impost, things start to happen. There is no plumbing the depths of ingenuity that might be devoted to this particular problem by professional bodies, rate payers and accountants, as well as various other people, all of whom are concerned with the long-term financial well-being and possibly the very survival of the business.
Lord Palmer of Childs Hill
My Lords, I take a contrary view, as this amendment would add uncertainty to a situation that is already too uncertain. I believe that local authorities and the businesses to which the noble Earl referred want certainty most of all. They want to know what the rates are and roughly what local authorities will be able to retain. There will be a problem with valuations and the changes experienced by businesses. The noble Earl considered how the measure would affect businesses, but we are talking about the local retention of business rates by the local authority and how that affects that local authority’s expenditure. With respect, I suggest that the measure’s effect on businesses will be a problem whatever system we have: the current one or another. As the noble Earl rightly said, many accountants, surveyors and the like will look for ways to avoid paying taxes for all the right reasons, whatever the system. Therefore, this amendment would do no more than add further confusion and uncertainty to an already uncertain situation.
Lord True
My Lords, I take a similar position to that of my noble friend who has just spoken but I have a different perspective. I declare an interest as leader of a London local authority—the worst-funded local authority—which will be a tariff authority under the system put forward. One might therefore conclude that I would look forward to a review of these matters. In the unlikely and unfortunate event that the party opposite finds itself back in power, I take this amendment as a pledge that it will conduct a review.
I spoke at some length in Committee on the philosophy of these questions so I do not intend to detain your Lordships on the same issues now. My authority calculates on the basis of the information that has been provided so far. Through my noble friend the Minister I thank officials for their courtesy in contacting my officers. My authority currently expects to be about 17% adrift of our business rate target. We have absolutely no prospect whatever of growing business rates to get out of that hole, which is a continuation of a historic hole in which my authority has sat for a long time. That ought to lead me to say, “Yes, let’s have this review”, but, actually, that would be a rather mechanistic approach. I am not happy at all, as I made clear in Committee. Nor am I happy with the idea that there should be no reset before 2020. That position is absolutely unsustainable and there has to be a system whereby these matters are reviewed before then. I would like them to be looked at before 2013, as the amendment suggests. However, I thought that I heard my noble friend say in Committee that, although she would not be prepared to entertain an overall, general reconsideration of the system, there would be some kind of ongoing consideration of problems and issues as they arose, and there would not always be a flint-hearted, Treasury-style response, although there would be many such responses to questions that might arise.
I agree with the noble Lord, Lord McKenzie, that we need to know more, and I am grateful for the assurances from my noble friend that we will hear more. My feeling is that if we park this away and do not have a review until 2013, everyone will say, “Oh well, there will be a review one day”, and nothing will happen. We need an ongoing dialogue, and I shall listen carefully to what my noble friend says in response. I hope she will indicate that there will be flexibility and a continuing readiness to listen, not only before 2013 but after, and that she will agree that 2020 is not the date before which no move will be made.
Lord Tope
My Lords, my noble friend referred several times to a review in 2013. While I am sure that he would like to have a review in 2013—would not we all?—I suspect that he might have meant 2016, which is the intention of the amendment. A review in 2013 is not a practical possibility, even if it were desirable.
My noble friend also said—and I rather agree with him—that the amendment from the Labour Benches is possibly the first firm election pledge that we have heard from the party opposite. I must say that I took it in a slightly different way. Although we will certainly have a new Government, of whatever composition, by 2016, this amendment seems to be an expression of doubt that the party opposite will be in a position to have a review even if it wants one. I am not quite as confident as my noble friend Lord True regarding the Labour Party’s intentions here.
My noble friends on this side have made the point that a review may very well be desirable, and of course there are a lot of uncertainties in introducing something as far-reaching as this—of course there must be, they are unavoidable. The review would also come in uncertain times, to say the least. However, I very much doubt whether we need to have in the Bill a binding commitment to a review in 2016. As my noble friend said, it would introduce yet another uncertainty. People would say, “The review is going to come. What will it say? Shall we try and hang on for another year or two?”. A review may very well be desirable at some point. It may happen in 2016, before that or afterwards. If the Government of the day, whoever they are, were able to carry out a review at such a time, in such circumstances and with such terms of reference as they chose, I would caution against having it as a legislative requirement in an Act of Parliament, three years in advance.
Baroness Hanham
My Lords, I particularly thank my noble friend Lord Tope for his final comments. We do not believe that a set review, with a timetable in the Bill, is the right way to go about this. We all accept that there will be huge volatility in the system from now on, but I have to say that there would have been huge volatility whatever happened, because the whole economic situation is such that it is unavoidable that local government could escape any changes at all. Indeed, I well recall under Labour Governments and indeed under my own Government being outraged and upset as money swam away from us to other parts of the country. Therefore, the idea of local government money being different in different areas and changing from time to time is not new.
We do not think that the proposal to set the time for a review is sensible. As my noble friend Lord True said, this is something that will affect each local authority. They will have access, as they always have had, to the Government to make representations either individually or on behalf of themselves and others to discuss their needs and resources under the retention scheme. If they are significantly out of kilter, then of course the Government will listen to that, but I do not think that an independent review of the whole system is really going to achieve that. We will see how this goes and listen as and when any local authority wants to talk to us about it.
In addition, if we constantly—and even three years is pretty constant in terms of the changes being made—review the funding arrangements within the rates retention system, looking at tariffs, top-ups, levies and baseline funding, we will completely undermine one of the principles of the scheme, which is that local authorities should invest and benefit from growth. The noble Lord, Lord Smith, said that the scheme will differ across the country and that some places will find it easier than others but, generally speaking, I do not think that a review in three years’ time is going to help us with that. For this growth to work at all, we have to understand that the rewards from investment need time to take effect and a longer-term view will be necessary for the investments to be worth while. By resetting the system too often, you simply move away from that situation.
The Government are satisfied that they are setting out the scheme until 2020—that is, with a reset after seven years. That will enable local authorities to understand what they are able to keep and the proceeds that they are going to be able to initiate to stir up and improve local businesses and to get the economy flowing in their area. I hope the House will understand that we do not think it is right to set a formal time limit for reviewing the system, but clearly with a new system of any sort the Government are not simply going to say, “Well, there you are. Thanks, that’s it. We have no more interest in this”. That is clearly not the situation, and certainly we will always be open to having discussions as the scheme develops. With that, I hope that the noble Lord will feel able to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I thank all noble Lords who have spoken in this short debate. I am sorry but not surprised at the response from the coalition Benches. In particular, in responding the noble Baroness went back to the mantra of saying that the scheme has to run until 2020 to ensure that there is an appropriate incentive, yet at the same time she said that the Government are going to keep it under review. The purpose of setting down the need for an independent review after a fixed period is, in a sense, to force the Government of the day, whoever they are, to take stock of where things are at that point. Otherwise, should this Government continue after 2015, there is a risk that nothing will happen until 2020. I thought that the position taken by the noble Lords, Lord True and Lord Tope, was, “Yes, give me a review but just not now or just not by this mechanism”. If not by this mechanism, what will force the review? Of course, there will be ongoing discussions and representations—that is an automatic part of government business. However, that is not the same as saying, “We have a new system here”. We are placing great reliance on calculations done for tariffs and top-ups right at the start of the system and those will be locked in place for a minimum of seven years and potentially longer. That does not seem sensible to me.
That does not address the issues that the noble Earl, Lord Lytton, made about the volatility of what is happening in the valuation of property and the domestic rating system generally. Although we had some very valuable input from the noble Earl in Committee about what is happening in that system where it is administered by central government, the risks are increasingly with local government. To allow that to continue without some formal check for seven years, or maybe longer, does not seem right to me.
I am grateful for the support of the noble Lord, Lord Williamson, on this. As he said, other amendments go further, and this is a very moderate amendment. He made the important point that growing a local economy does not necessarily always equate with growing the business base rate, particularly as high-tech matters come into play.
As ever, the noble Lord, Lord Smith, put his finger on the issue. This is a huge gamble in the new system. We need to ensure that it is fair and flexible, and not only at the start of the system—and we would challenge that it is. However, even if it is, we need to ensure that fairness is maintained throughout the period before it can be readjusted by way of a reset.
The noble Lord, Lord Palmer, said that it was building uncertainty on uncertainty. I do not accept that. The right of the Secretary of State to change things on a yearly basis is embedded in the Bill. We know that the current one is not likely to do that and would not do it before 2020. This amendment simply requires the process to review the system along the way. We will not have a meeting of minds on this so I would like to test the opinion of the House.
Lord Ahmad of Wimbledon
“(ba) amounts received by the Secretary of State in the year under regulations under section 99(3) (treatment of surplus or deficit in collection fund) that make provision in relation to non-domestic rates,”
Lord Ahmad of Wimbledon
Before moving the amendment on behalf of my noble friend Lady Hanham, perhaps I may take this opportunity to thank the noble Lord, Lord McKenzie, for his warm words of welcome to the Dispatch Box. The noble Lords, Lord Smith and Lord Tope, talked of their respective experiences in local government. While I cannot claim to have many decades of local government experience, I can certainly claim to have a single decade, which I hope will add in some way to the wisdom of this debate. I am fully aware of the great experience of local government which exists in your Lordships’ House.
Throughout this year, officials in the department have met local government finance officers to discuss how to operate the rates retention system. During those discussions, local government has often asked that rates retention be operated in practice through a system currently used for council tax.
Under local government’s preferred approach, billing authorities will estimate their rating income for the coming year, and that estimate will then set the amounts to be paid to central government for the central share and to precepting authorities for their share. If the amounts actually collected in the year are different, those surpluses or deficits are rolled forward into future years. In this way, precepting authorities have certainty that their share of the income will not change during the year.
This method of operating the collection fund system is familiar to local government and has worked well for council tax. The draft regulations that we have placed in the House Library are based on the use of the collection fund in this way. The amendments ensure that we have the necessary powers and directions as to information and calculations to deliver the collection fund model wanted by local government through the regulations. With this explanation, I ask noble Lords to accept the amendments in this group.
Lord McKenzie of Luton
My Lords, I thank the Minister for his explanation of the amendments, with which I do not believe we have a problem. Perhaps he might just clarify a couple of matters. First, on the change from “paid” to “payable” in several places, I am trying to understand the extent to which the “payable”, being an accrual concept, takes account of losses on collection, bad debts et cetera. Obviously, “paid” is in a sense a cash concept, whereas “payable” is something a little different.
Secondly, Amendments 5 and 6 contain references to debits and credits required under Section 99(3) of the Local Government Finance Act 1988. Might the Minister expand a little more on that? Thirdly, on Amendments 26, 27 and 28, there is a switching of the definition to rating income from the local share. Perhaps the Minister could expand also on the reason for that.
Lord Ahmad of Wimbledon
I thank the noble Lord for his questions. I am sure that he will excuse me if I do not know the exact detail on some of the amendments, but I shall certainly ensure that he is written to in this regard. On “payable” and “paid”, I believe that one would refer to past circumstances and the other to the future, but, again, I shall ensure that the noble Lord is written to on the issues that he has raised.
Lord McKenzie of Luton
I am grateful to the Minister. If he could assure us that we might get that response before Third Reading, it would be really helpful.
Baroness Hanham
“(za) payments made by the Secretary of State in the year under regulations under section 99(3) that make provision in relation to non-domestic rates,”
Lord McKenzie of Luton
“( ) Such use for the purposes of local government in England must be on a basis which reflects the spending needs of local government and the resources available to it.”
Lord McKenzie of Luton
My Lords, this is a partial rerun of an amendment from Committee, because a significant issue remains in our minds, which is lacking in clarity. This is the use of the central share and the principles that will determine how it is to be applied on an ongoing basis. We understand and accept that the central share for 2013-14 and 2014-15 will be used for revenue support grant and that, for the first of those two years at least, the central share is likely to be insufficient to meet the full RSG amount and that it will need to be topped up. The RSG, as I understand it, is the spending control total minus whatever the local share is. The approach to the revenue support grant is one that we would recognise, have come to love and of course completely understand. It is not only an issue of the quantum of the central share but the basis on which it is to be paid.
Given that the revenue support grant becomes discretionary under the scheme, there would appear to be no criteria governing the distribution of the central share and nothing to say that it has to reflect the needs and resources of local authorities, which is what this amendment requires. The statement of intent issued in June this year by the Government makes clear that the central share will be used by central government, in its entirety, to fund the local government sector. Presumably that means that amounts currently met from any departmental dell can be met from the central share; for example, the dedicated schools grant. Is that the case and is that the intent? It is not a question of new money going to local government from the central share, which itself is money that is raised by local government.
We are close to signing off this legislation, which is why we seek as much information as possible at this stage on this issue in particular. This is particularly because of the Government’s stated intent that they do not wish to see a resetting of the system, at least until 2020, subject to the debate that we have just had. That is notwithstanding of course that we remain in the dark about how the central share is to be used other than that it is to be used for the purposes of local government in England. The fear is that, with further cuts in the offing, the revenue support grant will be diminished, so that the balance of the central share will increasingly be deployed on some other basis, whatever it is called. In particular, the concern is that the revenues raised by local government will increasingly be used to displace spending that is, and has previously been, met directly by central government. Although some of the funding from the central share, at least in the early years when payable by revenue support grant, will reflect the relative needs and resources of local authorities, there is no assurance that this will continue to be the position in the future, except to the extent of tariffs and top-ups going forward.
This amendment simply lays down the requirement that the use of the central share must be on a basis that reflects the needs and resources of local government. It is an opportunity for the Government to let us know now the basis and principles that they wish to see govern the application of this amount—what will determine which elements of government spending will be diverted through the central share, and presumably the local government finance report process, and what will be dealt with as now. I beg to move.
Lord Shipley
My Lords, I feel that this amendment is actually extremely important. I draw the Minister’s attention to a report by the Institute for Fiscal Studies, which has confirmed that councils in the north of England are having to cut spending at almost three times the rate of councils in the south. In absolute terms of course, many councils in the north receive more revenue support per head than councils in the south, and will go on doing so, but then their needs in many places are also greater. The principles of resource equalisation continue to matter greatly, if we are to meet need fairly across the country.
This problem of deeper cuts in the north would have occurred had a Labour Government been elected in 2010, not least because Labour had plans to dismantle working neighbourhoods funding, worth several million pounds a year to many councils. However, I support the aim behind Amendment 7, because it maintains the principle of allocating spending against need and against the availability of resources, which I fear is increasingly in danger of being lost sight of, given recent settlements.
I hope that the Minister will be able to accept the amendment, or at least indicate agreement to its spirit: to ensure that resource distribution reflects the principles of need and equalisation. If the Government do not give that commitment, it implies that they are no longer in favour of resource equalisation.
Baroness Hanham
My Lords, I thank both noble Lords for their contributions. I appreciate that the use of the central share is of concern and interest, particularly once we get through the next couple of years. Amendment 7 would ensure that the central share money would always be distributed on the basis of need. We have said that the central share money will always be returned to local government. The basis of the central share going to the Government is that it will then be used for local government. The question of need and special grants will be covered by the central share. That is basically what the central share will do. I cannot at the moment give the absolutely unqualified assurance that both noble Lords, Lord Shipley and Lord McKenzie, asked for on resource need equalisation. I am pretty sure that that is correct, but I will come back to them if there is any change to that.
I also confirm that the amount of revenue support grant in the system will reflect future spending reviews, so the Government’s view of the funding will be available to local government in advance. I hope that with that rather short explanation the noble Lord will withdraw his amendment.
Lord McKenzie of Luton
I am bound to say that I do not feel that we have made any progress on this issue as a result of that response. I am grateful for the support of the noble Lord, Lord Shipley, on the issue. It seems to me to be a core point about how this will work that the Government have some idea of what they are going to do with the central share. Yes, we understand that it will be returned on some basis to local government in England but, as I pointed out when I moved the amendment, that might just be diverting whatever resources go through the schools grant. At the moment there are some £30-odd billion, as I understand it, that could be switched for use in the central share.
With great respect, I do not find it satisfactory that we are still left substantially in the dark even about the principles to be applied, beyond any use for revenue support grant. We know that system, we know what it does, but we know that it will be discretionary not mandatory in future. That is in the Bill. I find that profoundly unsatisfactory. If the Minister said that she could say more at Third Reading, that might help me with my next move. If not, I am inclined to get this in the Bill, but I should like to hear from her first.
Baroness Hanham
My Lords, I have given an explanation of what the central share is. I understand that the noble Lord wants absolute specifics of what the central share will encompass and what it will be used for. I do not have those details. I assure him that he will have them well before Third Reading so that we can come back to it if necessary.
Lord McKenzie of Luton
My Lords, on that basis, I am prepared to withdraw the amendment on the proviso that if what comes forward does not really address the point, I will revisit it at Third Reading. I stress that it is not the detail of every pound, it is the principles that will underpin its use that I seek. I beg leave to withdraw the amendment.
Baroness Hanham
Lord Jenkin of Roding
Lord Jenkin of Roding
My Lords, before I move this amendment I should declare my interest as a joint president of London Councils and, like a large number of other noble Lords in all parts of the House, as a vice-president of the Local Government Association. There were lengthy debates in Grand Committee about the question of 50% of the amount of business rates being retained by local authorities. I therefore really make no apology for coming back to this issue. There have been references already, in the debates on earlier amendments, to the Government having made it clear that there will be no reset until 2020 and that therefore the main structure of the system will remain as it is.
First, I can deal very briefly with Amendment 10 because I want to direct most of my speech to the two other amendments in my name in this group, Amendments 13 and 14. When a similar amendment to Amendment 10 was tabled in Grand Committee, my noble friend explained that it was the Government’s intention to retain, as I have just said, the first reset date as 2020. That means seven years without a change. It is worth reading what she said on that occasion:
“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 … process”.—[Official Report, 3/7/12; col. GC 327.]
At first sight, that sounds like an attractive proposition, but the fact of the matter, as has already been indicated, is that there are considerable other uncertainties surrounding this.
If I may say so, my noble friend might have somewhat exaggerated the degree of certainty that the system in the Bill, and her plans for it, will actually produce. What she said is really not accepted by a number of local authority associations. Perhaps I might just refer to one. London Councils suggests that while the system of top-ups and tariffs might remain constant within the business rates retention element of the system, although the adjustment for revaluation may alter this, uncertainty will continue to exist around the total level of funding that local authorities can expect to receive under this system. It points out that this really is not ideal. We have of course had references to the problem of setting budgets, not just for 2013-14 but thereafter.
To some extent, this overlaps the proposition in Amendments 13 and 14. These amendments go to the heart of the policy that lies behind this part of the Bill. They highlight what appears to be a contradiction between the laudable ambitions of Ministers to transform the system in the interests of economic growth, on the one hand, and on the other of what seem to be the instincts of the government machine to retain a very firm grip on the levers of control. This is an instinct that I of course recognise but in this context deplore.
The aim of this debate and the amendments that I am moving is to elicit from my noble friend a statement of the continuing willingness of Ministers in the department to do battle against the inertia of Whitehall’s controlling instincts and to hold fast to the vision of promoting growth and development. These are arguments that we developed at some length during the debates on the Localism Act, with, I have to say, some quite tangible results—Ministers recognised that if you were giving local authorities a general power of competence, it was rather silly to have pages and pages of the Bill telling them exactly how to do it. I am not asking for the impossible here but simply for recognition that one must resist the tendency for Whitehall to control town halls.
A fundamental principle behind the localisation of the business rates is that local residents of councils that actively promote development will see the benefit of extra growth in the form of retained tax receipts. To put it simply, it is an incentive, and that is what it is intended to be. It makes very real for councils the basic economic truth that the state prospers only if the nation does. All government, not just local government, can spend only what productive businesses earn. I recognise at once that many councils already care deeply about promoting their local economies. The evidence for that is clear as they put effort into economic development through activities as diverse as the way they operate the planning system, build up the local tourism offer—that has been referred to—tackle local unemployment, find training opportunities for young people and maintain the effectiveness and attractiveness of the local high street.
The evidence also shows that communities that know that extra development brings extra funding for public services take a different attitude to what might otherwise appear to be difficult decisions—one thinks particularly of planning decisions. That is not just my own opinion or even some abstract economic theory; we have as evidence the DCLG’s own excellent analysis, overseen by Professor Henry Overman of the London School of Economics. That analysis calculates for us the precise incentive effects from retaining business rates locally. It draws on empirical economic studies and the current academic literature. It shows that on a middle-case scenario, and of course there are margins for variability on either side, the Government’s policy could generate an extra £10.1 billion of gross domestic product as the result of the incentive effect of localising just half the business rate revenue, affecting councils’ planning decisions. Half is what the Bill provides, of course, and is what is intended to remain in place until 2020.
However, the evidence shows something more than that. According to the Government’s analysis of that best academic literature, this incentive effect works in direct proportion to the share of the business rate that is retained locally. For every extra percentage share of the rate revenue localised, the gain in GDP increases too. The more of the rate revenue you localise, the more extra-economic growth you get as a result. As I say, this is the finding of the Government’s own analysis.
I come therefore to the point of the amendments. If the Government believe their own economic analysis and if they really want to see economic growth—I cannot think of any of us who would not want to see that—the economic argument is completely compelling: we should localise as much of the business rate as we possibly can.
However, that is not what my noble friends have chosen to do. Instead, the policy is to fix 50% as the central share of the rates which councils must continue to surrender to the Exchequer. One can only speculate on the reasoning behind the figure of 50%, which seems a suspiciously round number, but the effect is clear. The mechanisms required to impose the 50% central share will mean that the DCLG will need to continue to involve itself deeply and in detail in councils’ financial affairs for some years to come. Central government will be kept busy. More than that, to go back to Professor Overman’s research, if the local share is set at 50%, so is the growth incentive of the new scheme. Are we really happy to try to escape the current choppy economic waters by going at only half speed?
Amendments 13 and 14 challenge the way in which the central share arrangement in effect contradicts the commitment to growth that lies behind the scheme in this Bill. They would require the size of the central share to reduce progressively over time—I suggest a minimum of 5% a year—and the local share to increase accordingly. They take the Government’s policy intention at face value and in the light of their own published economic evidence, and impose a framework that would allow them, over time, to increase the growth incentive built into the new system and as a consequence to increase the economic output of the nation. That seems to me to be a thoroughly desirable objective.
My noble friend has said on other occasions that 50% would not stay for all time; it is the Government’s hope, as they put it, that as the economic situation improves they will be able to increase it. But if increasing it earlier actually helps to put the Government’s economic policy firmly on to a growth trajectory, we really ought to consider that. When local authorities are looking for an opportunity to get a bigger than 50% share, that share should grow over a period of years. They are asking for something that is not only in their own interests but in the interests of the nation at large. I beg to move.
Baroness Thornton
My Lords, I shall speak to Amendment 37A, tabled in my name. I need to declare some interests. I am the honorary secretary of the All-Party Group on Social Enterprise, which I founded in 2001. I am a patron of Social Enterprise UK, and the ambassador for Spota, the trade body for a sports and leisure trust and an associate of Social Business International. The last two are modestly remunerated and are listed in the register of interests. I am a founding chair of Social Enterprise UK, a former trustee of Jamie Oliver’s Fifteen Foundation, Social Enterprise London and Training for Life, and I am a lifelong member of the Co-operative movement. Noble Lords will understand that with that background I know quite a lot about charities and social enterprises, but I have to say that local government finance does not rank highly among my areas of expertise. That is why I am so pleased that my noble friend Lord Smith and the noble Lord, Lord Shipley, have agreed to support this modest amendment because they certainly understand much more about the detail of business rate relief.
What we are considering today is not a partisan issue. It is in no one’s interests for the development of trusts to provide sports facilities, theatres, museums and libraries at the local level to be discouraged in any way, so it is disappointing that the issue has not been resolved since the Committee stage. When we last discussed this in Grand Committee on 5 July, it was clear that the Minister anticipated that it would be. She said:
“I understand the question of sports and leisure clubs is still under discussion, and perhaps we may be able to deal with that at a later stage”.—[Official Report, 5/712; col. GC 407.]
Lord Shipley
My Lords, I declare my interest as a vice-president of the Local Government Association. I agree with my noble friend Lord Jenkin about the share of the business rates. If the central share continues at 50%, there is a disincentive to local growth by local authorities. The series of amendments tabled by my noble friend, in favour of an escalator, would result in local growth being driven more strongly. His amendment should therefore be supported.
I will concentrate on Amendment 37A. It is an extremely important amendment, the implications of which were discussed in Committee; I had thought at that time that they would have been resolved by now. I have been a strong supporter of the concept of the big society. There is enormous value in promoting volunteerism, trusts and social enterprise. I have been encouraged by the positive approach of the Government to this. However, we have to assist and encourage volunteers and not put barriers in their way, so I am genuinely puzzled by what is still contained in this Bill when these problems were indentified in Committee. Sports and leisure trusts, as we have heard, the Association of Independent Museums and Social Enterprise UK have all pointed out that the incentives to keep such public services in-house, in local authorities, or else to privatise them, will become more pronounced as a consequence of the Bill. Discussions over the summer seem not to have solved the problem. The amendment does.
Under the Bill, there will be serious consequences for expanding trusts, for the creation of new charitable trusts and for the outsourcing of running council buildings which might be better run locally by a charitable trust structure. This is because the incentives to create trusts and mutuals will be reduced and local authorities will have less incentive to grant discretionary business rate relief.
On charities and charitable trusts, councils will be compensated for only 50% of the cost of a new or additional charitable concession on business rates. Currently, all of the mandatory cost—that is, 80% of the total business rate and 25% of the discretionary cost—has been met by central government. In future, that central contribution will drop to 50% and local authorities will have to meet the other 50%. Yet local authorities retaining services and facilities in-house will pay only 50% of the business rate cost because they will split the business rate income 50/50 with the Government. Previously, local authorities have paid 100%, all of which has gone to the national pool.
The incentive for councils to create their own trusts will be reduced. Such new trusts will have to meet additional business rate costs that keeping provision in house would not. Similarly, local authorities that outsource the operation of facilities and services to a private contractor will keep 50% of the business rate that these companies pay; previously, of course, 100% of these payments went to the national pool. There is therefore in this Bill a financial incentive to privatisation.
Trusts can involve significant transfer of buildings and facilities, and unfunded additional costs need to be avoided if more charitable trusts are to be encouraged. We really must give them the means to do the job. The solution is for the costs of mandatory and discretionary concessions to be met by the central share of the business rate revenues where there is an additional net cost to a local authority. Such a decision would remove barriers to trusts being formed.
I hope that the Minister will take on board these concerns and prevent significant additional costs arising for local authorities if they wish to transfer facilities and services to trusts. The proposal is of course revenue-neutral overall and I hope that we can secure all-party agreement to a different way of proceeding prior to Third Reading.
Baroness Eaton
My Lords, first, I must declare an interest as an elected member of Bradford Metropolitan District Council. Along with many Members of your Lordships’ House, I am also a vice-president of the Local Government Association. The amendment in the name of my noble friend Lord Jenkin is an extremely valuable contribution to the consideration of this Bill and I am very happy to support it. I should make it clear that I support the localisation of the business rate and congratulate Ministers on having pushed this policy through against much resistance. I campaigned for this change as chairman of the Local Government Association and I am pleased to see it becoming a reality.
However, today we are addressing a typical problem faced by a Government who are trying to get ideas from the drawing board of policy into the workshop of implementation when there are so many eager Civil Service helping hands to pass through on the journey. The amendment forces us to face up to a basic difficulty with the Government’s decision to set the central share of business rates at 50%. It is a problem we can even put a figure on thanks to the Government’s own evidence. As we have heard, we have a £10 billion problem.
My noble friend Lord Jenkin explained fully, competently and clearly the Government’s analysis of the scheme and the economic value of localising the business rate. I am sure that the Minister will explain what in this case trumps growth. But we have a few indications from the Government already about their reasons for setting the central share at 50%. For example, the Treasury is explicit that it will use the central share mechanism in order to continue to impose control over how much councils can spend, even though that spending is self-evidently funding itself without any impact on the national taxpayer or the deficit. This control has nothing to do with the Government’s deficit reduction plans, which are entirely necessary and correct. The expenditure and the local revenue balance out without any impact on borrowing. As I see it, it is control of the amount of spending for control’s sake alone.
With such a large central share the opportunities will be legion over coming years for the Treasury to try to share responsibility for programmes which are currently funded by the Exchequer into the ambit of the central share, to which the noble Lord, Lord McKenzie, has already referred. That would go beyond mere control into a zone where local ratepayers are being asked to shoulder burdens that previously would have been funded by national taxes. Perhaps I am being cynical but I feel that this would give me great concern.
The local share escalator proposed by my noble friend Lord Jenkin is a very elegant solution to resolving this problem over time. It would recall the Government to their localist and growth-focused principles, and bring the Bill closer to its advertised purpose. I am very happy to support it.
Lord Smith of Leigh
My Lords, I have a couple of amendments in my name and one which I share. Before I turn to them, I should like to comment on the significant amendment moved by the noble Lord, Lord Jenkin of Roding. I agree with much but perhaps not quite all of what he said. He is right about what it reveals about the Government’s attitude to localism, which is schizophrenic at best. In some ways they push very much on to local authorities and at other times they want to put controls in. I think that this is one on which the Treasury is not willing to trust and give up control entirely to the local authority. He is absolutely right that there should be, as I am sure there is, a consensus in this House about the need to achieve economic growth. We come from every different angle. I look at the level of youth unemployment in my area and of unemployment generally and, clearly, I want to achieve growth. My own local authority is working together with colleague authorities in Greater Manchester—perhaps I should have said that I am chair of the Association of Greater Manchester Authorities, too. We put a lot of effort and resources into trying to achieve growth. At a time when local funds are being squeezed, this is discretionary spending; it is not something that we have to do as local authorities, but we do it because we believe that it is important.
Lord Tope
My Lords, I intended that my name should also be added to the amendments tabled by the noble Lord, Lord Jenkin. Due to some mishap, that did not happen, but the noble Lord knows that and that I support the amendments that he has moved so ably. He and my noble friend Lady Eaton and others have said much that needs to be said and, perhaps unusually in this Chamber, I do not intend to repeat it all.
I would like to add a little context to remind noble Lords of the situation here. Ever since the business rate was nationalised some 20 years ago, successive opposition parties pledged themselves to denationalise or localise it, and it has not happened. At last the coalition Government announced that they were going to localise business rates, and I think it is fair to say that that met with a general if cautious welcome across the whole of local government. It was something that all parties in local government had long wanted and argued for, and at last it was going to happen. As it became clearer and clearer exactly what was going to happen and what the intentions were, the wisdom of a cautious welcome became clearer and clearer. It was not quite as good as it was thought to be. And then the announcement came that, at least in the first year, the set-aside would be as much as 50%. For most that came as a shock rather than just an unwelcome surprise. That is the context in which we approach the amendments today.
Local government on all sides is understandably suspicious and doubtful not of the Government’s good intentions but of their fulfilment, and that the 50% rate may remain for ever. Therefore, the amendments that the noble Lord, Lord Jenkin, has proposed are a very good way, although it might not be perfect, to introduce some certainty into what I am sure is the Government’s intention: that it should not remain at 50% but should escalate so that one day we reach that dream world where 100% is retained by the local authority, when it will be a real incentive. I hope that the Government will consider very carefully the amendments and most particularly the intentions behind them.
I want to say a few words from personal experience in support of the amendment proposed by the noble Baroness, Lady Thornton. I was very interested to listen to the noble Lord, Lord Smith, talk about the Wigan Leisure and Culture Trust. In common with many local authorities, my own has considered, for perhaps a little too long, a similar sort of culture trust for the services for which I had executive responsibility right up to May. It is therefore no surprise that I am still involved with this area. We are a little way yet from a decision on it—there are inevitably many pros and cons with these things, and things to be considered—but one key aspect is the question of the NNDR. I could almost go so far as to say that that is a deal breaker or a deal maker. It makes a critical difference to the finances of this operation. Therefore, I support this amendment very strongly and what has been said by the noble Baroness, my noble friend Lord Shipley and the noble Lord, Lord Smith of Leigh. Indeed, I want to know more about the Wigan trust.
I hope that if what we have been discussing is an unintended consequence—I want to believe that it is—active consideration is being given to what to do about it. As I said, I have a personal interest in the sense that this issue is very live with my own local authority. I know that it is equally live with a lot of other local authorities. We need to know, particularly at this budget time, what the position will be by next April.
Lord True
My Lords, I wish to follow that point and add my support to the principle of the amendment put forward by the noble Baroness, which I am afraid I saw only when I came down to collect the relevant papers before coming to the Chamber. From what she has said I understand that there is continuing dialogue on the issue. I may be reading wrongly paragraph (b) of the noble Baroness’s amendment, which states, “arising between resets”, but it appears to generalise beyond the specific issue raised of mandatory and discretionary rate relief. I am not sure whether that is the case but it is something that we would have to discuss. However, I endorse everything that has been said by the noble Lords, Lord Smith and Lord Tope, and others. I discussed this issue with two other London council leaders only yesterday.
One of the principles of wishing to promote social enterprise and trust approaches is to support the principle of local involvement, localism and local understanding. If a perverse disincentive is being created quite by accident to offload institutions to far more remote bodies or else to keep the matter in-house, that would be a great pity. In the case of mandatory rate relief, I do not know how it will evolve, but if we are to have an increasing number of charitably run academies and other institutions, these are issues over which local authorities have no control whatever under existing legislation.
I hope that the noble Baroness will not press the amendment at this stage, although I do not think that is her intention. I hope that my noble friend will listen to the points that have been raised, and to which I add my voice, as this Government have a proud record in supporting localism, social enterprise and charitable activity. I do not think that anyone, certainly not in my noble friend’s department and I would hope not in others, would wish unintentionally to cause any disadvantage. Therefore, from these Benches I add my voice in support of these amendments in principle.
Lord McKenzie of Luton
My Lords, my noble friend and I have tabled Amendment 15 in this group, to which I shall speak briefly. I shall then comment on the other amendments in the group. Amendment 15 is by way of a short probing amendment to follow up a point which I think is still outstanding from Committee. It seeks to determine how the rates generated from the central rating list will feature in the business rate retention scheme. Essentially, it is asking how local government gets the benefit of this measure, if at all. Does it feed into the central share, which is then paid back through certain processes or does local government get half of it up front through the sharing arrangement? Of course, the central list is the list on which utilities find themselves because they cannot very easily be distributed among a range of individual authorities. It would be good to know how local government gets the benefit of the business rate on central list items.
I wholeheartedly support Amendment 37A in the name of my noble friend Lady Thornton, as do all other noble Lords who have spoken on it. An interesting facet of the background to the amendment is that we are reminded, when considering this system, that local authorities can be both payers and collectors of the business rate. That is part of the issue that the measure is highlighting. The solution of seeing mandatory relief on an ongoing basis as a new burden to be met from the central share seems to me absolutely right. I think the intention is that that should be the position between resets and that resets would be the point where you would have a squaring up and look at aggregate business rates and proportionate shares. Therefore, that would be a point at which you could recalibrate tariffs and top-ups and that would deal with the matter. I think that that was the intention behind casting the amendment in that way.
The noble Lord, Lord Jenkin, has, as ever, brought forward some interesting amendments. We cannot support all of his amendments but we can certainly support some. He took us back to the economic analysis which underpins much of the Bill and the benefits of localisation. Although the relevant report was quite heavily caveated, that does not deny the thrust of the points which the noble Lord made. Nevertheless, as my noble friend Lord Smith said, much of the analysis might have referred to a previous era. I think that the starting point of the analysis was a look at what happened in reverse, when the business rate was nationalised and the system went from being a local one to a national one. The noble Lord, Lord Tope, was ecstatic about localism having been achieved. I had understood localism to be not only about getting a share of what you collect but also about having some influence on the rate of tax. I thought that that was the noble Lord’s ambition at one stage. I am not sure whether it is his ambition now.
We have an issue with Amendment 10 in the name of the noble Lord, Lord Jenkin, which basically says that after a period of time there will be no central share. Apart from the fact that I do not think any Government will totally relinquish attempts to influence local government, the amendment raises the issue of how you rebalance the potential inequities that might arise from relying just on the business rate shares. That issue also applies to Amendments 11 and 12, particularly Amendment 12.
I entirely support Amendment 13. In fact, it coincides with the proposition that we make in Amendment 16, which basically means that you should lock in the local share so that it can never be less than 50%. I think the noble Lord’s amendment does more than that, but it achieves that objective as well.
As regards the ratchet, if the proposition is that there should be opportunities for the local share to increase, we can support that. I know that the noble Lord is not necessarily particularly wedded to the mechanistic approach but is addressing the concept. However, when you change the local and central shares, logic demands that you have to recalibrate and reset the system. I do not know what the Minister’s notes say about that. However, I think that once you start doing that, you have to revisit tariffs and top-ups. That follows logically from the way the system is constructed. That is tied up with the other components of the system and the debate we have just had about what happens to any component of the central share and how that is deployed back to local government. Will it be done on a basis that has regard to resources? On one basis, we might be content to see a higher central share than other noble Lords would prefer; not as high as 50%, but not necessarily right at the extreme edge of what might be achieved.
I say to my noble friend Lord Smith of Leigh that there is absolutely nothing wrong with trying to keep down the price of beer, although I accept that doing it via the rates might be pushing one’s luck a bit. Again, we have heard the voice of experience, particularly in the context of the amendment of my noble friend Lady Thornton. The concept of trying to give local authorities a three-year indication about the funding they can have must make sense. The current system is an improvement on what existed in the past. The requirement that there be consultation with local government on the setting of the shares must be absolutely right.
My noble friend’s Amendment 17 requires that the local government finance report specify the central and local shares and that it be laid before the House of Commons,
“including the full details of the consultation undertaken”,
in respect of that determination. That seems a modest but entirely reasonable amendment and it has our full support. I hope that the Minister will feel able to support it.
Baroness Hanham
My Lords, this debate has taken us through several areas. Sometimes the groupings are more interesting than the actual outcomes. We have a raft of issues that have come into the debate.
It might be worth, at the outset, repeating something that I said in Committee. All of us here who have had anything to do with local government have for years said, “Let us keep the business rate and bring it all back”. That principle—the fact that local government will retain the business rate—has been accepted in the Bill. However, the noble Lord, Lord McKenzie, made the good point that you would never have been able to keep it all. Some form of an equalisation scheme was always going to be needed, because some authorities receive far more business rate than others. The concept of keeping 100% in every local authority was clearly never going to work.
What has been accepted—and we have accepted it in our discussions today—is the principle, which was never there before, that local government should retain the business rate. Therefore, that leaves us with a movable feast and brings us back to the issue of the 50% retention. We have made it clear, and I made it clear in Committee, that the 50% is there at the moment entirely because of the economic situation. We have to make sure that local government is part and parcel of the resolution of the difficulties that we face. We hope that the deficit will be short-term. It does not feel much like that at the moment, but once the economic situation begins to improve, we hope that there will be a reduction in the percentages. Obviously, I cannot say today that the figure will reduce from 50% by 5% year on year. I am not completely sure that my noble friend Lord Jenkin thinks that that would happen. All I can say is that if we get improvement in the economic situation, we will be in a much stronger position to ensure that that 50% share gradually reduces.
I am not sure whether the noble Lord, Lord McKenzie, is going to debate the next amendment, regarding the heads or tails side of the coin. The answer is yes, so we will come back to that.
Amendments 12 and 17 would require specific consultation with local government on the central and local share. That is an important point. I assure the noble Lord, Lord Smith, that the draft local government finance report will set out the central and local shares, and that in itself has to be consulted upon. Therefore, there will be consultation—actually, a specific consultation within the finance report. I am not sure that anything is to be gained by adding anything to what is there at the moment.
The process of setting central and local shares has to reflect the Government’s ability to protect the interests of the taxpayer. I have said that at length and I reiterate it. It is essential that a judgment is made about the macro economy before any changes can take place. More generally, we have made clear that we would not anticipate central and local shares changing from year to year. At the moment it is going to be a ratio of 50:50, until something happens to change that, and the reset will be in seven years. We would expect the central share to remain unchanged between 2013-14 and 2020. That takes in the reset and the setting of the tariffs and top-ups. We would also expect the tariffs and top-ups to remain within the seven years. As we have discussed, if there are particular problems, it is clear that the Government will need to take them on board.
Also regarding the 50:50, and as laid out at the moment, the Government and local authorities, within the seven years and the split shares, will have a much better idea of how much there will be by way of support—what local authorities’ financial obligations are to central government and what they can receive from it. Local government has wanted that for a long time—the ability to know, year on year for a reasonable length of time, what their income and expenditure, and likely contribution to the Government, are going to be.
Again, I am not sure that Amendment 11, tabled by the noble Lord, Lord Smith of Leigh, will be necessary. Local authorities are going to know reasonably confidently what their central share will be for the next seven years until 2020. I think that he accepts that because I see him nodding.
In talking to Amendment 15, the noble Lord, Lord McKenzie, raised the issue of the central list—the element of business rates that is collected directly by central government from local government and network properties. Income from the central list will be paid into the main rating account, as provided for in paragraph 2(1)(a) of new Schedule 7B to the 1988 Act, as inserted by Schedule 1. I am sure that the noble Lord wanted to know that and that Hansard will be delighted. That will happen. Along with the other money paid into that account it will be used solely for the purposes of local government. As I said when responding to previous amendments, the central share comes back to local government. What we have not bottomed out—and I promise to do so—is exactly what that central share contains. That is what we will do before the next session. The central share will also be used to fund the revenue support grant and/or specific grants in the first couple of years.
The existence of £1.2 billion of central list money collected every year was also taken into account in the macroeconomic judgments that went into the Government’s announcement of the 50:50 share. It is not and should not be taken into account in the arithmetical calculation of the estimated business rates aggregate—I know that the noble Lord wants to know this also—that will determine the total funding in the rates retention scheme, as sought by Amendment 15. If this were to happen, it would simply increase the total aggregate rates income and, paradoxically, would thereby reduce the revenue support grant available to local government. We have heads and tails again.
I hope that I have given a reasonable explanation of why we will not be able to accept these amendments. I am not sure whether my noble friend Lord Jenkin will be persuaded to withdraw Amendment 10, but I ask noble Lords not to press the other amendments on these subjects. However, I hope that he will at least understand my explanation.
In 2012 we held technical consultations to explain to local authorities that they will be fully compensated for both the mandatory and the discretionary relief that they currently give at the point that the scheme is set up. I refer to the amendment of the noble Baroness, Lady Thornton. In addition, local authorities will be compensated for any new mandatory reliefs through the “new burdens” principle. The point has been made by the noble Lord, Lord Smith of Leigh, and others that the setting up of trusts, at the moment and in the future, would form a new burden. However, in line with the general principles that risks and rewards under the scheme would be shared between central and local government, the costs of any changes in the amount of mandatory discretionary relief given by local authorities will be shared. That point was made by the noble Baroness—that the 80% was fully funded by government in the past but now it will be shared 50:50.
We are undoubtedly aware of the concerns that have been raised by authorities about the funding of reliefs, particularly the mandatory relief—we have had that response in the consultations. We will consider the position further before taking a final decision later this year. If the noble Baroness is asking for discussions, I shall be happy to talk about this further between now and the next session if that would be helpful. If we were going to change the arrangements, we think that we could do so through secondary legislation, so let us see where we can get to with that. On the basis that we will have further discussions, perhaps I do not need to go any further into the benefits or otherwise of the amendments, and I look forward to talking to the noble Baroness in the next week or so.
With those comments, I hope that my noble friend Lord Jenkin will feel able to withdraw his amendment.
Lord Jenkin of Roding
My Lords, I am extremely grateful to all those who took part in this debate and, in particular, to a number of my noble friends, as well as the noble Lord, Lord Smith of Leigh, who were able to support my amendment concerning the escalator. However, there is an interesting parallel between the two Front Benches: they accept the matter in principle but do not want to be pinned down to a timetable. I understand that. I understand that the timetable that we built into Amendment 14 would, if it became part of the Bill, require further legislation if it were going to be departed from, so I do not think that we can possibly advance on that.
However, the main purpose of moving the amendment has been accepted. My noble friend has reiterated her support for the principle of the progressive increase in the local share of the business rate to be retained by local authorities, but, as she said, she would prefer that to be a movable feast rather than a fixed escalator. I understand that.
With regard to the amendment very ably spoken to by the noble Baroness, Lady Thornton—she was kind enough to ply me with a number of quite long papers in support of it—if this matter is currently being discussed between the noble Baroness and her supporters on the one hand and the Government on the other, it seems to me that that is the right way to proceed. I support the Local Government Association when it raises the question of affecting competition between in-house and out-of-house services. The LGA says—and I agree—that this must be on the basis of cost and not on the basis of some sort of tax break. I am not sure how far the noble Baroness was arguing that case but if one is going to do it in-house, rather than contract it out or use the services of a private contractor, it has to be on the basis of fair competition. I understand that.
Returning to the question of a steady increase in the local share, I think, if I may say so, that my amendment has achieved its purpose. There has been a very clear statement from the Government that they are in favour of this. We shall hold them to that over the years ahead because there is no doubt that local authorities would love to see that. They do not want to be pinned to feeling that the local share has to be 50% and no more over a period. Having said that, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“The local share must never be less than 50% of the business rates aggregate.”
Lord McKenzie of Luton
My Lords, I think that I can be brief because this follows on from the debate that we have just had. Amendment 16 seeks to enshrine in primary legislation that the local share must never be less than 50% of the business rates aggregate. Therefore, it is entirely consistent with Amendment 13, to which the noble Lord, Lord Jenkin, spoke a moment ago.
In Grand Committee on 3 July, the noble Baroness, Lady Hanham, declared in response to an extensive debate about central and local shares that,
“it would be imprudent to presume that there might never be a time when we might need to increase the central share”.—[Official Report, 3/7/12; col. GC 327.]
The import of that was, I think, to increase it beyond 50%. We have just had a good debate about how the business rates should be shared and about the strong desire, which we support, for the local share to be higher than 50%. Perhaps I may say to the noble Lord, Lord Jenkin, that my reticence about the formulation was not necessarily due to the mechanistic approach; it was a question of whether you can just change the central and local shares without having to address all the other ramifications and components of the system. That arises in respect of another amendment in the name of the noble Lord. I would not assert that that is the case but there is an issue there that needs to be resolved.
Of course, the difficulty in setting an increasing share, by a ratchet mechanism or otherwise, is that the shares cannot be seen in isolation. They have to be considered together with all the other components of the business rate retention scheme—the tariffs and top-ups, the levy and safety net. There is also the important question of how the central share is to be deployed. The system has to seek to promote an incentive for growth as well as ensure that local authorities have adequate resources to carry out their functions. However, it clearly also, from the government perspective, provides a mechanism to control local government expenditure, and we have seen the latest devices for taking yet further resources from local government.
The Government are controlling expenditure next year at a level above the local share by using all the projected central share—and more—in revenue support grant. However, all the indications for the future are that the revenue support grant will reduce or disappear, so the Government cannot use that mechanism to control expenditure. Their reach in this respect cannot go beyond the central share. Therefore, the prospect of increasing the central share and reducing the local share implies particularly draconian expenditure controls on local government, perhaps even if there were dramatic growth in the business rates over the period.
Therefore, the amendment does not mandate increasing local shares, although there is a strong argument for that, which we would support; it simply prevents the local share reducing beyond what the Government see as a fair starting point, and we believe that that ought to be locked into the legislation. I beg to move.
Lord True
My Lords, I do not know whether my noble friend intends to support this but I think that if she did it would be very odd. We have just heard from her a clear statement of the direction of travel in which the Government wish to go. She sees 50% as the minimum and we are going further. Given the state of the economy that we have inherited and still have—and there has been agreement across the House on many things during the course of the Bill—limiting, in effect, the discretion of any Government in the future in this way in respect of local government finance would probably not be, if I may borrow the word, a prudent step. Therefore, if the party opposite presses this amendment, I certainly hope that my noble friends will not be gulled into that Division Lobby.
Baroness Hollis of Heigham
In that case, what does localism mean if its revenues are available for raiding by central government when it chooses?
Lord True
My Lords, I have made a general statement of principle about public finance. I do not think that anyone who has heard my contributions to debates on this or other Bills relating to localism would doubt that I am very strongly committed to it. I would like the direction of travel to be as my noble friend has indicated. I am simply saying that ring-fencing local authority provision for ever in this manner does not seem an appropriate way to tie the hands of any future Chancellor from whatever party.
Lord Tope
My Lords, that intervention reminds me that almost exactly a year ago we had quite a long debate in your Lordships’ House about what localism is. My noble friend Lord Greaves and I tried to set down, at some length, what we think localism means and it rapidly became clear that localism means what you want it to mean. In the ensuing 12 months, it has become increasingly clear that localism means what you want it to mean. Increasing pronouncements from central government—from my Government—demonstrate that point.
I am sure that there is no one involved with this Bill and no one in local government who does not agree with the view expressed in this amendment. In that, I include the Minister, who will speak for herself. I am sure she cannot say that but I am equally sure that she agrees with the views expressed. I even dare to go so far as to say that I suspect that the Secretary of State would agree with the view expressed. However, we all have to recognise the reality that no Minister in any Government will accept this amendment. The Treasury would simply never let them. That is a hard reality of life and one that I personally regret very much. Before today, the Minister has gone a considerable way, and I hope she will in a few minutes’ time, when she replies, make it very clear to us that the genuine intention of the Government is that it should not and will not go below 50%. I was not at the Local Government Association conference—I am one of the few people here who is not a vice-president—but I read that the Secretary of State, Mr Pickles, was urging delegates there to continue campaigning for a higher share than 50%. Perhaps that was just a populist appeal at the time but I like to think that that was the sentiment.
I think we all share the view expressed in the amendment. If we are honest, I think most of us realistically understand that no government Minister, of whatever party or coalition, would be able to accept that amendment. I am grateful to the noble Lord, Lord McKenzie, for moving the amendment and allowing us to press the point even further. I think the point is well and truly made and accepted. When the time comes, I hope that he will feel able to withdraw the amendment.
Baroness Hanham
My Lords, I thank my noble friends behind me for their contributions. In the middle of the previous amendment, I asked the noble Lord whether he was going to move this one but I am very happy, now that he has done so, to reiterate that the Government’s intention is to increase the 50% share of local authorities as soon as there is economic acceptance that we can do so.
As other noble Lords have said, I am not sure that the noble Lord, Lord McKenzie, who was in government and who knows all about the difficulties, would believe at this stage of the Bill that we would be able to restrict the future ability of a Government if the situation ever arose—I hope that it never will and that things will get better rather than worse. I do not think that we could tie the hands of future Governments or of this Government with any statement that the share would never go up. I hope that the noble Lord will accept that. I reiterate that, as and when we get to a situation in which we can see the economy going in the right direction, further consideration might be given to that. I hope that the noble Lord will be able to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I thank the noble Baroness for her reply and other noble Lords who have spoken. It seems that we are all on the same page, going in the same direction and all in agreement that the local share must not be less than 50%, but somehow we do not want to commit to that in legislation. Primary legislation does lock Governments in but not for ever. The noble Lord, Lord Tope, said that the Treasury would not allow it. If we passed it into legislation, the Treasury would have to accept it, would it not? The point of putting things into primary legislation is to stop the Treasury’s controlling instincts.
Lord McKenzie of Luton
Yes, my Lords. As my noble friend has advised me, that depends in large measure on how the Liberal Democrats use their votes in the other place. They are meant to be part of this Government and have some strength there. I think we have enough on the record. I am half tempted to press the matter to a vote, but I will accept what has been said and leave the matter there. I beg leave to withdraw the amendment.
Lord Smith of Leigh
Lord Smith of Leigh
My Lords, the local government finance report will be a really important document when it comes out. My two amendments in this group apply to that. In Amendment 18 we come back to this magic date of 30 November, but some date needs to be suggested. It is fundamentally important to local authorities that we should understand what is in this document within a reasonable time so that we can make budgets for future years. I recognise that it is a challenge for the department and the Secretary of State to agree to a particular date. Nevertheless, this is something that the department should aim for. We want reassurances that, due to the nature of this report, we will not be deferred even further down the line, and that we will be able to make a judgment on what each local authority’s needs will be and what the budget will be for the following year.
I do not intend to go through the detail of Amendment 73, but with this probing amendment I am trying to tease out from the Minister a good indication of what is contained within the finance report. I presume that most of these things would be in there, but I would be very grateful if she could confirm that.
Lord Jenkin of Roding
My Lords, I have three amendments in this group and I can put them swiftly to the House. Amendments 57 and 58 deal with what is to happen if there is a surplus, or what the Bill calls “the remaining balance”, left over after the tariffs and levies have been made. The Bill, as it stands, says:
“The Secretary of State may by regulations make provision about the basis (‘the basis of distribution’) on which an amount … is to be distributed”.
It seems to me that it should be a matter not for the Secretary of State but for the local authority. Therefore, Amendment 57 sets out a slightly longer procedure which involves a consultation with the local authority about what is to happen to that remaining balance—whether it should be retained or distributed—and the basis on which it should be distributed.
Secondly, it requires that to be dealt with through the local government finance report. That is what gives Parliament a say on this. Essentially, this seeks to provide, first, an opportunity for local authorities to express their views through consultation and then for Parliament to have the final say. It is not the end of the world, but I think that this is going in the direction in which we would want to move. If you are to have these elaborate procedures, it seems to me that parliamentary control is important.
Amendment 78 proposes a new clause, which again requires consultation. The clause states:
“The Secretary of State may not make any changes to national business rate policy which impact on local business rate yields without first consulting with all interested parties”.
For the life of me, I cannot foresee circumstances in which a Government would want to do this without consulting. It seems that this is a perfectly sensible procedure to put in. If you are going to change the basis on which business rates are collected, it should be a matter for consultation.
We had a brief discussion when debating the previous amendment in which the noble Lord, Lord McKenzie, referred to the nationalisation of the business rates. I was responsible for that policy. When they were going to denationalise and decentralise, the main point was that businesses were charged rates by local authorities and had no vote. Therefore, business rates have been set nationally ever since. However, if the national rate is to be changed, there should be a process of consultation. I hope that the Government will be able to accept that.
Lord McKenzie of Luton
My Lords, we tabled Amendments 79 and 81 in this group. Amendment 79 revisits a debate we had in Committee concerning resetting—indeed, it revisits a debate we had earlier today. It requires arrangements whereby the Secretary of State must formally report on representations received from local government about resetting the system, and the outcome of the Secretary of State’s deliberations on such representations. As we have discovered, resetting is a contentious issue. The Government have made their position clear: not before 2020. However, the fear is that the system introduced will not remain robust over that period and that many councils will find themselves in difficulties.
As the Minister asserted in Committee, it is accepted that receiving and considering representations is a fundamental part of government work. The amendment seeks some transparency in the process. It seeks the formal detailing of representations so that the scale and scope of any concerns are clear. It also requires exposition of the Government’s position and reasoning in response to such representations. The Minister will doubtless say that such an amendment is unnecessary if there is an undertaking to deliver what we seek. Perhaps I would agree, but I will make it clear that we seek a process that spells out for Parliament the representations that have been received and the Government’s decisions thereon.
Amendment 81 is more specific and requires a reset every three years, to coincide with each spending review. This will entail an assessment of relative resources and of the needs of local authorities. The exclusion of the specific issues that need to be assessed—deprivation, unemployment, child poverty, the number of looked-after children, adult social care and so on—emphasises not only the important role that local government can play, but what is at stake under these proposals. I offer that amendment in particular for noble Lords who expressed themselves in favour of resetting but did not feel able to sign up to a formal review process. It might be more palatable to some noble Lords; I will be interested to know whether it is.
We thoroughly support Amendment 18, moved by my noble friend Lord Smith. We have added our names to Amendments 57 and 58, and support the noble Lord, Lord Jenkin, in tabling them.
Amendment 73, tabled by my noble friend Lord Smith, calls for the Secretary of State to compile each year and for each authority in England a raft of information about resources, including estimates for subsequent years. As ever, it seems an entirely reasonable proposition. We also support Amendment 78, to which we added our names. This is about changes to national business rate policy that impact on local business rate yields, and the requirement for consultation. It is absolutely essential that it takes place because the ground has shifted on this. Local authorities are at risk; they are not just collectors of the business rate now. They are at risk from the consequences of how much is collected, how the system operates, and any policy changes that central government may feel inclined to make. That is a particularly important issue.
Lord Tope
My Lords, I will say briefly that the mishap to which I referred earlier has occurred again with these amendments. My name should have been on the amendments of the noble Lord, Lord Jenkin. It did not happen, but my support is there. Again, I will not repeat what he said. He made the case very well, and we are all keen to hear what the Minister has to say in response. My noble friend Lord Jenkin again confessed to being the man who nationalised the business rate. I think that we have all long since forgiven him for the errors and misdeeds of his youth. He has more than compensated for them in the years since.
Baroness Hanham
My Lords, I will start with Amendments 73, 79 and 81. I realise that that may seem slightly perverse given how they are laid out in the list, but it makes reasonable sense. Amendment 73 requires the publication of a raft of information that is already published by my department and is part of statistical releases that are all published as well—and will be in future. To say explicitly in the Bill that they must be published and laid out would be a quite unnecessary duplication. All the information will be set out in each year’s local government finance report, and so will be available to all those who want it.
Amendments 79 and 81 seek to ensure that needs are explicitly taken into account after the system is up and running, by providing for authorities to be able to make representations calling for a reset, and for the Secretary of State to make a reassessment of the system every three years. We discussed much of that and I will not again go through the arguments I made. I just need to say that to enable an effective incentive for economic growth, we need to give local authorities certainty about the length of time they will keep the rewards from generating local economic growth. That is the answer I gave earlier and that is what I say again. Frequent resets on the system would undermine this, to the detriment of the national economy and of local authorities. I hope that in due course noble Lords will not press those amendments.
Amendment 18 seeks to ensure that the local government finance report must be laid before the other place by 30 November each year. The amendment is both impractical and unhelpful. When discussing the previous group of amendments, I explained that the local government finance report cannot be laid this year until after the Autumn Statement. The Chancellor recently announced that this would take place on 5 December. I also recognise the complications of this for local government budget setting, regardless of whether the rate retention scheme is introduced. I will not go back over the arguments presented to the House a moment ago, and I hope that the noble Lord, Lord Smith, will withdraw Amendment 18 on the basis that we have already discussed the issue.
Amendments 57 and 58 were tabled by my noble friend Lord Jenkin, as well as by the noble Lords, Lord McKenzie and Lord Beecham—and by my noble friend Lord Tope in absentia. They seek to reverse the changes made in the other place to the way in which the Government will distribute surplus levy income. I sympathise with the intentions of the noble Lords who tabled the amendments. The Government’s intentions were very similar when we introduced the Bill in the other place at the beginning of the year. However, after further consideration we recognised that specifying the basis for distributing the surplus levy in the local government finance report, as opposed to in regulations, was not advantageous for local government. Therefore, in responding to the amendments, I shall go through in some detail the advantages of the Government’s approach. I hope that my explanation will address the concerns of noble Lords and underline why I will not be able to support their proposed approach.
I remind the House that the levy on disproportionate gain is a key part of the business rates retention scheme, the safety net in particular. The money collected will be used for one purpose only: to fund safety net payments to local authorities that see significant reductions in their retained business rates incomes. The Government have always made it clear that, if any levy collected is not required to fund the safety net, it will be completely redistributed to local government. We are committed to this principle and we will not hold on to larger and larger surpluses.
Baroness Hanham
Lord Jenkin of Roding
“(4A) Regulations under this paragraph and under paragraph 8 may, subject to such adjustments as may be specified in the regulations, define the non-domestic rating income of a special authority by reference to the amount which would be payable to it in respect of the year under sections 43 and 45 if—
(a) the authority’s non-domestic rating multiplier and small business non-domestic rating multiplier for the year were equal respectively to the non-domestic rating multiplier and small business non-domestic rating multiplier for the year, so far as relating to England, determined in accordance with Part 1 of Schedule 7, and(b) the authority acted diligently.”
Lord Jenkin of Roding
My Lords, this amendment deals with the situation of the City of London as a “special authority” for non-domestic rating purposes; that is, of course, a statutory expression. Perhaps it would help if I explained a little of the background to the City of London’s particular treatment for non-domestic rating purposes.
I should say at the outset that this is a probing amendment; I do not wish to divide the House on it. It is intended to provide an opportunity for the Minister to clarify why this Bill does not refer expressly to the City’s position and to confirm that this will be dealt with in regulations. Previously it has always been a matter of primary legislation. Now, if the Government can tell me that that will happen, it will be in regulations.
The background to the City’s particular treatment arises from the fact that the City is overwhelmingly a place for doing business and not for living in. Fewer than 7,000 individuals are currently on the constituency register of electors, and of course the number of actual households is far lower than that. So the council tax base is, in relative terms, very small. On the other hand, the City currently provides local services to more than 300,000 people who come in every day to work.
The starkness of the imbalance between the local services needed to meet the needs of the daytime population and the income generated from the residential tax base is illustrated by the effect on the City of London when the community charge, the predecessor of the council tax, was introduced. Without special provision for the City, its residents would have had to pay an annual charge of £8,700 each, equivalent to about £19,000 in today’s money. In other words, the general formula simply did not begin to work, given the City’s unusual demography.
It was for this reason that arrangements were made to treat the City as a special authority under that legislation. This had the effect of reducing the amount payable by residents to realistic levels. The cost of local services was to be met in part by businesses through a rate retention mechanism, with the City also being given the ability to levy a small local business rate. That is the system that operates today and which is, I think, a matter of general consent from the point of view both of the commercial population of London and of the residents.
I hope that it will be apparent from this short explanation that the City of London regards the retention of this arrangement as important, not least for the safeguarding of its 7,000 residents. However, there is no reference in the Bill whatever to the City as a “special authority”. The DCLG, my noble friend’s department, has indicated in its technical consultation document, published in July, that the Government do not intend to disturb the status quo. My amendment tries to reflect that. I gather that the arrangement is assumed to be dealt with later by regulations, but it is not at all clear why the status of the City as a special authority has been omitted from the Bill. Accordingly, my amendment seeks to reinstate the existing references to “special authority” contained in the Local Government Finance Act 1988.
The question is whether the arrangement should be in the Bill or whether it is sufficient to deal with it by regulations. It has always been in the Act and the City will be disappointed if it is not going to be in this Bill today. The amendment gives the Minister an opportunity to confirm that the situation is indeed as I have described and perhaps to indicate to the House why a reference to it has not been included in the current Bill. I beg to move.
Lord Ahmad of Wimbledon
My Lords, I am grateful to the noble Lord, Lord Jenkin, for raising this amendment, and I hope that I can provide him with the reassurances that he seeks. I have knowledge at a personal level of the City and its qualities and recognise the benefits that it brings to our country.
As the noble Lord notes and so aptly describes, under the current system the City of London is allowed to keep extra resources from business rates. First, the City has the power to raise additional funds from its business rate payers through a higher non-domestic multiplier. This is known as the City of London premium. Secondly, the City is also allowed to retain £10 million of extra business rates income. This is known as the City of London offset. These extra resources are given to the City in recognition of its low council tax base.
Her Majesty’s Government agree that the City of London should be able to retain in full the City offset and any extra revenue that it can generate from the City premium. We made this clear in this summer’s technical consultation, to which the noble Lord referred. Moreover, we have placed in the House of Lords Library the draft Non-Domestic Rating (Rates Retention) Regulations 2012. The regulations will determine through Schedule 1 the income to be included in the rates retention scheme. Paragraph 1(2) of Schedule 1 states that the income of a special authority, which also means the City of London, should be calculated on the basis of the national multiplier and not the special authority’s multiplier. The same paragraph states that the calculation of income should be reduced by the value of the city offset, which is around £10 million as I previously stated.
Paragraph 1(2) of Schedule 1 to the draft regulations will therefore ensure that any additional revenue from the City premium and the City offset will be retained in full by the City of London. I hope that this clear statement of government policy, together with the draft regulations to which I have referred, gives the noble Lord the reassurance that he and the City of London require. I invite him to withdraw the amendment.
Lord Jenkin of Roding
I am very grateful for my noble friend’s very clear and specific assurances on that basis, but I am sure that he will understand that the City is a little upset that it is being dealt with through subordinate legislation whereas hitherto it has always stood on primary legislation. However, if the Government have made up their mind that that is how they are going to do it, so be it, and I have no doubt that the City authorities will come to terms with it afterwards. However much we may be trying to rebalance the economy, the City is such an important part of it that the authorities should always recognise that this arrangement must be preserved if it is going to be able to perform its role for the benefit of the very large number who come in every day and work there. I beg leave to withdraw the amendment.
Baroness Hanham
“( ) This paragraph is subject to regulations under paragraph 7A.”
Baroness Hanham
“( ) about the making of a payment by a billing authority to the Secretary of State or vice versa where— (i) a calculation of a payment under paragraph 6 is made by reference to an estimate of an amount, and(ii) it is subsequently determined that the actual amount is more or less than the estimate.”
Lord Jenkin of Roding
“(3) The regulations must make provision to ensure that, where—
(a) a billing authority is required to make a repayment or credit by regulations made under paragraph 2(2)(j) of Schedule 9, and(b) the requirement is the result of a relevant alteration of the authority’s local non-domestic rating list,the amount of the repayment or credit is credited against subsequent payments by the authority under this paragraph.(4) A relevant alteration for the purposes of sub-paragraph (3) is an alteration made under section 55, which was—
(a) an alteration of the rateable value of a hereditament shown in the list,(b) made on the grounds of an inaccuracy in the list arising from a change in the matter mentioned in paragraph 2(7)(e) of Schedule 6, and(c) attributable to a general change in the level of demand for, or supply of premises of a given use or occupation within the locality of the hereditament.(5) The regulations must make provision to ensure that, where—
(a) a billing authority is required to make a repayment or credit by regulations made under paragraph 2(2)(j) of Schedule 9,(b) the requirement is the result of a relevant alteration of the authority’s local non-domestic rating list, and(c) the authority has made a payment under paragraph 6(2) or 8(1) as a result of the relevant sum having been treated as forming part of the authority’s non-domestic rating income for the year,the amount of the payment by the authority referred to in paragraph (c) is repaid to the authority or credited against subsequent payments by the authority under the same paragraph.(6) A relevant alteration for the purposes of sub-paragraph (5) is an alteration made under section 55, which was—
(a) an alteration of the rateable value of a hereditament shown in the list, and(b) not made by reason of a material change of circumstances which occurred on or after the day on which the list was compiled,and the relevant sum for the purposes of sub-paragraph (5)(c) is the sum in relation to which the repayment or credit referred to in sub-paragraph (5)(a) is required to be made.”
Lord Jenkin of Roding
My Lords, the amendments in this group, of which Amendment 24 is the first, are very long. I hope that the House may bear with me while I explain what they are all about.
How to deal with errors in the valuation list and with the sometimes long-delayed impact of appeals was referred to in Committee, as was the question of how these would be dealt with in the face of the new system of local retention of business rates. I use the term “appeals” to describe all successful proposals by a ratepayer to reduce the rateable value shown for his property in the local rating list, and thus his liability to pay. In essence, the amendments are intended to protect against a large transfer of risk to local billing authorities. It is important to make the point that these are matters beyond the control of the local councils. That is the background to what the amendments are about.
As part of local retention, the effects of valuation appeals in a billing authority’s area would, unless there was some express provision to the contrary, directly affect the finances of the authority. Appeals are a particular concern because of their prospective and retrospective effects. They tend to take a long period to conclude and can therefore relate to circumstances which may have arisen some years previously. Therefore, the reduction in rateable value is often then backdated by several years. As a result, the authority is faced not only with a reduction in future income but with the immediate need to make backdated refunds, and consequent effects on cash flow.
It is, of course, inherent in the notion of local retention that local rating authorities will be exposed to some volatility and risk to which they would not be exposed in a system of wholly centralised distribution as we have had hitherto. But there are certain sources of risk to which it would not be fair to expose individual billing authorities, even as part of a system of local retention.
The appeals with which I am concerned are of two types. The first are appeals where the value shown in the rating list was, for whatever reason, inaccurate when the list was made. I shall refer to this category as “initial inaccuracy” appeals. The second type is where the value has become inaccurate as a result of a general movement in the local property market since the list was made. These are sometimes called “market movement” appeals.
The initial inaccuracy type of appeal is fairly straightforward and can be dealt with quite shortly. Such appeals arise in a wide variety of circumstances. The central point for the present purpose is that the compilation of local rating lists is in no way the responsibility of local billing authorities. It is conducted entirely by the Valuation Office Agency, which is, of course, an agency of central government. Therefore, local billing authorities have no control over the accuracy or otherwise of the lists. This being the case, it would seem plainly unfair if a local billing authority were to find itself out of pocket by reason of some inaccuracy for which it was not responsible. That is the basic point of principle embodied in these amendments. I make clear that the amendments in relation to initial inaccuracy, and appeals of that kind, would not enable billing authorities to gain any benefit from any inaccuracy in the rating lists. They would not have any windfall from being able to retain the local share of overpaid rates. The amendments simply seek to ensure that billing authorities are not left in a worse position than they would have been if the list had been accurate to start with.
Three elements are needed to protect them in this way. First, where the billing authorities pass on half the revenue that is collected to central government—the central share—and some of that revenue later has to be refunded to the ratepayer after a successful appeal, of course, in those circumstances, the Government must refund the billing authority for the share that was passed to it. Otherwise, the billing authority would be out of pocket and the Government would be left with a completely undeserved windfall.
The second element is where the billing authority has to make backdated refunds, which means the system in past years has relied on an overgenerous assessment of the authority’s financial situation. In other words, the authority’s top-up will have been too low, or its tariff too high, because the calculation of the authority’s baseline—the revenue expectation, which is taken as the starting point for the authority under the new system and which determines the level of its top-up or tariff—was influenced by an inaccurate rating list. Where the appeal succeeds, a backdated correction of the position between the ratepayer and the billing authority will always follow. Of course, it is only fair that this must be accompanied by a backdated correction in the position between the billing authority and the Government. Otherwise, the authority would be disadvantaged through an inflated calculation of its expected revenue.
Thirdly, for much the same reason, the authority’s top-up or tariff for subsequent years should be adjusted to take account of that reduced ability to raise revenue in the future. An authority’s baseline is calculated by reference to the local rating list. Where an inaccuracy is revealed, it is right that the authority’s baseline be adjusted to take this into account. Otherwise, their entitlement will continue to be calculated on an erroneous basis.
I hope that the House will agree that really that is absolutely straightforward. It may be the intention of the Government to deal with these points through regulations. Of course, I have to raise this as an amendment on the Bill, simply as a matter of procedure, but I am looking for some assurances on that.
The second type of appeal, on market movements, raises rather more complicated issues. I will briefly explain how this can give rise to appeals. It is not the basic intention behind the rating system, where alterations are meant to deal with immediate, physical changes to properties and their surroundings. The broader economic developments in the locality are meant to be taken into account only every five years, in the revaluation. However, the line between the two is blurred by reason of the general movements of the market, as a reflection of the principles of supply and demand, which is obviously manifest in the rate of occupancy of certain types of property in a given area. The interpretation of the valuation tribunal has been that pronounced changes in levels of occupancy amount to the sort of significant change that gives rise to appeals, even though the effect is, in truth, just that of a market fluctuation.
This is likely, by its very nature, to affect a large number of similar properties at any one time. Liabilities for the authorities affected can be large and immediate. The threat is particularly severe in those areas that contain high concentrations of homogenous commercial property. The City, again, is an obvious example, but I understand that there has been a striking instance in Leeds, which has a thriving commercial district at its centre. It is a risk to which all billing authorities are exposed, to one extent or another.
It is not immediately obvious, as with initial inaccuracy, why market movements should be excluded from the scope of the risk borne by the local billing authorities. I understand that, but it could be perfectly properly argued that local property markets are a reflection of the local business environment, for which billing authorities are at least in part responsible and which they ought to have an incentive to improve. However, this is not the path the Bill takes. The system has been designed so that market movements will not form part of the incentive for local billing authorities. The scope of the incentive—and of course, conversely, the risk—has been confined to the direct consequences of changes resulting from the addition or removal of properties from the list.
This is evident from the Government’s approach to revaluations, which are the primary way in which general movements of rental values affect a billing authority’s revenue. The Government have stated that they intend to neutralise these effects in the local retention scheme by adjusting the top-up or the tariff of the authority. The rationale for that appears in the response of the Government to the consultation of the local government resource review. The reason given in paragraph 4.6 of the government response, published by my noble friend’s department last December, is that to allow the effects of revaluation to fall within the scope of the retention scheme,
“could lead to local authorities experiencing turbulence in their budgets as a result of revaluation changes which are, for the most part, out of their control. Allowing the impact of revaluations to feed through into the business rates retention scheme could result in significant changes to the income that authorities retain from business rates through no fault of their own”.
I accept that. It is obviously right. However, exactly the same principle requires that appeals founded on market movements should also be excluded from the risks faced by local billing authorities. It does not matter, for present purposes, whether the premise that such factors are largely out of the control of local authorities is right or wrong. What matters is that the principle adopted by the Government from the passage that I have just quoted, in such clear terms, should be applied consistently and fairly. If it is wrong that billing authorities should face adverse effects from local market movements through the mechanism of revaluation, it appears equally unfair that they should do so simply because it has been discovered through the mechanism of appeals.
As a further point, which should make that inconsistency particularly invidious, market movement appeals are made only, by definition, by the ratepayer. There is no mechanism to do it the other way around. It is a particularly risky downside for billing authorities—a large transfer of risk to local authorities with no commensurate prospect of reward.
In relation to this type of appeal, the amendments again have two strands. The first deals with the retrospective effect of appeals and requires the Government, in effect, to indemnify billing authorities against any refunds they are required to make as a result of backdated market movement appeals. The second addresses the prospective effect of appeals and requires that a billing authority’s top-up or tariff be adjusted in future to counteract the loss of revenue resulting from a market movement appeal.
In fairness to the Government, they have made some movement in response to the concerns about appeals. Initially, they seemed to take the position that the effects of appeals would simply form part and parcel of the increased volatility that would naturally face billing authorities in a system of local retention. In Grand Committee, and in the Government’s technical consultation, this position has now been modified, which is very welcome. The historical incidence of appeals will be taken into account when determining the revenue expectations of local government in England as a whole. However, in my view and that of those who are advising me, that does not go far enough to meet the concerns. The losses incurred by an individual authority will arise to a large extent from one-off circumstances that will be difficult to predict with accuracy. The effect is that billing authorities will be left facing the consequences of factors entirely outside their control. The amendments would put in place a system ex post facto to the actual losses suffered by individual authorities. That would seem to be the fairest way to proceed; that is what ought to be done.
Lord McKenzie of Luton
We have tabled Amendment 82 in this group, to which I will speak very briefly because it has effectively been covered in the subset of the amendments spoken to by the noble Lord, Lord Jenkin. It deals with refunds of non-domestic rates in circumstances where the rates were collected and paid over in a period prior to 1 April 2013 but where, under the new system, an authority has to reimburse a business rate payer on appeal. Our amendment states that there should be reimbursement in the first case from,
“undistributed business rates at 31st March 2013”,
and then from the central share. I take this opportunity to ask the Minister: what is the level of the undistributed business rate at 31 March 2013? A letter before Third Reading would be fine.
Amendments 24, 37, 38 and 40 are extensive and complex, and I know that they have been pursued by the City of London. I am grateful to the noble Lord, Lord Jenkin, for securing a briefing which certainly helped our understanding of what it seeks to do. As we have heard, it seeks to address what is argued to be an inequity in the current business rate retention scheme proposals arising in respect of valuation appeals. As we have heard, they form two types of appeal in particular: those arising from error from an initial valuation being too high; and those arising from market movements such as a general fall in the local property market.
The amendment proposes a three-part solution for the impact of the initial valuation appeals. For any business rates collected and passed over to or shared with the Government, there should be a refund to local authorities which have had to fully reimburse the ratepayer. Those should be very straightforward. Secondly, top-ups and tariffs should be adjusted to reflect lower incomes from the past. Thirdly, top-ups and tariffs should be adjusted for the future to reflect lower business rate income. That is the proposition, and a similar approach is suggested for market property movements.
The case for neutralising the effect of market reductions, as the Government propose for market revaluations, seems entirely reasonable. My uncertainty, without having had the opportunity to work through this in great detail, is whether the express remedies relating to the adjustments of top-ups and tariffs can work as suggested. While the legislation would allow adjustment for individual authorities for those components, the system envisages calculation of aggregate business rates and proportionate shares. Recognising changes to some local authorities would imply changes to the whole way in which the formula works. Obviously, the process of resetting would cover that, but its timing cannot be driven by the outcomes of appeals. The issues raised by the amendments are real, but I look forward to the Minister’s response on the particular solutions proposed.
Baroness Hanham
My Lords, I thank my noble friend Lord Jenkin for explaining his long amendments so succinctly. I hope that I can be succinct in response; I can see people looking at their watches. We have recognised the question of appeals from the outset. As early as the summer of 2011, we recognised that the rate retention scheme would have to accommodate the volatility that exists in the business rate system.
My noble friend gave us all the notes and half the answers, so some of this will be repetition. The technical paper to which he referred, published in August 2011, looked at the question of the volatility of the rating system, such as from rating appeals, and considered how it should be treated in the rate retention system.
Rather than seeking to categorise in some way all the many thousands of alterations to the waiting list made each month, we proposed a general safety net to protect authorities from large reductions in their income, whatever the reason for it. Almost 80% of the respondents to the consultation agreed with the general safety net approach, so that is what we have adopted in the Bill. Conversations with local government are still going on about the issue; they went on throughout last year. We continue to explore whether it would be possible to isolate specific types of alteration to the rating list, but we have not seen any proposals—even in the amendments tabled by my noble friend—which would adequately address the issue in a fair way while maintaining a reasonable share of risk and reward between local and central government. Noble Lords will recognise that appeals can go either way. You may end up quids in on one appeal and quids out on another, but a local balance can be struck from that.
The amendments precisely illustrate the problem as, taken together, they would pass to central government all the risk associated with most alterations to the rating list, including all alterations to the current compiled rating list. They would leave central government carrying most of the risk on business rates while allowing local government to pick up all the rewards when the rates go up. That does not strike the right balance, but our discussion with local government has not found any better formulation than we have here at the moment. That is why we are proposing in the Bill a general safety net to protect local government income from alterations to the rating lists, whatever the reasons for that change. The safety net will work on the basis of the baseline.
There was mention of transition. We recognise that when the rate retention scheme commences there will still be historic alterations to be made to the rating lists. Many of these alterations, including additions for new buildings as well as reductions from appeals, will be backdated into years prior to 2013. While this is all part of the system that we will localise from next April, we appreciate that not all alterations have been captured in the baselines when setting up that system. We have therefore promised that some allowance should be made for appeals when setting it up. To deliver on this promise, we will adjust the starting position for local authorities so that they have extra financial headroom for changes to the rating list, such as from appeals—and that will be in the baseline. We will set out the size of this adjustment in the draft local government finance report. The adjustment will provide extra cash for local government to manage its appeals.
I accept that the matter of volatility in the rating system is a challenge for the rate retention system. As I have said, it is a matter we have recognised from the outset. We have been and remain in discussions with local government throughout the passage of the Bill. The combination of a general safety net and an allowance for appeals in the set-up of the scheme seems to provide a reasonable solution and the right balance of risk and reward. My noble friend has laid out at great length the problems which London Councils, in particular, may still see but I hope that I have demonstrated that the Government have listened very carefully to what has been said and that there is a solution here which will be fair to just about everybody. I hope that my noble friend will be able to withdraw his amendment.
Lord McKenzie of Luton
Before the noble Baroness sits down, can she deal with the point about the undistributed rates at 31 March and what the quantum of that is?
Baroness Hanham
I apologise to the noble Lord but I think that when he asked the question he anticipated that that is actually quite detailed. It is not a figure that I have just got in my head, so perhaps I may write to him to give it.
Lord Jenkin of Roding
My Lords, my noble friend has made it very clear that these matters are going to be dealt with in regulations. There will therefore be the opportunity to consider those regulations in draft and if necessary, to negotiate. As I understand it, the City authorities have been negotiating with my noble friend’s department for some time on this. This is not a new thing, but there still has to be an opportunity to try to reach a sensible agreement. I understand the point that my noble friend has made about not loading the whole thing on to government, but that agreement has to be fair to both parties. Having heard that, however, I do not think that I should talk any longer and I beg leave to withdraw the amendment.
Baroness Hanham
“Regulations about deductions from central share payments7A (1) The Secretary of State may by regulations make provision for the deduction from a payment to be made under paragraph 6 by a billing authority to the Secretary of State of an amount to be determined in accordance with the regulations.
(2) The regulations may, in particular, make provision for the determination of an amount to be deducted to be made by reference to the operation in relation to the billing authority of section 47 (discretionary relief).
(3) The consent of the Treasury is required to regulations under this paragraph.”
“( ) The regulations may not have the effect that the total amount payable by a billing authority under the regulations for a year exceeds the billing authority’s local share of its non-domestic rating income for a year.”
“( ) about the making of a payment by a billing authority to a major precepting authority or vice versa where—(i) a calculation of a payment under regulations under paragraph 8 is made by reference to an estimate of an amount, and(ii) it is subsequently determined that the actual amount is more or less than the estimate.”