Council Tax (Benefit Claimants)

Tuesday 29th January 2013 Westminster Hall

16:45

[John Hemming (Birmingham, Yardley) (LD)]

I am pleased to serve under your chairmanship, Sir Roger, and I thank Mr Speaker for allowing such an important debate.

A single person on jobseeker’s allowance or income support gets £56.25 a week if they are under 25 or £71 a week if they are over 25, but the Welfare Reform Act 2012 means that those people’s income will fall about 56p or 71p behind inflation next year. Some councils are proposing to charge them £3.55 a week, or even more, for council tax. Birmingham city council intends to ask for 20% of the full amount from people on a subsistence income.

The financial position in western countries is bad. Between the fourth quarter of 2011 and the fourth quarter of 2012, UK GDP grew from an index of 102.8 to 102.9. People who have not looked at the source data think that the economy flatlined, when it in fact crawled up a single tenth of an index point, but the consequences are much the same. I have argued for some time that the high price of oil, and hence the high price of energy, will reduce economic activity. Unless we see a material reduction in energy prices, we will continue to have a stuttering economy.

That affects the public finances, because tax revenue is anaemic and more people are out of work. To keep sovereign debt interest rates under control, we need to control public spending. Unless there is a very high economic spending multiplier, additional spending will not result in a sufficient increase in tax revenues to allow a reduction in borrowing. Little of the fiscal debate concerns the key issue that we are in fact borrowing to keep up revenue spending, and that there is no space for additional spending. Furthermore, we must reduce Government spending to reduce the deficit and show sufficient commitment to keep gilt interest rates down. It is important to remember that every one percentage point on gilt interest rates increases costs by more than £10 billion a year in additional cuts or additional taxes.

The welfare bill cannot be immune to savings, although the £3 billion-plus arising from the 2012 Act is small in comparison with the deficit. I supported that legislation, although I am concerned about what will happen to the cost of living, and we may have to revisit that either if there is greater than expected economic growth—that currently looks unlikely—or if the cost of living goes up by more than expected.

Historically, local government had a great ability to increase central Government financing merely by putting up the council tax, because a major proportion of council tax was paid by central Government through council tax benefit, with an increase of the council tax resulting in an increase in central Government funding. The total central funding was around £5 billion; in Birmingham, it was about a quarter of council tax revenues.

We needed to put tight controls on central Government spending, but there also needed to be a change in the relationship between councils and the central Government in the operation of council tax benefit.

[Sir Roger Gale (in the Chair)]

Order. I am sorry to interrupt the hon. Gentleman. He does realise that he can speak until 5.15, does he not? The time has been extended.

[John Hemming]

Thank you, Sir Roger. I am trying to ensure that I can make my speech and allow time for interventions, but I will slow down a little.

On council tax benefit, it may be that that relationship can be changed, but I would expect it to be needed for at least a decade. Any additional funding could be only by discussion, not through automaticity, as has previously been the case. The old system gave people such as Sir Albert Bore a local hand in George Osborne’s central Government pocket.

Thereafter, local councils will have the difficulty of a 10% cut in that support, but they will have the ability to raise additional costs from empty properties, flexibility as to how to provide support for people on lower incomes and the offer of grant support, which would be £2.1 million for Birmingham. There is an argument that it is a good idea for everyone to contribute something towards local government spending. A contrary argument is that it is silly for all of someone’s income to come from benefits and for there also to be an additional tax transaction.

My own view is that we need to look at things from the perspective of someone on £56.25 or £71 a week after rent. They have certain fixed costs, such as water and energy bills, for which there is no support. Without a phone, such a person will have more difficulty getting a job. I was uncomfortable about their falling behind inflation by 56p or 71p, but Labour is proposing to charge those in band H—some people in band H are on benefits—up to £8.50 a week in Birmingham. The food budget is about £20 a week for somebody on £71 a week, and Sir Albert is asking for more than a day’s worth of that budget for the council. Furthermore, food costs are expected to increase and energy costs do not look as though they are on the way down.

It is true that the average stay on JSA is about four months, but we must have a system that enables everybody to cope. I accept that some people have no recourse to public funds. We cannot say with certainty that everybody who cannot get a job in 12 months is a scrounger. There is a baby and bathwater problem—if we make the system too tough, we start hitting a lot of people who are trying hard to get a job and just find the economic situation too tough.

The good news, if it can be called good news, is that the courts will only attach benefits of up to £3.55 a week—5% of the 25-plus JSA figure—for council tax and so on. Hence, in the end, the council can only get £3.55 a week, but that is five times the cut that the Opposition opposed last week. The figure of £3.55 a week includes the £65 summons fee. Hence on Birmingham’s figures after collection costs, there would even be a cash shortfall for people in band A. The council has not taken that into account in its calculations.

It is worth looking at the figures behind the calculations. In 2012-13, Birmingham expects £88.2 million of council tax grant, and it is likely to get £79.5 million in 2013-14. That is a shortfall of £8.7 million. Using a 98% collection rate for the new charges, the council can get £6 million from additional empty homes charges, with only an 80% collection rate on the 150% charge.

The council is offering a grant of £2.1 million, which leaves a shortfall of £600,000. That can be covered by changing the rules on backdating, which will potentially bring in £883,199. In any event, that allows the council to cover the costs of the cut without charging people on JSA a penny. The Government grant allows a charge of between zero and 8.5%, and I believe that the passing of the Welfare Bill justifies the zero charge.

We then come to the sting in the tail of Sir Albert Bore and Birmingham Labour’s approach on charging people on JSA council tax. They put out a misleading consultation that argued that they should keep support costs within the level of Government funding. That means taxing poor people to pay for benefits for the poor. They estimate a 1.45% increase in the cost of council tax more generally, an increase of £1.3 million. The real sting in the tail, however, is the taxing of a “contingency” figure of £882,316 on those people on JSA.

The absurdity of such a policy is obvious in the long term. It will require a further increase in the proportion of tax on those on JSA for each year that the council tax is increased by 1.45%. However, the key is that we should ask for the burden to be shared, not simply hit those people on the lowest incomes with a tax to pay for people who also have low incomes. Yes, that does mean that somehow the cost of £1.3 million should be found from the general fund. Furthermore, the contingency risk, which could go either way, should be borne by the general reserves. However, the general fund is getting an additional £1.4 million from an increase in the tax base in any event.

Sir Albert, in his “jaws of doom” graph, says that inflation will go up by £18 million from £8.2 million in 2012-13 to £26.2 million in 2013-4. He has recognised that that is too high by more than £5.3 million, but there is still an increase of £12.7 million. That is more than a doubling in the council’s assessment of inflation and easily allows the £1.3 million needed to avoid taxing the poor to be found.

There is a problem with low pay. The biggest problem is the driving of wages down towards the minimum wage and it may be worth having visas for Romanians and Bulgarians from 2014 to reduce that effect. However, Sir Albert Bore’s “jaws of doom” graph suggests a cost to the council of £11.5 million in 2016-17 for increasing the pay of the employees of contractors. That is a nice thing to do, but when we are taxing the poor—including those people affected by that increase—in part to pay for it, that has to be questioned.

Those on the minimum wage are not paying council tax, and Labour’s proposals would increase their costs also by the full amount of 20% of JSA. Given the wage increase and the tax increase, someone in band C would get an additional £28 a week after tax, but lose £9.46 in additional council tax. Those who do not work for contractors would just pay the additional tax.

The Government, however, cannot come out of this without having to think carefully about the future. The funding provided in this year should also be provided in future years. This issue may not have got the media attention of the cut in child benefit for higher earners, because inherently very few people in the media are on JSA—they have jobs—whereas quite a few are affected by the cut in child benefit. It is, however, a very important issue for those people facing this tax. I do not think the Government can use financial constraints to justify this tax while increasing foreign aid.

[Richard Burden (Birmingham, Northfield) (Lab)]

I am grateful to the hon. Gentleman for giving way. I am pleased and reassured that he has drawn breath before anything more serious happened in the Chamber. I think he might agree with me that all this takes place in a context. As I recall, at the time when Labour was in power, the hon. Gentleman was very vocal, both as a councillor and subsequently as a Member of this place, in saying that Birmingham did not get enough money from the Government. He is now quoted in The Birmingham Post as saying that the authority

“has done relatively well in the local government settlement in comparison to other authorities.”

Does he think that a cut in spending power of £149 for every single Birmingham resident, compared with £74 as a national average, really counts as doing well?

[John Hemming]

The argument is about whether it is best to compare people on the basis of the percentage cut in spending power or the total cut. If another council is spending only £40 and it has the whole amount cut, that is going to cause it a lot more problems. There is no doubt that it is the percentage that matters, and Birmingham’s percentage in this particular spending round is relatively good. It has to be accepted that all the figures are better than the average. Unquestionably, Birmingham has done relatively well. If the Labour party goes round whinging, no one will give them any credibility whatever. I am happy to take further interventions.

[Steve McCabe (Birmingham, Selly Oak) (Lab)]

The hon. Gentleman’s words may come back to haunt him. Most people in Birmingham expect their MPs to stand up for them. If I have understood the hon. Gentleman’s position, he is trying to suggest that Birmingham council is deliberately over-charging the poor. In doing that, he is managing completely to ignore the fact that it his Government who are cutting council tax support.

The hon. Gentleman seems to be advocating that Birmingham should accept the transitional grant. I have just read the Institute for Fiscal Studies report. Will he tell me whether he accepts that this is a one-off, one-year grant that is designed to persuade councils not to cut council tax support by as much as the Government are cutting council tax funding? Despite his maverick use of figures, does not it ultimately mean that further services will be cut to make up the shortfall? If that is his position, why does not he tell people?

[Sir Roger Gale (in the Chair)]

Order. There is a limit to what I am prepared to permit.

[John Hemming]

I thank the hon. Gentleman for his questions. On the first one, which is fighting for the city, the right hon. Member for Wentworth and Dearne (John Healey) and I campaigned considerably, including in this Chamber, for an increase in fire funding, because the proposals from the Government were unfair. The Government indeed changed those proposals, and it is now accepted that the new proposals on fire funding are completely fair. However, when the city does relatively well out of the funding settlement, I will have no credibility at all if I go around whinging about it, which is what Sir Albert Bore does whatever happens. On the first point, of course I will fight for the city, but when we get a reasonably good deal I will say just that, because it is foolish to complain about things when we are actually doing quite well.

I accept that I have gone through a lot of figures. I can give hon. Members the spreadsheets if they want to see them. If the Government grant is £2.1 million, it is true that £1.3 million is needed from the general fund. However, if houses are built and people move into the city, there is more council tax. The estimated figure for next year is £1.4 million more. The Government grant leaves a shortfall of £1.3 million. If we then use the £1.4 million of extra council tax to prevent ourselves from having to pay the poor, we are far better off.

[Steve McCabe]

Is the hon. Gentleman saying that any additional council tax revenue that is generated by new growth should all go towards the council tax support scheme, and that there should be nothing to deal with any of the other cuts being inflicted on Birmingham?

[John Hemming]

I have highlighted areas in which there are reserves within the council. I have particularly identified the over-budgeting for inflation. I quoted the figures from the council’s background papers, and I am happy to share the spreadsheets with all Birmingham Members if there interested. The issue is about choices. It is clear that the administration in Birmingham has decided that its choice is to try to charge poor people council tax. My view is that it has a lot of alternatives. To say, “We must do it,” is complete nonsense.

I accept, as the hon. Gentleman said, that the grant is a one-off scheme at the moment, but in my speech I said—I did not say it all that quickly—that we should extend it into further years. I hope that the Minister is listening. I repeat that I want to see the Government extend the grant to further years, because it is important that we try to protect the poorest people in society. The argument of the administration in Birmingham is that we need work incentives. We already have things such as the Welfare Benefits Up-rating Bill, but the administration is pushing it too far.

[Steve McCabe]

I am interested in the hon. Gentleman’s point about work incentives. Does he accept that the change in council tax support will fall on those who are of working age? They are the people who will be hit.

[John Hemming]

I accept that. That is why the Labour party administration in Birmingham argued that it wanted to do this—to encourage people to work. I want to encourage people to work, but let us recognise that the Welfare Benefits Up-rating Bill is coming in. If we ladle things on top of people, it gets very difficult. They are householders, so they are having to manage being in a household. The courts will not enforce the whole tax bill, and the council has ignored that, but the point is serious. It is a political choice made by the authority. The grant that I want to be continued costs only £100 million. I say “only”—£100 million is quite a bit of money, but it is not difficult to find from the national budget.

It was a real struggle to get the information that I have used in this speech from the Labour administration in Birmingham. In its report, its reason for not taking the Government grant was:

“The deferral of the scheme for 12 months may not truly promote positive work incentives or support people back into work.”

It seems to me, however, that it wishes to tax the poor in order to blame the Government and for party political gain.

17:02

[The Parliamentary Under-Secretary of State for Communities and Local Government (Brandon Lewis)]

It is a pleasure to serve under your chairmanship today, Sir Roger. I am grateful to my hon. Friend the Member for Birmingham, Yardley (John Hemming) for providing us with the opportunity to debate the policy of localising council tax support, which will be delivered through the Local Government Finance Act 2012. I will touch on the salient points generally as well as the specific points about the council in Birmingham if time allows.

There is widespread recognition that welfare spending needs to be targeted better. My hon. Friend made that point. More needs to be done to tackle poverty by getting people off benefits and into work. Council tax benefit expenditure more than doubled between 1997 and 2010 under the Labour Government. Localising support for council tax delivers a 10% saving on council tax benefit expenditure, making a vital contribution to deficit reduction.

Importantly, however, this reform also gives local authorities control over how this saving is delivered, and it gives them a direct financial stake in supporting local people into work. I am clear that councils are best placed to understand local priorities and the needs of residents on low incomes. Localisation enables them to take local factors into account when deciding on levels of support and programmes.

Localising council tax support gives local authorities a real stake in the economic future of their areas. We want local authorities to do more to grow their local economy and reap more of the benefits of local economic growth. Making local authorities responsible for council tax support reinforces the positive benefits of driving economic growth in their areas. Funding for local council tax support schemes is being provided through the retained business rates system itself, further strengthening the incentive for local authorities to grow their local economy and get more people into work in the first place. In doing so, local authorities will not only be helping to create jobs, but will be increasing the income from increases in business rates and, therefore, the amount that they can spend on other valued local services.

Through our other local government reforms we have been clear that we want local authorities to be fully accountable for the decisions that they take. At present, councils can put up council tax without considering the impact on council tax benefit costs. Localising council tax support will change that and encourage greater local financial accountability. It will also strengthen the incentives to drive down fraud and error. We have shown that local authorities can do far more about that.

Councils have choices about how to design their schemes and manage the reduction in funding. As well as being able to choose whether some awards should be reduced, they can also manage the reduction by reconfiguring funding for other services through efficiency savings, using reserves, or using the flexibility that we have now given over council tax charges. I am aware that some local authorities, such as East Hampshire district council, Bristol and the London borough of Merton have decided to do just that, so that council tax benefit claimants in their areas see no reduction in the support that they receive, which shows that it can be done.

Local authorities have until this Thursday to agree their local schemes. I am aware of a range of options that are being considered across different authorities in addition to the examples I have given.

[John Hemming]

Will the Minister confirm that if a local authority has not agreed a scheme, central Government will impose a scheme where people on JSA pay no money?

[Brandon Lewis]

I will come back to that point in a moment.

Let me give another example. Mansfield district council has agreed a scheme that will see claimants pay a maximum of 8.5% of their council tax bill and no change to the support that they receive on top of that for six weeks after returning to work, which is better than the current four. The council has also set up a hardship fund to assist people who experience genuine financial difficulties as a result of the changes. That is the kind of sensible, forward-thinking approach that I hope to see other local authorities adopting. The debate is a good opportunity to put on the record some of the great work that authorities are doing.

[Richard Burden]

In reality, Birmingham is losing £11 million in Government support to help people on low incomes or on fixed low incomes with their council tax. It is being told by the Government that for two years, perhaps—no commitment after that—it might get £2 million back if it does what the Government say. The Government’s financial envelope, looking forward to the next five years, will leave Birmingham with a shortfall of £625 million, although it is being told that if it freezes council tax, it will get another bung, but only for two years. This sounds like a loan shark offering a payday loan that will leave Birmingham’s citizens much worse off in the space of two years.

[Brandon Lewis]

I will touch on a comment that was made by my hon. Friend the Member for Birmingham, Yardley earlier. To be fair, he made the point very well. Some hon. Members are confusing their role as Members of Parliament in representing their residents when they criticise my hon. Friend and make comments about supporting Birmingham. The job of an MP is not to support the council; it is to support, defend and stand up for the residents. There is nothing wrong with a Member of Parliament standing up for the residents and challenging the council on whether it is doing the right thing and putting in a good scheme. I have already given examples of councils that are doing the right thing by their residents. If Birmingham does not choose to do that, that is a decision that Birmingham residents should consider carefully when they get their opportunity at the ballot box.

[John Hemming]

Does the Minister agree that if the council produces massive figures by exaggerating, for instance, inflation, it gets misleading results?

[Brandon Lewis]

That is a fair point. Obviously, anybody can use figures in a way that suits them. The reality is that we have put in some money to help councils through the first year or so, and I will come back to that in a moment. However, if councils have not done anything by Thursday, the current scheme stays in place.

I see the most variation in the amount that local authorities propose to charge benefit claimants who have previously received 100% support. Suggested amounts range from 6% to 30% of council tax bills.

[Steve McCabe]

Will the Minister confirm what the Institute for Fiscal Studies has said, which is that the support that has been offered is worth 25% of the cuts? Is that not the difficulty?

[Brandon Lewis]

I will come back to that point in a moment, but as it happens I do not agree that that is the difficulty; it is just part of a wider package. As ever, Opposition Members tend to pick on one thing rather than look at an issue as a whole. The flexibilities that we have given to local government, along with councils’ ability to crack down on fraud and error—£200-odd million last year alone, which in most people’s books is a lot of money—give local government enough to deal with the measure. Across the country, that comes to more than its cost.

I am disappointed that some councils have failed to rise to the challenge to explore every option, and that they are taking what they perceive to be the easier route of looking at double-digit across-the-board cuts. That is a short-term approach that slashes entitlements for the poorest without looking at other ways in which to manage the funding reduction, and it is not sustainable. It is common sense that asking the poorest to pay contributions of 30% is simply unreasonable and, in the longer term, as the funding for council tax support is built into the baseline level of business rates funding, councils have everything to gain from helping people back into work. That is where their focus should be.

It is, of course, for local authorities to consider the appropriate funding to be applied to support local taxpayers as part of their wider budget decisions. Making councils financially responsible for providing support creates stronger incentives for them to get people back into work and to reduce costs.

[Richard Burden]

Why is the support scheme that the Government are offering only temporary?

[Brandon Lewis]

That issue was raised earlier, and I said that I would come to it, so if the hon. Gentleman will bear with me I will do so.

We want to ensure that councils are doing all the right things. They should be looking at back-office functions, tackling fraud and error, and carrying out every one of the “50 ways to save”, especially an authority such as Birmingham, where the spending reduction for 2013-14 is just 1.1%.

To provide the space and the support for local authorities to design a scheme that protects the poorest by making the most of opportunities to find savings elsewhere, the Government announced in October the provision of an additional £100 million transitional grant for 2013-14. The money will be available to councils—billing and major precepting authorities—that choose to design their local schemes so that people currently on 100% support pay between 0% and no more than 8.5% of their liability, the taper rate does not increase above 25%, and there is no sharp reduction in support for people entering work. Details of how the grant can be claimed were sent out on Friday.

As time is of the essence, I will skip to the core query about the grant being for only one year. I recommend that authorities that have not yet looked at their schemes do so very quickly now so that they might qualify for the grant. It is for only one year because it is, effectively, pump priming. It gives councils that year—that opportunity —to redesign their schemes, to consider how they fund other services and look at what they do with the flexibilities we give them regarding council tax and encouraging local growth. The benefits will come during and towards the end of the first year, and we are putting the money in up front to give the councils a cushion to get them through that year. I will be very clear about this: we will closely watch the decisions local authorities take on their schemes and the impact on the poorest people in their communities before deciding whether to take further action.

Localising council tax support is an important step towards reducing the welfare bill. The measure will not only reduce spending by £470 million, but give local authorities significant local control. It will give them an opportunity to make council tax support an integral part of the council tax system. Ultimately, the new localised system will enable councils to take decisions locally about the provision of council tax support in their areas, and it is consistent with the drive for greater local financial accountability and decision making.

Question put and agreed to.

17:13

Sitting adjourned.