Localism Bill

Baroness Kramer Excerpts

Tuesday 28th June 2011 Lords Chamber

[Lord Newton of Braintree]

My Lords, it is probably rash of me to intervene in a debate that has so far been dominated largely by great gurus of local government, another of whom is yet to speak. However, it must have become obvious, at least to my Front Bench, that I am one of those who become more rash, rather than more cautious, as the years advance. I have endlessly declared my wife as an interest, in respect of Braintree District Council. I hasten to add that she has not told me to say anything about this issue. The council is well conducted—and I say that not just because she told me that. However, I support the noble Lord, Lord Tope, and say that the concern is confined not just to his Benches. That has admirably been made clear, but having geared myself up to speak, I decided that I would do so—albeit very briefly.

First, the noble Lord, Lord Tope, was right to say that this issue should have been discussed with local authorities, not just bounced out with the publication of the Bill. Secondly, I have every sympathy with what my noble friend Lord Jenkin said—whether or not something like this survives, the Secretary of State should not be judge, jury, prosecutor and executioner. That leads to my interest in some of the amendments in the group, including that of my noble friend Lady Gardner of Parkes. I noted that the noble Lord, Lord Best, who knows as much about all this as anyone, said—although he did not use this phrase—that the Government were opening a can of worms. The whole of the rest of the debate has demonstrated that it is indeed a can of worms, not least in the speeches of my noble friend Lord Cathcart and the noble Lord, Lord Empey. It may be too late to put the lid back on it, but my noble friends ought to contemplate whether they can squeeze it down a bit or at least make it a more palatable lot of worms.

I do not have much more to say, but I have two questions that link with the points made in recent speeches. I want to put them very directly. First, as was initially raised in uncertain terms by the noble Lord, Lord Wigley, just where does this stand in relation to the devolved Administrations? Since the noble Lord spoke, I have checked Clause 213 on the extent of the Bill. If I read that correctly, this lot does extend to Wales; but it does not extend to Scotland and, as we have just heard, it does not extend to Northern Ireland. Therefore a fine from the European Union would be imposed on the United Kingdom Government. We are the members of the European Union, not Scotland, even if it would like to be, or Wales, even if it would like to be, or Northern Ireland—I do not know whether it would or not. That means that in certain circumstances the United Kingdom Government could be fined, but if the fine related to a local authority in Scotland, the European Union could do nothing about it. Only an English council could have a knock-on fine under these proposals. If I got that wrong, I would be glad to be told; but that appears to me to be the meaning of the Bill and I do not think it is satisfactory.

Secondly, as was touched on by my noble friend Lord Cathcart, is this or is this not retrospective? I could just about understand it if councils knew what they were getting into when they made a decision that might lead to this risk. However, unless I have read the Bill wrongly, this is a backward-looking proposal. A fine could be imposed that related to something that had already happened, in circumstances in which a local authority had no reason to suppose that there would be a penalty. Most of us would regard that situation as deeply unsatisfactory, and I do not regard it as satisfactory on anything that I have heard today.

From what the noble Lord, Lord Best, said the other day, we know that this clause was one of the top three targets of the Local Government Association, which is why he is here today, no doubt. He was very kind, and rightly so, to my noble friend Lady Hanham on the Front Bench for having been so conciliatory on its other two main targets—one was the issue of mayors, the other I cannot remember. I urge my noble friend to be conciliatory on this one as well.

[Baroness Kramer]

My Lords, I am afraid that I am a local government novice rather than a local government guru. However, I want to add a few words because in some of the last speeches there was a dangerous drift, I thought, towards implying that this was all the fault of Brussels and I think that has to be countered quickly. As a Londoner, I am very grateful that there is an EU air quality directive. The Mayor of London and his draft air quality strategy assess that PM10 particulates play a part in the premature deaths of more than 4,000 people per year here in London. In fact, if you look at the impact on heart disease, it is probably closer to 8,000 people. If we had that number of premature deaths from food poisoning, I would guess that there would be a very big response. The fact that it comes from air poisoning seems to have drifted past an awful lot of British Governments. As a Londoner, I suspect that many of us are reasonably concerned about that.

I agree with all the arguments that the Government cannot possibly turn around and pass these fines off to other authorities to act as judge and jury. That is against natural justice and it is important that we say so. However, this whole conversation that we have had today has made it clear that arbitration is complex, expensive and protracted; the wisdom of Solomon would rarely be adequate to make sure that proper allocation followed. In those circumstances, this strikes me as a classic piece of the gold-plating that we mention when we talk about how our country handles directives from Brussels. Going back to the original proposition, to simply eliminate this clause would be the far cleaner way in which to act. The Government have often said that they do not expect us to ever get any EU fines, in which case the argument is even stronger for simply eliminating all of this rather than following the gold-plating strategy that seems to be under consideration.

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Moved by

[Baroness Kramer]

118: Before Clause 38, insert the following new Clause—
“Tax increment financing
(1) The Business Rate Supplement Act 2009 is amended as follows.
(2) After section 1 (power to impose a BRS) insert—
“(1A) A BRS may be in the form of tax increment financing.”
(3) In section 14 (chargeable amount: supplementary) in subsection (2) after ““A” is” insert “for any form of BRS other than tax increment financing”.
(4) In section 14, after subsection (2) insert—
“(2A) For tax increment financing “A” is—
(a) the increase in the rateable value on the chargeable day attributable to the project to which the tax increment financing relates, or(b) if section 12(2) applies, the rateable value of the occupied part of the hereditament on that day.”.”

[Baroness Kramer]

My Lords, we have just been through a very important debate that has taken a good two hours. I sense that the House is absolutely exhausted, so I will try to be very brief in moving Amendment 118. I will speak also to Amendment 118ZA. Since the latter is the smaller, I will address it very quickly now.

This arose because my colleague and expert lawyer, the noble Baroness, Lady Hamwee, looked at the Bill and realised that there was a serious question in the wording of Clause 38(7), which refers to business rate supplements and makes various amendments. It says:

“The amendments made by this section do not apply in relation to a BRS imposed before the date this section comes into force”.

That is an important date because on one side of the date of raising a business rate supplement there is in many cases no requirement for a ballot, and various other conditions are different, and on the other side of that benchmark the conditions are entirely different. It is absolutely necessary that any authority affected by business rate supplement rules knows when that date occurs. I apologise if we have made a mistake, but neither the noble Baroness, Lady Hamwee, nor I can find any definition to determine when “this section comes into force”. This is an attempt to do that by replacing those words with the word “enacted”. It seems that if this clause should pass and become part of the Bill in its final form there has to be some clarity from the Government. This is a technical issue but it could lead to an awful lot of confusion and litigation if it is not clarified.

Amendment 118 covers the issue of tax increment financing. I will take a moment or two to explain what tax increment financing is. I am sure many Members of this House are very aware of it but there might be one or two who are not. I will then explain why I have raised this in this Bill and at this point. Tax increment financing was first used in the 1950s by California and is now part of the framework statutes of every state of the United States bar Arkansas, as well as of various continental countries, in various forms. Essentially it is a mechanism that recognises that where regeneration takes place or where there is new infrastructure, land values consequently rise. Therefore, business rates associated with that increase in land values are attributable to the existence of the project. In effect, it allows the relevant local authority or other body to borrow against that predicted increase in the business rates that results from the construction and existence of the project.

In this country we have a great problem in building infrastructure. People often use the example of the London Tube system and the Jubilee line. We get the cost upfront—in the case of the Jubilee line, about £3.5 billion—but there is a huge benefit at the far end when the project is complete. The increase in benefit to landowners around the various stations on the Jubilee line is estimated at about £13 billion. In other words, huge value is created, but we rarely find any mechanism to let us capture that value in order to get the financing to build the project in the first place. This happens on a small scale as well as a large scale. Knowing the cash that is coming out at the end, are we going to take the steps to allow us to find a mechanism to tap that in order to get the project built?

In the United States, this is not often used on large-scale projects. It is used typically on small, local regeneration projects in blighted areas, but it need not be limited to that application. The Deputy Prime Minister, Nick Clegg, announced in September 2010 that the coalition would at some point allow local authorities to use tax increment financing to finance infrastructure projects. In a sense, this is a probing amendment to find out where on earth we are in this process. I speak partly as a Londoner because I know that so many infrastructure projects are necessary in this city, but it has to apply to the whole of the country.

This issue is relevant because of the various new clauses in the Bill that apply to the business rate supplement. I am conscious that a review is under way of local government revenue-raising powers and that tax increment financing is likely to be discussed as part of that. However, a problem arises from Clause 38 because of the new constraints that are applied to local authorities in raising business rate supplements— notably that a ballot is now necessary for every business rate supplement. Under the existing rules, no ballot is necessary if the business rate supplement provides less than one-third of the total cost of the project.

Crossrail was passed through a special hybrid Bill but the business rate supplement plays a significant part in the financing for it. Had all the businesses in London that are covered by this rate been balloted, they would not have passed the business rate supplement because many of them do not benefit from the existence of Crossrail. I am sure that this will be true on a small scale as well. It will become very difficult to achieve a business rate supplement when many businesses will look at the project that is very beneficial to the community but say that it does not benefit them directly. The joy about tax increment financing, if that were to be the basis on which businesses were balloted, is that you pay it only if you have benefited. You will pay a tax increment levy only if you have seen the increase in property values that comes because the project has been created. That, presumably, is something that businesses capture through rent or through the sale of property or in various other ways, but it is in their interest to make sure that the project happens.

That is why I have raised the matter in this context, although there is a more general Bill to come. It seemed to me that if we were going to see in this Bill new difficulties for using business rate supplements, we at least ought to have some discussion of mechanisms that would be put in place to give confidence to local authorities that they could proceed with infrastructure projects, regeneration and other necessary developments. They would then have some assurance that mechanisms would be coming their way that would allow them to achieve that. At a time when we talk about the importance of economic growth, infrastructure is perhaps more important than ever, so there is an urgency in clarifying this issue. That is why I have brought forward the amendment. I beg to move.

[Lord McKenzie of Luton]

My Lords, we understand why the smaller of the amendments has been introduced tonight. Doubtless the Minister will be able to give satisfaction on the date that these provisions enter into force for the reasons the noble Baroness has outlined. We also understand better now why she has attached tax increment financing to these provisions. As she said, a ballot is now required in all circumstances, whatever the level of funding, and there may be difficulties in securing that in the future.

Tax increment financing is about raising more money upfront by committing revenues which would not have arisen but for the project going ahead. We accept and support the importance of focusing at this time on tax increment financing when capital resources for local authorities are especially tight and the private-sector nervousness about the state of the economy means fund raising is extremely difficult. The noble Baroness will be aware that the previous Government set up a working party to examine this and an enlarged group has been working with the coalition Government. What I am not sure about is the grafting of these provisions on to the Business Rate Supplements Act 2009, which is about levying a supplement on the NNDR. It involves consultation arrangements and a ballot of those existing ratepayers affected. In concept, TIF is about ring-fencing additional business rates and almost hypothecating those to fund a borrowing arrangement. The current position is set out in the local growth document which the Government issued recently. That talks about introducing new borrowing powers to allow tax increment financing. It will be interesting to hear from the Minister what the mechanism is for those borrowing powers to be introduced to facilitate tax increment financing. I do not think grafting it on to the Business Rate Supplements Act provisions will be the right way to achieve it. It looks as though the Government already are focused on changes to borrowing arrangements which will facilitate it and obviously, subject to the detail of that, it is a principle and a project which we would support because it is important to get this source of funding under way at the current time.

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[Lord Shutt of Greetland]

My Lords, I hope I can be helpful on this but, while thanking all noble Lords who have spoken, I revert to the point that my noble friend Lady Kramer made in her initial remarks about this being a probing amendment.

The Government have committed to introduce tax increment financing but we should not pre-empt the outcome of the local government resource review that will conclude in July. The review is looking at both local retention of rates and tax increment financing as we need to make sure that tax increment financing proposals are consistent with our wider proposals on business rates retention. The amendment appears to increase the rates liability of businesses, whereas tax increment financing, as generally understood, does not increase the business rates that would otherwise be levied but uses those rates to repay the borrowing that helped to deliver a piece of infrastructure. The business rate supplement and proposals for tax increment financing are two separate models that are structured differently. Rather than integrate them, there is no reason why they could not be used alongside each other to facilitate the funding of infrastructure to support economic growth.

The amendment seems to create two types of business rate supplement. The first type is a traditional business rate supplement of up to a 2p levy on business rates payers within an authority area that occupy property rated above £50,000 for an economic development project. The second type is a business rate supplement for where tax increment financing has delivered some infrastructure project of up to a 2p levy within an authority area but is restricted to the increases in rateable value of properties rated above £50,000 as a result of some infrastructure that has been implemented by tax increment financing.

The amendment appears to be defective in a number of ways. There is no definition of tax increment financing. The amendment would also create some practical concerns. The tuppence maximum will apply to the area, so in London the proposal could not apply as the tuppence limit reached by the Crossrail business rate supplement has been dealt with. Applying the increase to the rateable value to adjust the impact of the tax increment financing project would require a second ratings list to be set up for all properties with rateable values both prior to and after the tax increment financing project delivery. A consequent increase in administrative costs is highly subject to challenges over the extent of any rateable value increase as a result of the tax increment financing project or other factors—refurbishment of a property, for example.

The tax increment financing scheme does not increase the business rates that would otherwise be levied but uses those rates generated by the infrastructure to repay borrowing. Under existing arrangements, 100 per cent of business rate revenues collected by local authorities are pooled for redistribution to local authorities in England. By considering options to enable councils to retain their locally raised business rates, the current local government resource review provides an opportunity for significant changes in the way in which councils are funded. Such an approach could help to set free many local councils from dependency on central government funding and provide incentives for them to promote economic growth. The review is considering how we could manage the distributional impacts of any new arrangements. More deprived councils will continue to receive support.

Last September, the Deputy Prime Minister announced that the Government were committed to take legislation to allow for tax increment financing. Then, the local growth White Paper, issued in November, set out the Government’s intention to carry out a resource review. The terms of reference for the resource review were published in a Written Ministerial Statement by the Secretary of State on 17 March 2011. The resource review will look at local retention and tax increment financing in the round and will conclude in July. The aim is then to move as quickly as possible towards implementation, taking into account the need for primary legislation.

I appreciate the spirit of Amendment 118ZA, which aims to ensure that any business rate supplement where the levy raises less than one-third of the overall project cannot be imposed between Royal Assent and the commencement order without a ballot. However, we do not think that bringing forward commencement of that part is necessary as we are not aware of any proposals for any new business rate supplement planned to be imposed—that would fund less than one-third of the overall project—as we have not seen an initial prospectus or consultation. The business rate supplement for Crossrail has already been imposed and would not be affected by the amendment. I should like to offer reassurance that the Government will bring into force the proposed change that will ensure a ballot for all future business rate supplements regardless of whether it funds more or less than one-third of overall costs.

Clause 38 will come into force following a commencement order to be made by the Secretary of State. We will look to make that commencement order for a date no earlier than two months after Royal Assent in line with convention that legislation is brought into force earlier only where necessary and in exceptional circumstances. I trust that that is a fair response to the noble Baroness and that she will feel able to withdraw her amendment.

[Baroness Kramer]

I thank the Minister. I am not sure that we are a whole lot clearer on the commencement date but perhaps the Government at the earliest possible opportunity will make that date clear to allow local authorities to handle their affairs in the most effective manner. I accept that I am not likely to get a clearer answer than that.

There are no absolute rules on tax increment financing. There is no absolute requirement that TIF applies only to the standard business rate. There is no rationale that says that it should not apply to a special business rate, which is what we might call the business rate supplement. If this begins to be a widely used measure, many communities and many business communities might rather see a special rate for a project that they consider to be particularly beneficial rather than forgo the project. I would be sad if the Government were ruling out flexibility around TIF from the beginning and going only with the very plain vanilla simplest form of TIF as they look at the various options in front of them.

The noble Lord, Lord Beecham, raised the point that very often the person or the business paying the business rate is not necessarily the one that benefits from the increase in value. I take his point. However, as the Minister pointed out, with the standard vanilla TIF, this would not be an issue because one is looking just at the standard business rate and it would be only where there was a special levy in order to create the project. It will depend on whether that increase in value results in increased benefits to the occupier. For example, a shop that suddenly finds there is much more traffic coming through the door may be very pleased to support the higher rate payment because, in effect, their business has benefited. I would say that that is not an absolute.

I would hope that local authorities are given the maximum amount of flexibility to be able to design projects around the needs of their community—and the benefits that will come to their community—to negotiate much of this with local business. I hope very much that as the Government deal with this issue, they will not try to be prescriptive but will allow that kind of financial flexibility which local authorities, I suspect, are best positioned to understand in detail.

I very much confirm that this was a probing amendment. I was rather flattered by the Minister’s attempt to deal with some of it on a line-by-line basis. It was not written with that in mind. I very gladly beg leave to withdraw the amendment.

Amendment 118 withdrawn.