Local Government Finance

Lord Desai Excerpts

Thursday 13th July 2017 Lords Chamber

[Lord Desai (Lab)]

My Lords, we are very grateful to my noble friend Lord Kennedy for initiating this important debate. Unlike some other speakers, such as my noble friends Lord Smith and Lord Kennedy, I have no experience of local government, but I am an economist.

In all the years I have spent in your Lordships’ House, local authority revenue has haunted British politics. I am old enough to remember what was there before the poll tax. It was the biggest crisis in British politics that there was a need at that time, with the rating system, for the Government in charge to take the bull by the horns and revalue properties, because property prices had risen. Governments were proud that they had. Rising house prices is a fundamental part of British politics and we are alarmed when property prices are not rising. But when it comes to earning the state’s share of the rising capital value, we are suddenly very shy. Because of the Conservative Government under Mrs Thatcher, we do not want to go into the tricky idea of revaluing property and then passing on the standard rateable value calculation.

Then we got into the poll tax. We all remember what happened with that. It was a complete disaster. Then we had the council tax. I remember taking part in the debate on council tax and trying to point out that it would not be adequate unless there was flexibility to increase council tax or add new property bands, because property values would rise. We know that; it is a fundamental fact. So here we are discussing a variety of revenue sources. The noble Lord, Lord Shipley, talked about a variety of sources that his party has been proposing over the years—local income tax and various other things—but we are not taxing the most valuable asset local authorities have. It is like the elephant in the middle of the room: we know that when we talk about that we are going to talk about every little bit—business taxes and this and that.

At some stage, one of the political parties has to bite the bullet and say that we need a royal commission or some other official body to sit down and examine how much property prices have risen since the council tax was introduced. We all know that it is a gigantic sum. I have lived in a house in south London since 2004. I might not be too far wrong in saying that the property price has risen by three times. I am still paying the same council tax. It would be fair for me to pay a bigger local authority tax so that my local authority does not have to shut down local libraries. Yes, I can join the campaign to not shut down local libraries, but that will not solve the problem. They need money. If you unlock that particular source of local authority wealth—houses cannot run away; they have to be there, so you can be pretty sure it is your asset—then they will have a flexible and buoyant source of revenue. You could even cut the council tax rate and increase the revenue. It is a win-win solution. You could say, “If we get into power we’re going to cut the council tax rate but we’re going to revalue properties”. It could be done—if the Government want, I could do it in 15 days—and we would release this buoyant source of revenue and solve a lot of the problems local authorities have.

As I said, this could be done keeping the current structure of council tax intact. You do not need to be predatory or increase the tax rate. As some people may know, there is the philosophy of Henry George, who said in the 19th century that countries need only one tax: on the improvement of landed property. If you had that one tax you could abolish all others. I have done some work on that—I will go down that route—and we have a source of taxation that we are deliberately not using because we think it will be very unpopular. We are willing to go through austerity and all the hardships local authorities have. Even local authorities are not thinking about this as a source taxation.

Being an academic economist, I do not have to worry about the real world; I can think about ideal solutions. One feasible solution is to keep council tax but have a panel that revalues properties across the country. It does not have to rely on anything subjective; there is enough evidence in estate agents’ records. We know what transactions have taken place in each area and we know how much property prices have gone up. We could easily treble, if not quadruple, local authority income from council taxes. I know it will not happen. I have spent a lot of my life saying things here that will not happen that ought to, but we ought seriously to consider, on a bipartisan or all-party basis, that the time has come and we cannot deprive our local authorities of a fruitful source of revenue and go through torturous negotiations between central and local government.

Every party in one way or another tells us how valuable local initiative is, how much we want to decentralise and, once we have delegated power to local authorities, how power should be near the people. The Conservative, Labour and Liberal parties have slightly different philosophies, but we are all for it. It is only when it comes to giving the money that we suddenly become centralist. If we stay centralist we will deprive local authorities of proper revenue. That is unfortunately a sad truth, as some speakers have said, and more will talk about it. I suggest to the Government that they have a panel to revalue properties across the nation. They have enough problems on their hands anyway; one more will not make much difference, so they may as well bite the bullet. Then, we can have a proper yield from council tax. That will solve the problems of local authority financing.

--- Later in debate ---

[Lord Young of Cookham (Con)]

My Lords, I welcome this opportunity to debate this important issue, and I am grateful to all noble Lords who have taken part. We have had a thoughtful and, on the whole, consensual, debate about the future of local government. As the noble Lord, Lord Kennedy, said, right at the beginning, many of the key services on which our society depends—education, social services, housing and public transport—are not delivered by central government but by local government. Local government works hard to deliver quality services when it has had fewer resources to do so, as the noble Lord, Lord Smith, said. It works hard to deliver those services. Local councils have much to be proud of and I pay tribute to the way that they have made economies and efficiencies and yet still maintained a high level of public satisfaction.

I cannot claim the same intensity of local government service as many noble Lords who have spoken. I served three years on Lambeth Borough Council in 1968, when there were 50 Conservative and three Labour councillors, but I must have visited Pendle in 1971, because I then lost my seat.

This debate, which I am grateful to the noble Lord, Lord Kennedy, for initiating, gives us an opportunity to stand back a bit from the day-to-day challenge of service delivery and look at some of the medium-term strategic issues that we have talked about—if not the fundamental rethink that the noble Lord, Lord Greaves, called for, at least a serious look at the challenges faced by local government and possible solutions. These strategic issues include finance—the main subject of the debate—but we have also touched on the relationship between central and local government and the redistribution of powers, and within that, the relationship between the NHS and adult social care, which has been one of the major themes. I also want to touch on the emerging and changing structures of local government, and new ways of working together, mentioned by the noble Lord, Lord Shipley, and indeed, working with the private sector to deliver those services.

First, a cautionary note: when I was no longer Housing Minister after my second visit to Pendle, I became a Minister at the Treasury. We need to set this discussion in the context of the challenging fiscal position in the UK. As we heard at the end of the previous debate, at nearly 90% of GDP, our public debt is the highest it has been in nearly 50 years. Our deficit is still above the post war average and above sustainable levels. We have the fourth highest deficit and the sixth highest level of debt out of 24 advanced economies.

We are having this debate against the background of trying to return to balance by the middle of the next decade, which is the right medium-term fiscal objective, enabling debt to fall back to safer levels. We cannot exempt, and we have not exempted, local authorities from this process. As I said, we have recognised their successes in making efficiencies over recent years. Looking ahead, local authorities will see a modest 1.2% increase in cash terms between 2015 and 2020, but looking only at central grants—RSG—does not reflect the totality of resources available to local authorities to deliver local services, including business rates and council tax, as well as dedicated grants, such as the improved better care fund.

Local government finance is a key element in enabling local councils to play their role. To facilitate their work, we have given councils important financial freedoms and flexibilities to help them manage their own budgets. For example, we have given councils new flexibility to use up to 100% of the receipts from the sale of land and buildings, to help make the up-front investment in the transformation of local services and therefore ensure further savings.

The noble Lord, Lord Kennedy, asked in his opening speech for more certainty and stability—I think those were the two words he used. In 2015 we provided more certainty and stability through the offer of a four-year financial settlement, and 97% of eligible local authorities have accepted that offer. We have also introduced flexibility to use the receipts from the sale of land and building, as I have just mentioned, not just to help pay the up-front investment in the transformation of local services, but to put more money into adult social care. We have also introduced the social care precept. As a result of those, against a challenging background, councils can now plan for the future with greater certainty over their funding than ever before, helping them to take more control and plan service delivery and transformation, and to achieve more effective collaboration with local partners.

For example, the transformation challenge award is a challenge fund to support local authorities to re-engineer their business practices and redesign service delivery. It helps local authorities to go further and faster with their transformation plans. Among many others, Lancashire County Council used it to develop and implement an integrated well-being and resilience offer, the London Borough of Brent used it to help local residents overcome barriers to employment, and Blaby District Council is using it to make housing support services easier to access. Much of this debate has been about business rates retention. The noble Lord, Lord Kennedy, and the noble Baroness, Lady Donaghy, touched on that.

As noble Lords have noted, there was no government finance Bill in the Queen’s speech, so there have been questions about our plans for the future of business rates. Looking ahead, I can assure the noble Lord, Lord Kennedy, and others, that local government finance is still very much on our agenda. We are committed to delivering the manifesto pledge we made to continue to give local government greater control over the money it raises, and we will work closely with local government to agree the best way of achieving that. We have no plans yet on timing for a broad local government finance Bill; we will, of course, be looking at what can be achieved without primary legislation, which was something the noble Lord, Lord Shipley, touched on, although, of course, there will be some constraints on what we can do through that route.

We are planning to take this opportunity to open up a conversation with business and local government stakeholders, and ask what their priorities are for the future direction of local government finance reform. We are committed to making the right reforms and ensuring the long-term sustainability of the local government system, delivered on an appropriate timescale. That does not mean we have abandoned the idea of early action. We recognise the impact of increasing service pressures, and are already responding positively to help councils meet immediate issues. For example, as noble Lords have said, in addition to the money announced by the Government in 2015, at the spring Budget this year the Government announced an additional £2 billion to put social care on a more stable footing and alleviate short-term pressures across the health and care system. We have also allowed relevant authorities the flexibility to raise more income through the adult social care precept.

I note the point raised by the noble Lord, Lord Smith—that the money raised from the precept is not quite as much in areas with low-valued housing. But the money raised from the precept is only part of the additional funding made available for adult social care. The majority of the funding announced in the spring Budget will be allocated using the improved better care fund formula, which takes account of the ability to raise money through the council tax precept for social care. Therefore, the total reflects relative need as closely as possible, in recognition of the additional challenges that social care places on certain councils.

In the medium term I reiterate our commitment to the fair funding review, which addresses local authority concerns about the fairness of current funding distributions and the lack of transparency and simplicity in how that funding is allocated. It has been almost 10 years since the current formula was reviewed, and it needs revision to reflect the rapidly shifting factors, such as changing population and demographic pressures, which determine local authority costs in providing services. The fair funding review will set new baseline funding allocations for local authorities by delivering an up-to-date assessment of their relative needs and resources, using the best evidence available. It will be a thorough, evidence-based review of what the relative needs formula should be and will consider a wide range of options for developing an updated funding formula by looking again at the factors that drive costs for local authorities. We cannot and will not do that in isolation; the review is using an open process of close consultation and engagement, and the team is working actively with the LGA and with representatives from all parts of local government through a technical working group to try to get this right. I recognise that local authorities are keen to make progress on this, as indeed are the Government, but they also tell us that it is important to get this review right. We shall continue to seek views on the approach and the target date for implementation.

Adult social care was mentioned by the noble Lord, Lord Smith, the noble Baroness, Lady Donaghy, and others. As my noble friend Lord O’Shaughnessy said in exchange at Question Time earlier this week:

“This Government’s ambition is to make the UK a good place for everyone to grow old, and we have put in place a programme of reforms across health, care, housing and other services to support older people to live independent and fulfilling lives”.—[Official Report, 11/7/17; col. 1158.]


For example, following the rollout of full devolution in April 2016, 10 local authorities and clinical commissioning groups for Greater Manchester have devolved responsibility for the health and social care budget to a new Greater Manchester partnership, which will oversee an annual £6 billion budget with which to commission both health and social care services. That has to be the way forward—breaking down the iron curtain between health and social care.

The ageing population still presents one of our nation’s most profound challenges—one of the themes of this debate—and it raises critical questions as to how as a society we enable all adults to live well into later life and how we deliver sustainable public services that support them. We have, as I said already, invested an additional £2 billion to put social care on a more stable footing and alleviate short-term pressures across the health and care system. However, further reform is required to ensure that the system is prepared to meet the challenges of the increasing numbers of over-75s.

To address these questions, the Government will work with partners at all levels, including those who use services and who work to provide care, to bring forward proposals for public consultation. The Government will consult on options to encourage a wider debate. The consultation will set out options to improve the social care system so as to put it on a more secure financial footing, supporting people, families and communities to prepare for old age, and to address issues related to the quality of care and variation in practice.

On emerging structures of local government and new ways of working, local government has changed since I was a first elected as a councillor nearly 50 years ago. The aldermen and town clerks that I recall working with have been replaced by chief executives, leaders and cabinets. Across government, we are making huge strides towards rebalancing the economy and empowering local government. Devolution deals have been mentioned in this debate, and we have supported such deals, strengthening local leadership and institutions through the establishment of mayoral combined authorities. We have devolved powers and funding away from Whitehall, so that those powers are exercised at the right level. We are also strengthening local leadership and institutions through the establishment of mayoral combined authorities. Directly elected mayors provide a single point of accountability for residents and are an ambassador for their area, boosting the area’s profile and helping to attract inward investment. On 4 May, six combined authority mayors were elected, representing 9.8 million people in England—33% of England, including London, now has a directly elected mayor with new powers to create jobs, improve skills, build homes and make it easier to travel.

We want to see these new city region mayors continue to develop innovative policy solutions. I will, for example, be interested to see development of the West Midlands Mayor’s mentorship scheme, which he hopes will attract mentors to help guide young people into worthwhile careers and out of unemployment. Councils are also innovating in how they work with each other—a point raised by the noble Lord, Lord Shipley—and with outside bodies. This has produced new delivery models such as Achieving for Children, a social enterprise company created by the Royal Borough of Kingston upon Thames and the London Borough of Richmond upon Thames to provide their children’s services.

Touching on some of the issues raised in the debate, the noble Lord, Lord Desai, mentioned the poll tax. I confess that I was one of the Tory rebels who voted against the poll tax at every conceivable point as it went through the House of Commons—I was subsequently surprised to be appointed Chief Whip against that background. The noble Lord said, I think, that he could quadruple the revenue from council tax in a way that was almost painless. I think that we would like to see that scheme worked up in a little more detail before we finally commit ourselves to it.

On revaluation, I gently point out that the Labour Government, between 1997 and 2010, did not revalue in England, despite the powerful arguments for revaluation that we have heard from the noble Lord, Lord Desai. The Government capture the rising values of property in other ways, for example, through inheritance tax and, of course, stamp duty. It is not the case that the public purse does not benefit from rising values. We have no plans to introduce new bands; adding new bands would be complex, involve the valuation of many homes and raise fairness issues about the ability of those liable to pay the tax. Many people living in high-value homes may be on fixed incomes and may have lived in them for a long time. It would risk penalising those people on low incomes, such as pensioners, who have seen their homes appreciate in value. They might face a substantial increase in taxes without having the income to pay it.

[Lord Desai]

The noble Lord will remember, during the poll tax debates, that we had the whole population studied. It was said there were houses where a working man lived with four adult boys working and others where there was a lonely old lady, and there was an injustice because their rates were the same. That is a myth. Let us face it: we need revaluation. People with a fixed income living in a highly valued property will be a very tiny minority.

[Lord Young of Cookham]

Well, I hope that the noble Lord’s words of wisdom have fallen on his Front Bench as well as my own. I just make the point that they did revalue in Wales, in 2005; 33% of homes were placed in a higher band and only 8% of homes were placed in a lower band. Two-thirds of the net rises were among homes originally in bands A to C, meaning that in that case revaluation hit the less well-off households the hardest. Therefore, I note the case that was made, but I have to disappoint the noble Lord and say that that is not on the agenda.

I was encouraged to hear the noble Baroness, Lady Donaghy, say that she has three energetic candidates waiting to fight in her ward. I will make it my mission to ensure that they are opposed by three equally energetic, dynamic and motivated candidates from my party so that we have a proper contest in whatever part of Southwark she may live in.

The noble Lord, Lord Shipley, raised the point about local authorities investing in property. Like him, I saw the article and made some inquiries following the leader in the Times on Tuesday about local authority property investments betting with taxpayers’ money. There are strong checks and balances in place to protect taxpayers’ money, and local authorities are required to ensure that they have the right skills and commercial expertise to make investment decisions. However, we are actively monitoring the nature and scale of local authority commercial activity, working closely with the sector to ensure that the governance framework continues to be appropriate.

Yes, we have to do more on housing; I recognise that. I have some briefing here on housing, explaining how we are building more council houses than the Labour Party. I will not read this out because I am short of time, but I agree with one of the thrusts of this debate that we need to raise our game on housing.

I say to the noble Lord, Lord Greaves, that it says here that you should not comment on an ongoing police investigation, so I will not.