Local Government Finance Bill

Lord Shipley Excerpts

Tuesday 12th June 2012 Lords Chamber

[Lord Shipley]

My Lords, I declare an interest as a vice-president of the Local Government Association.

I welcome, in principle, the proposals for business rate localisation. The key reason for that is that I want local government to have a clear responsibility for driving growth and then to secure the benefit of the financial rewards from doing so.

I have had doubts about council tax benefit localisation given the introduction of the universal credit. However, I understand the case for it, which, frankly, would be better made if it did not include a 10% cut in the resource available and which will prove difficult to implement fairly.

I was glad to hear the Minister refer to the issue of the funding baseline as a stable starting point in which no council would be worse off—except that that is not worse off today and into the future as opposed to not worse off than in 2010 when the budget cuts, which were front-loaded, began to impact upon local government. The setting of that funding baseline of government support is very important and will be subject to a consultation over the summer. I hope that we get it right because it will inform the calculation of the initial tariff or top-up. We will have the outcome of that consultation by the time we reach Report stage and it will inevitably inform our thinking on the Bill at that point.

We should remember that cuts in council funding support since 2010 have been higher in the poorer parts of the country, both north and south, and it will be important to ensure that council tax resource equalisation is protected in future both in principle and in practice.

Student council tax exemptions are also being consulted upon. It is important because some councils are now only 75% funded through the current resource equalisation mechanism, and that percentage is likely to drop further in 2013-14. Student council tax exemptions, which are statutory, are supposed to be fully funded. I hope the Minister will be able to give us an assurance, if not today then at Committee stage, that if student housing continues to be exempt from both council tax and business rates, there will be full recompense from the national pot for councils that have to fund local services for dwellings which, in some cases, can be substantial.

I move next to the localisation of business rates. I agree with others who have talked about the 50% central share. It seems very high and it is much higher than I had anticipated. It has the effect of reducing the incentive for growth and, in my view, it is too restrictive. Local growth in business rates should not be used to fund local government grants that currently come from departmental budgets because growth inevitably requires additional basic local government services, and these are likely to outstrip the 50% allocated locally. A better way forward might be to share the baseline at 70%:30% in councils’ favour, but to allow councils 100% of future growth.

Mention has been in the debate about tax incremental financing, but the Treasury seems to have curtailed its potential: TIF 1 because of the 50% retention in business rate growth by central government, and TIF 2 because it is a very small sum, amounting to just £150 million of infrastructure costs to be competed for by the eight English core cities. It is not clear why the principles of enterprise zone financing have not applied to the TIF 2 funding. All 24 new enterprise zones are able to retain business rates over a 25-year period, so surely this accounting convention could apply to the TIF 2 schemes. This should not be seen as an immediate cost against government finances. It seems that the Treasury is putting control ahead of growth and treating TIF as a spending decision rather than as an instrument of growth, which is what it is intended to be. My fear is that, as currently configured, TIF is not going to deliver the growth we desire, so I hope that the Government will look at this again. It is most certainly in their interests to do so because growth delivered by local government delivers tax income for central government from corporation tax, VAT, income tax, national insurance and so on.

I turn briefly to collection rates, safety nets, reserve levels, reset periods and risk management. Risk is being transferred from central to local government, inevitably so since this is about localisation. But councils’ unearmarked reserves will need to be higher, to deal with unintended consequences such as successful back-dated appeals against the 2010 business rate list or a decision by the district valuer to impose a general reduction in rateable value in between scheduled revaluation dates, which can happen, as it did recently in Leeds. Given that a council will itself need to fund up to 10% of any loss, it is inevitable that reserves will have to rise, with a commensurate reduction in revenue spending as a result. Will my noble friend the Minister look again at that figure of 10% and consider whether, as the Local Government Association has suggested, a lower percentage might be more appropriate?

Could I also ask the Minister to look again at the problem with resets, because a full reset every seven to 10 years does not provide enough of a growth incentive? Councils will not feel secure about deriving longer term benefit from the growth it drives and will seek to delay starting schemes to the next reset period in order to get full value from the growth of an individual scheme. A solution to this would be a partial reset system, and I hope that Ministers will look further at that possibility.

Turning to council tax benefit, a 10% cut is inevitably skewed towards poorer areas. There is also a risk of future increases in the cost of this benefit being transferred to local government, which may prove to be higher than the 90% being transferred, even in the first year. As we have heard, the Government are offering powers to local authorities to make up the 10% reduction by reducing empty home and second home discounts. That is an acceptable proposal in principle, to give discretion locally for local councils to decide whether or how to do these things, but there are several problems.

First, the estimates of what can be collected are too high. In many places, second home totals are low, as are the number of empty homes. Secondly, many council treasurers think that collection rates will fall if a full charge is made, and of course recovery costs will rise. Thirdly, the impact on the housing revenue accounts needs to be considered because empty homes that are in council ownership will have to be funded by existing tenants, most of whom are not well off and are already subject to high rent rises. Fourthly, if a council cannot get enough income from reducing discounts on second and empty homes because it does not have enough of them, it will have to decide whether to load the resulting cut on to poor households or to spread it across all council taxpayers.

Local authorities with low numbers of empty and second homes and high numbers of pensioners and vulnerable people who could be exempt from any cut are clearly going to face some very difficult decisions. If councils consider the impact on disability and child poverty of a benefit cut—as they should—council tax bills could rise significantly for remaining groups, who will be working-age council taxpayers, by as much as £300 to £400 a year. For that reason, it cannot be right to load the cost on such a potentially small group of people who are themselves poor by any measure. As my noble friend Lord True has identified, inevitably many councils will adopt the default scheme from April 2013. That may be a good thing because it would enable the Government to understand better the implications of their policy change and what the noble Lord, Lord Best, referred to as the “compounding effect” across all welfare reform.

In conclusion, if the Government believe in devolution, they should do that. But in this Bill there are too many government controls still in place. TIF funding is inadequate and will not deliver government aims, and they need to act urgently on this. The Government should also examine carefully the case for including rateable value increases in business rate retention; and understand the need for local government, in its desire to drive growth and its willingness to manage risk, to have security in delivering this. This means the funding baseline has to be right, the reset period has to be right, the safety net has to be right, and the rewards for local government have to be right. There is a chance over the summer for consultation and discussion to take place. I hope that that will be productive, particularly on the crucial issue of pooling. Committee will be over by the autumn but I hope that the outcome of the consultation can be addressed satisfactorily when we return on Report after the Summer Recess.