Local Government Finance Bill

Lord Shipley Excerpts

Wednesday 10th October 2012 Lords Chamber

[Baroness Kramer]

My Lords, given the speed with which this debate is going, I shall try to be fast, in the mood of the evening. All the amendments in this group stand in my name and those of my noble colleagues Lord Tope and Lord Shipley. They address deficiencies in the clauses in the Bill that deal with tax increment financing, commonly known as TIF.

As your Lordships will know, TIF-type financing arrangements financed much of the infrastructure of our Victorian cities. The structure is widely used in the United States to finance regeneration and development. It is a financing arrangement that is well understood by the capital markets and investors, but it has not been available for many decades as a financing tool for local government in the UK.

First, I acknowledge that the Government have taken an important first step by providing a framework in the Bill for this kind of financing. They have proposed two different programmes, commonly known as TIF 1 and TIF 2, both of which are based on the new right of local government to retain a percentage of the uplift in business rate revenues that results from designated infrastructure investments.

However, the Government have in effect made sure that the use of TIF 1 and TIF 2 will be severely limited. TIF 1 programmes are crushed by the seven-year reset period in business rate retention. In effect, a project started on day one of the legislation must be designed, receive planning consent, be built and financed, and the financing repaid, within seven years. That is limiting enough, but in the second year the time span reduces to six years and then to five years and so on. Clearly, no steady flow of projects can possibly result from this arrangement. TIF 2 enjoys a 25-year guarantee of business rate retention, so that problem disappears, but the programme is capped at £160 million for the whole nation and so is, frankly, a drop in the ocean.

These constraints fly in the teeth of the Government’s commitment to the devolution of power to local authorities. The constraints emasculate a form of financing that could have enabled a host of infrastructure projects at a time when we need economic growth. The constraints delay the development of a real market to fund TIFs. Markets need both volume and a steady supply. Only then will investors develop the skill base and build the marketing structure to invest, and only then will they offer well structured, attractively priced financing for TIF projects.

Amendment 67 would simply make sure that the term “tax increment finance” was included in the Bill. It is just silliness that the programme dare not, as it were, speak its name under the present arrangement.

Amendment 68 would tackle a far more significant problem. The Government argue that they must constrain TIFs because the financing will be added to the national debt figures, even though the national Government are providing no guarantees and no backstops and the project generates the repayment of the financing. Why do the Government take that position? It does not happen in other countries, so no one can argue that it is required by international accounting standards. This amendment effectively removes that self-inflicted problem.

Amendment 69 allows flexibility in designating the start of the seven-year rate retention period for any specific TIF 1 project. TIF 1 would therefore be far more viable. I defy anybody to give me a coherent argument against this, other than not wanting TIFs to happen.

Amendment 71 allows the Government to look at TIF 2 projects on a case-by-case basis rather than set an artificial, national cap. This amendment seems simply good sense and says that we respect the judgment of the Treasury on a project-by-project basis.

Ironically, because financing for infrastructure in the UK has been hard to come by for so many years, there are excellent projects, big and small, all around the country, which could go ahead if the constraints on TIFs were eased. Many would deliver jobs, housing and new commercial opportunities quite quickly, especially the smaller projects, which need little lead time. Many local authorities have been so disappointed by the emasculation of TIFs. The Government have a last opportunity to think again, and I hope that they will.

[Lord Shipley]

My Lords, I express my full support for the speech by the noble Baroness, Lady Kramer. The amendment is about getting TIF written into the Bill as a financial lever that can generate growth. All the international experience suggests that other countries are well used to using it.

I fully understand the need to ensure that investment and borrowing are responsibly undertaken and I have no desire to see problems arise such as have occurred in Spain with excess local authority and regional spending. However, localism in England has to mean trusting people with power and enabling them to manage their own investment and their own risk. As long as schemes meet the regulations, are genuinely additional and would not otherwise take place, the number of schemes should not be limited by central government, hence our full support for Amendment 71 which gives effect to that.

One of the amendments makes clear reference to tax increment financing, as opposed to there being no reference to those words at all. There is also an amendment that gives greater flexibility in start dates for schemes. Absolutely crucial, however, is the question of self-funding expenditure that complies with accounting standards, and the fact that it ought to be exempt from the public expenditure control framework because its impact on the deficit would be neutral, as the noble Baroness, Lady Kramer, has pointed out. In other words, there is a need to drive long-term growth through tax increment financing rather than through something that counts as an in-year spending decision, as long as it has been exempted from the public expenditure control framework. It seems that the Treasury has regarded infrastructure funded by TIF 2 as part of the local authority self-financed expenditure limits, which contrasts with the policy being followed for enterprise zones, which does not count, even though both mechanisms borrow against future business rate income over 25 years.

This is all about growth. We urgently want everyone to have responsibility for driving growth. This Bill says a lot about devolving business rates to local authorities. However, actually empowering and enabling local authorities to manage investment on the basis of future business rate income, but over a long period of time as opposed to a short one, is a vehicle that will enable growth levels to be enhanced. I hope very much that the Minister will agree with us that we need to do a little more now to promote tax increment financing as a vehicle for growth.

[Lord Beecham]

My Lords, I warmly endorse the amendments moved by the noble Baroness, Lady Kramer, and supported by my fellow Newcastle councillor—ex-Newcastle councillor, I should say now—the noble Lord, Lord Shipley. The noble Baroness is quite right to point out that for all the potential of this scheme, the amount that the Government have decided to allocate to it is, frankly, pitiful. I think that the figure is £150 million. During the mayoral referendum campaigns, which took place earlier this year, much was made of the prospect of city deals for the eight authorities that were subjected to a referendum, and the prospect of tax increment financing was dangled in front of them. However, only three authorities, I think, have now been awarded tax increment financing arrangements. Newcastle, I am pleased to say, has secured I think £90 million of the £250 million, but only two other authorities have been brought in. That is a fairly minimal impact overall.

We have just been treated to the noise of fireworks, which reminded me rather of the spectacular opening of the Olympic Games and the wonderful display there, which of course cost £29 million. That is 20% of the total that is going to be allocated for tax increment financing—for one evening’s entertainment, however wonderful. There has to be something wrong with the Government’s priorities when they afford only £150 million to an imaginative scheme that should incentivise growth. This is a good way to promote growth quickly. As the noble Lord, Lord Shipley, implied, infrastructure investment, which is of course what tax increment finance would essentially be directed to, can take place relatively quickly. It can generate growth in its own terms and blazes the trail for more substantial growth over a period.

In the debate in Committee the Minister prayed in aid the Office for Budget Responsibility as taking a view on these matters. I do not know on what basis that information was conveyed. It may be that the OBR has advised the Government—but the OBR does not take decisions in these matters.

As the noble Baroness, Lady Kramer, pointed out, it is for the Government to decide. On the face of it, it does not appear to be inconsistent with international practice. There has been some question about whether PFI arrangements should or should not be counted for those purposes—certainly, for many years, they were not—but the difference between this and PFI is that PFI was to cover public expenditure. To my mind, the only advantage of PFI arrangements was that they took it off the balance sheet internationally, as it were. It is not comparable when the whole thrust of the TIF proposal is to facilitate private sector development, with the beneficial effect that that would have on the economy. I hope that the Minister and the Government will look at this again and not seek reasons not to accept the amendment of the noble Baroness, Lady Kramer, but find ways to accept and develop it.