Local Government Finance Bill

Lord Smith of Leigh Excerpts

Wednesday 10th October 2012 Lords Chamber

Moved by

[Lord Smith of Leigh]

39: Schedule 1, page 27, leave out lines 37 to 40 and insert “in two equal instalments at six monthly intervals”

[Lord Smith of Leigh]

I do not intend to delay your Lordships too long on this amendment but I was intrigued by the subsection in the Bill which reads:

“A payment by the Secretary of State to a relevant authority under sub-paragraph (2) must be made—

(a) in instalments of such amounts, and

(b) at such times in the year to which the local government finance report relates,

as the Secretary of State determines with the Treasury’s consent”.

If the process is that flexible, all the money could be paid out on 31 March in any financial year. The amendment probes what the Government intend to do in terms of the payment. I am sure that the Minister is concerned about the Government’s cash flow but I am concerned about that of local authorities as well.

[Baroness Hanham]

My Lords, I shall try to do better on this one. This amendment concerns the timing of top-up payments from the Secretary of State to local authorities. Top-ups will be paid to those authorities which at the start of the system receive less in business rates than their funding level. They will be set out in the draft local government finance report.

Our objective is to put in place a system of payments which is easy to administer and fair to local government. Currently, local authorities pay their business rates to the Government in 24 fortnightly instalments. That is a system which has worked well and is understood by local government and it may be that the same system of instalments would work well under rates retention. But if local government believes there are better options then we will, of course, consider them. That is why the summer 2012 technical consultation invited views from local government on how many instalments we should have under the new system.

We will continue to listen on how best to set up the payments system and study carefully the responses to the consultation. The Bill gives us the flexibility to adopt different payment and instalment arrangements in response to those discussions with local government whereas the noble Lord’s amendment would constrain us to two payments for the top-up. I do not think that that would support our dialogue with local government on this point but I hope I have given the noble Lord some assurances that the instalment arrangements we will put in place will reflect the views of local government. I invite him to withdraw the amendment.

[Lord Smith of Leigh]

I beg leave to withdraw the amendment.

Amendment 39 withdrawn.

--- Later in debate ---

Moved by

[Lord Smith of Leigh]

44: Schedule 1, page 33, line 39, at end insert “, and
(c) whether the payment would be triggered by a fall in business rates of 5 per cent”

[Lord Smith of Leigh]

We now move to the safety net for local authorities. The Minister said earlier that this is a very significant matter and clearly it is for local authorities. It is recognised around the House that local government finance is going through a turbulent period and that there are likely to be movements of significant amounts while the pressure on local authorities continues to rise, particularly as regards adult social services, as my noble friend Lord McKenzie said earlier. The famous graph of doom is getting closer every time we meet. The Government have talked generally about a 10% safety net being accessible. However, given the discussion we had earlier and the fact that the review will not happen until 2020, we could have a local authority which suffers a reduction in its business rates of 9.9% in year one, would not therefore be eligible for any safety net mechanism and would have to run with that for a period of seven years. That is unsustainable in terms of supporting local authorities. As I previously argued, there is likely to be a lot of change, and we are now making judgments about what is significant in terms of a percentage. I should have thought, given the pressure on local authorities from central government in terms of reductions in spending and local delivery, that 5% would be a much more reasonable figure.

As regards my Amendment 46A, the issue is intriguing because we assumed when the Government introduced the system in the Bill that they would be funding it and the money would come out of central government because of the impact on particular local authorities. We are now led to believe that some of that funding will not come from central government sources but from local government itself. It seems somewhat bizarre that a system that is meant to help local authorities which are suffering from turbulence due to the current funding system are to be paid for by other local authorities. I hope that the noble Baroness can make it clear that the funding will not come from other local authorities and that central government will take responsibility for it. I beg to move.

[Lord Beecham]

My Lords, I shall speak to my noble friend’s amendments, and the amendments in my name and that of my noble friend Lord McKenzie.

My noble friend Lord Smith rightly referred to the concern about the threshold level above which protection would be given. I note that in the debate in Committee, the Minister said that the Government had been carefully considering these issues,

“together with the safety net support threshold in the range of 7.5% to 10% below baseline funding”,

and said that that offered the, “best combination on balance”. She went on to say:

“We will be consulting local government over the summer before any final decisions are taken”.—[Official Report, 5/7/12; col. GC424.]

It would be interesting to know what representations there have been and what progress was made during those consultations because, on the face of it, it looks as though the Government are still on course for that higher figure. My noble friend Lord Smith rightly pointed out the severe financial problems facing local authorities—a combination both of cuts in government grant and the rising demand for and costs of services. Many authorities will find themselves in an unprecedentedly grey financial situation. The noises outside suggest that the heavens appear to echo my sentiments.

The problem is shared by many authorities. I ought to declare an interest as a member of Newcastle City Council and, like others, I am an honorary vice-president of the Local Government Association. In Newcastle, we are contemplating reaching a position whereby we have to find £90 million a year by the end of a three-year period. That is £90 million every year, which is a significant proportion of the budget. Consequently, any diminution of resources from the reduction in business rate income would be a matter of even greater significance.

--- Later in debate ---

[Baroness Hanham]

The answer on regulations is yes. What comes out of the consultation will either be in the regulations or, if we can make it available, we will. Is that helpful? That probably sets the scene for us on this amendment.

We have always been clear that the levy and the safety net were as one. The reason for the levy is to provide money for the safety net. They cannot be separated. The reason for the levy relates to disproportionate growth, in that people have more than they should have in terms of equalisation and that money will go to the safety net. The safety net is to deal with a sudden collapse of a business or something mega happening that leaves the local authority without finance or as much finance as it needs.

In considering the safety net, we thought that it should not be so generous that authorities cease to care about whether their business rates grow or decline. We want the system to provide an incentive to authorities, first, to maintain and then to grow their business rates. Secondly, the safety net cannot be so lacking in generosity that vital local services are put at risk when authorities see, even temporarily, a decline in the business rates, particularly as this can be for reasons entirely outside the authority’s control—we recognise that—for example, because of losses on appeal. We have discussed what happens on appeal. That can be supported by the safety net. Thirdly, wherever the safety net is set, we need to keep an eye on the scale of the levy that would be needed to fund it. A safety net that requires a very stringent levy might work for the safety net, but if it means that authorities keep next to nothing of any growth that they generate, it will have failed the overall scheme.

I will not pretend that this is an easy judgment about what to do. It is not. It is one that, initially at least, we believe is met by setting the safety net threshold, as I have just explained, somewhere between 7.5% and 10% below baseline funding level; in other words, guaranteeing authorities somewhere between 90% and 92.5% of the funding that they could expect to see from the rates retention scheme. We will want to keep this under review and possibly adjust these percentages in the light of the actual operation of the scheme and certainly as a result of the consultation. Building fixed percentages into the Bill would effectively deny us the opportunity to respond to the concerns of local government, in future, if the percentages turn out to be either too high or too low.

I am not sure that I understand the problems that Amendment 50 seeks to address, and I am not persuaded that the concerns that underpin it are justified. It is undoubtedly true that a major redevelopment to, say, a town centre, could cause a temporary loss of income before the potential benefits of the scheme come to fruition. But if such a loss were significant, it would be covered by the safety net, which, as I explained earlier, would guarantee the authority between 90% and 92.5% of its baseline funding. To create, therefore, a special class of events—redevelopment—where an authority could be guaranteed to secure more than 90% to 92.5% of its funding, as this amendment would effectively do, seems to be wrong in principle. Why just redevelopment and why not other things? I am sure that other authorities could make a case for other one-off events which might, they would claim, be equally deserving of special treatment. Moreover, by providing indemnity for the early-years loss of income, we might end up with the law of unintended consequences and find ourselves simply indemnifying delay in bringing schemes to fruition, with all parties safe in the knowledge that no cost will fall to them. Where there is a redevelopment, obviously there is an initial loss of money, but the expectation is that as redevelopment takes place, the rating potential will come back in. I hope that explanation will satisfy the noble Lord and he will withdraw his amendment.

[Lord Smith of Leigh]

I was pleased that the Minister said that we would have, by regulation, an opportunity to debate this. It is important that we have a consultation so that we can consider it. She made the important point—with which I certainly agree—that many of these changes are outside the local authority’s control. Obviously we would like to produce growth but we cannot always do it.

The Minister said that when the process was up and running there would be some kind of review. I will just check that we will not have to wait until 2020 for it. I hope that when the safety net process has been in operation for a year or so it will be reviewed separately from the system as a whole.

[Baroness Hanham]

My Lords, I am told that the answer to that point is yes; there will be a separate review just of the safety net and the levy.

[Lord Smith of Leigh]

I beg leave to withdraw the amendment.

Amendment 44 withdrawn.