Business Rates (North-East)

Alex Cunningham Excerpts

Tuesday 25th October 2011 Westminster Hall

[Alex Cunningham (Stockton North) (Lab)]

Thank you, Mr Amess, for calling me to speak this morning on a subject that has far-reaching implications for my constituency and the north-east as a whole. I congratulate my hon. Friend the Member for Sunderland Central (Julie Elliott) on securing the debate.

The Government’s ambition to “incentivise” councils to boost local economic growth by linking it to a meaningful increase in funding for local services is laudable in its aims. However, I feel strongly that their proposals will have a raft of unintended consequences which will have a damaging effect on the north-east and other less developed areas of the country, such as Yorkshire. They will not encourage strong, sustainable growth in local areas but rather undermine the manufacturing companies that are so vital to the north-east’s economy. There is no doubt in my mind that the Association of North East Councils is correct when it says that wealthy areas could grow stronger and poorer areas weaker if business rates are localised as proposed. The 12 councils warn that wealthy parts of London and the south-east, led by Westminster and the City of London, could have resources reallocated to them while poorer areas lose out. The new system must take account of local needs, including cost pressures resulting from deprivation.

The current system recognises the systemic inequalities in Britain, providing different councils with different levels of resource to meet different needs and ensuring that the service needs of the poorest areas are met. That is fundamental, as there is substantially greater need in the north-east in terms of pressures on local services and the smaller commercial and business areas. One example is children’s services. Proportionately, several times more children are on free school meals in my Stockton North constituency than in the affluent areas of the south-east, so our local authority’s costs are proportionately much higher on children’s services alone. Some may claim the Stockton borough will benefit marginally—it would only be marginally—from the changes, but any small benefit will be dwarfed by the total loss across the north-east. This is about the north-east region and not about individual authorities—it is about a regional, shared economy.

Despite the diversification of the region’s economy and considerable action over the 13 years of Labour Government on health and poverty, the region sadly still has the largest percentage of its population—around 33%—living in some of the most deprived areas of England. The proposals will make it much worse. If the Government’s proposals were applied to the 2011-12 or 2012-13 grant settlements for the north-east, it would result in grant losses above the national average in percentage terms and substantially above average reductions in cash grant. That significant reduction means that councils would inevitably have to make deeper cuts in their budgets, thereby putting greater pressure on the delivery of the most essential local services.

The Government should realise that not only do different areas of the country face different levels of need and dependency on public services, but they have different business and economic structures. The north-east is very proud of its manufacturing sector, which currently, as my hon. Friend the Member for Sedgefield (Phil Wilson) pointed out, contributes £7.5 billion to the regional economy. However, the sole focus on business rates as a means on incentivising local business growth will hugely undermine that sector.

Business rates from retail or commercial developments are significantly higher, as others have pointed out, than from manufacturing and, under current proposals, it is likely that manufacturing developments will be seen as less attractive propositions, despite the wider economic benefits such as exports, supply chain industries, jobs and skills, compared with retail developments which have the capability to secure greater levels of business income.

[Ian Swales]

Does the hon. Gentleman believe that his area of Stockton has unlimited potential for more and more retail development, which would thereby stop manufacturing investment, which seems to be his proposition?

[Alex Cunningham]

One of the things that I have fought for over the years is to restrict the growth of retail outside our town centre, which, as with so many town centres throughout the country, is suffering. We will not get anything extra for the empty properties sitting in our high streets; I want to see them filled up with new businesses and contributing to our economy.

There seems to be a contradiction between the Tory-led Government’s rhetoric and their actions. When the Tory leader first became Prime Minister, he claimed that he wanted to give manufacturing “another chance” and sang the praises of small businesses by saying that they were the “lifeblood” of the economy. During the general election campaign, he—not then Prime Minister—told the north-east media that the region would be safe in his hands. Sadly, he has failed to keep any promise in that direction, delivering less investment, a laughable growth fund that has yet to achieve any single thing of note, enterprise zones without any real, up-front, hard cash to support them and a banking sector that ignores his pleas for loans to businesses. Now his proposals for business rates fail our north-east region.

I also have strong reservations, as does my local Stockton borough council, about the lack of a clear mechanism for adjusting to changes in the needs of local authorities. I was encouraged that the hon. Member for Stockton South (James Wharton), who has now left his place, agreed that that is a major issue. Under the present formula grant system, needs are adjusted every year through changes in data and every three years by considering changes to the actual formulae. To move to a much more infrequent reassessment of need in the proposed rates retention scheme would be a worrying move, particularly in such uncertain economic times. It is therefore of the utmost importance that the Government forecasts of business rate yield are realistic, and that updated estimates are based on adjustments arising from continuing economic indicators.

I started with how the Government want to incentivise local authorities, but it is important to emphasise that the notion that local authorities in the north-east do not promote economic growth in their area because they do not benefit from increased business rates is fundamentally flawed and, I would go so far as to say, deeply insulting. People in the north-east are working extremely hard to develop, to grow our local economies and to create jobs. Local authorities, including those in the north-east, have embarked on economic development in their area for countless years because they will attract jobs and benefit their area. The Government reforms are not only likely to hinder the prospect of a strong business sector in the north-east but very likely to worsen public services when they are needed most. That “survival of the fittest” model is simply the wrong policy, with the north-east again paying the price.

--- Later in debate ---

[Andrew Stunell]

Yes, most certainly. It will be transparent. I think that the hon. Gentleman, for whom I have a great deal of respect, knows that the formula system, which was made even more convoluted during his period in office, has clearly passed its sell-by date. It is impenetrable, even to chief finance officers of local authorities, not to mention voters on the street.

In the time remaining, I will explain some of our proposed scheme’s features and talk about the consultation process. The aim of the proposals is to change the dynamic from a centrally controlled system to a locally controlled system. That is the purpose of the reform.

[Alex Cunningham]

The Government do not let local authorities set the business rate and they dictate the council tax through freezing, so where is this great accountability and devolution of power to our elected councillors when it comes to finance?

[Andrew Stunell]

I do not want to go too far astray, but I point out to the hon. Gentleman that the referendum proposal in the Localism Bill, which will change who is accountable to the local electorate for excessive council tax rises, is a huge transfer of control from Whitehall to local communities over the council tax income-raising power of councils. The transfer of business rate distribution from a formula determined by central Government to one that gives local councils a real incentive to build their own income base is a fundamental change in both of the aspects that have been mentioned. I am sure that the hon. Gentleman, like me, would like to go much further than that, but let us be clear: these are significant steps.

The consultation was published on 18 July and was backed up by the publication of eight technical papers on 19 August. They included an interactive, electronic paper that allows councils to feed in different parameters of the consultation so that they can establish what the outcome would be for their local authority. I can only suppose that local finance officers in the constituencies of certain Members who have spoken during the debate have not shared that information with them, because there is a clear gap between the worst possible case constructed by that interactive model and the worst case presented in this debate.

I want to make it clear that the baseline will be based on the formula grant that would have been received by a local authority had there been no reform of the system, and that it will be neither better nor worse than that. We made that clear in the consultation. That baseline will not get lost in the future, so local authorities in the north-east will have it as their fixed point for the future. Once we get beyond the period of the comprehensive spending review, growth beyond that baseline will be theirs to have.