Local Government Finance Bill

Andrew Gwynne Excerpts

Wednesday 18th January 2012 Commons Chamber

[Mr Jones]

I do not know when the hon. Gentleman left local government, but we introduced three-year budgeting, which helped local councils. I agree that under the old system, when I was a councillor in the days when the Tories were last in government, the biggest problem for councils was having to guess what their annual budget would be. I am not sure whether three-year budgets were introduced by my right hon. Friend the Member for Greenwich and Woolwich (Mr Raynsford), who is in his place, but they gave councils some certainty. The Bill will add more uncertainty. Councils will be asked to second-guess what the system will be, and we will have no opportunity to scrutinise it before it becomes law.

[Andrew Gwynne (Denton and Reddish) (Lab)]

It is precisely that uncertainty that is unsettling a number of local authorities, including Tameside metropolitan borough council in my constituency. Had we had the opportunity to scrutinise properly the impact of the Government’s changes on various local authorities as part of the process of deliberating on the Bill, we would have been able to assess the winners and losers across the country. Despite the picture that Ministers paint that everybody is a winner and nobody is a loser, the reality is quite the contrary. Over the coming years, as the new mechanism operates, the gap between authorities that win and those that lose will widen. I believe that areas such as mine, and no doubt my hon. Friend’s, will be the losers.

[Mr Jones]

I agree, and that uncertainty will be a problem not just because councils will not know what the rebate is going to be. It is quite clear that Durham is not going to gain from the new system, and it was interesting to hear the Secretary of State and the Minister say last week that the area would be a net gainer. However, the Secretary of State failed to tell the House—he is very good at that—that he was referring to the last five years’ figures, for some of which time the economy of County Durham was growing. Now, under the coalition Government, it is—

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[Mr Jones]

Indeed. Now, we see that the latest unemployment figure is nearly 7.8% for my constituency and nearly 12% for the north-east in general, and businesses are closing. Is the hon. Member for Tamworth (Christopher Pincher) saying that those businesses are somehow going to grow over the next few years as a result of this measure? In fact, councils will lack certainty about how much they will get. The local authority is one of the biggest employers in County Durham, but there has been a reduction in the numbers of people. I think the policy is that by cutting back in local government and public services, all these new jobs will rush forward from the private sector, but today’s figures show that 67,000 people have left the public service in the last quarter, while only 5,000 jobs have been created in the private sector.

As I said on Second Reading about my constituents in the north-east, the Bill will actually help the affluent south. Clearly, it is a damn sight easier to attract business to the likes of Westminster and other economic hotspots in the south-east of England than to parts of County Durham. That is no criticism of the work that local councils do to attract jobs—for instance, with the council’s full support, the area has succeeded in attracting Hitachi trains to Newton Aycliffe in County Durham. I know of the tremendous work that my hon. Friend the Member for Sedgefield (Phil Wilson) did on that campaign.

The Bill is being rushed through with undue haste. We are expecting councils and local people to walk blindly into the future. The parties in government sometimes try to portray this as a simplified system, but it is not; it will be a centralised and bureaucratic system. We cannot allow a situation to develop in which local people or local government do not know how much money they will get or how the system will work in practice.

[Andrew Gwynne]

Is not one merit of pausing, delaying and taking stock of the changes that it would allow us to get the baseline starting point absolutely right for each local authority, which is crucial, and is it not the case that using the 2012-13 formula grant model, including the damping, to determine the baseline will, for local authorities such as mine in Tameside, lock in the funding losses arising from the damping exercise and the disproportionate reduction in funding from the 2011-12 and 2012-13 settlements?

[Mr Jones]

Yes. That would have come out had we had proper pre-legislative scrutiny in Committee. It is the same for County Durham. Under the funding settlement introduced last year by the Conservatives and Liberal Democrats, County Durham lost about £10 million. That will be in the system for ever more now because of the measures in the Bill. Surprisingly, Wokingham council, Surrey council and many others gained from the system. That injustice will be written into the Bill for ever.

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[Mr Ward]

Let me just finish; I shall not be much longer.

I understand all the measures that are built in, but if the total pot is the same and there is a redistribution, it must be to the disadvantage of the beneficiary authorities that receive most of the formula grant. That is a concern, and although it might not affect those authorities for the first few years, because of the baseline protection, the unknown consequences—

[Andrew Gwynne]

Will the hon. Gentleman give way on that point?

[Mr Ward]

Let me just get through this.

The Bill is not too complex. One of the arguments against having witnesses—it would have been useful to do that—is that we will get the opinions of only those witnesses. The truth is that nobody knows what the outcome of this will be, because it is dependent on the growth in business rates, while the strategy of rebalancing the economy will have implications for different parts of the national economy.

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[Heidi Alexander (Lewisham East) (Lab)]

I am grateful for the opportunity to speak in this debate, Mr Amess. I just want to pick up on the point made by the hon. Member for Bradford East (Mr Ward) about the principle of this Bill. I think that he said that most people in the Committee agree with it. I agree with the principle that local authorities should do all they can to promote economic prosperity and growth in their areas. I am not sure that I necessarily agree with the principle of retention and localisation of business rates, although I will not repeat my concerns about that point, which I expressed on Second Reading last week.

I support the amendment tabled by my right hon. and hon. Friends on the Front Bench, because it is overly optimistic, shall we say, of the Government to think that they will be able to get this legislation through and that councils will be able to put the requisite systems in place to introduce the new system of finance in 2013. If we are to have this new system, the commencement date should be moved back, to 2014.

Last week on Second Reading we heard a lot about how the issue of local government finance had been much debated and how the previous Government commissioned the Lyons review. We had an historical “tour de force”, going through the history of local government finance, even referring to the work of Layfield in the 1970s. Government Members seemed to suggest that there was a case for just getting on and doing something to localise business rate retention, but doing something for the sake of it is not the same as doing something because it is the right thing to do and because it will work. The complexity of the new scheme that is being proposed will not make the system of local government finance any more transparent to local councils and councillors, or even the general public, because what we have before us is a system with a whole range of baselines, tariffs, top-ups, levies, set-asides and safety net payments.

[Andrew Gwynne]

My hon. Friend mentioned the issue of setting the baseline. It is absolutely crucial that we get that right, so that local authorities are not put at an immediate disadvantage. She talked about the tariffs and top-up system. However, the introduction of the new system is also predicated on every local authority in the country having the same council tax base and the same ability to raise income from council tax if it faces a reduction in its business rates. Local authorities such as Tameside—where more than 90% of the properties are in band A or B—do not have the same ability to raise extra income from council tax, should they lose out on the business rate formula.

[Heidi Alexander]

My hon. Friend makes a very fair point, and if I am correct, those on our Front Bench have tabled amendments for debate later that deal with exactly that point.

We need to take longer to scrutinise the Bill and for the proposals within it to come into force, because I would contest that this Government do not know whether they are coming or going in relation to local government finance and the retention of business rates, or how this proposal will stimulate growth in local economies.

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[Heidi Alexander]

I have not had the same reaction from my local authority, although the hon. Gentleman and I represent very different parts of the country. If the Government’s proposal prompts local authorities to think more positively about what they can do, that is all well and good, but it is not the whole answer. I would also urge caution, as developments need to be appropriate. The benefits of increased business rates as a result of new commercial development, arguably in unsuitable locations, might drive more local authorities to grant planning permission for unsuitable developments. We need the right development in the right place, with local government financed in a way that allows it to provide the services needed by the local population.

[Andrew Gwynne]

My hon. Friend is getting to the heart of why a pause is needed for deliberation on the possible impacts across the country of such far-reaching changes: some local authorities might have an over-reliance on one sector in developing economic regeneration plans. In my local authority, Tameside, the largest business rate take is from IKEA, the second largest is from Morrisons, and the third largest is from the Crown Point North retail development in Denton. The three main beneficiaries of the proposal would therefore be retail developments. There is no capacity for more retail on such a scale in Tameside without destroying the market across Greater Manchester, of which Tameside is an integral part.

[Heidi Alexander]

My hon. Friend is right to ask whether the proposal will result in the development and business growth that the country needs. There are only so many supermarkets and out-of-town retail centres that the country needs. It was suggested on Second Reading that the kind of economic growth that we would ideally like has a lower business rate take. In my constituency, I am struck by the small companies that start up in people’s homes—Lewisham does not have large tracts of land where businesses are located. The Government need to think hard about the development that the proposal would stimulate. I support the amendment.

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[John Healey]

The hon. Gentleman is right—there will be resets—but we do not know after what period or on what basis, so there is no guarantee that the accounting of need in the current system, which will be frozen at the point when the new system starts, will be reflected in a formula for, assessment of, or decisions on resetting. He might want to pursue that point with his hon. Friend the Minister.

[Andrew Gwynne]

My right hon. Friend makes an excellent point, but does he share my concern that, if, as is suggested, the reset period is set at 10 years, the gap between the poorest and the most affluent authorities will widen and the disparities will worsen in that period? Does that not reinforce his argument that need must be a fundamental part of the overall formula, as does the capacity to raise additional income using the council tax and the council tax base?

[John Healey]

My hon. Friend is right—I am about to make a similar point on relatively affluent areas becoming relatively more affluent under the proposed system.

The Government’s declared intention is for a 10-year gap between resets. I have my doubts about whether a reset after that period will be capable of restoring a proper reflection of need or a proper fairness in the system. We will speak later to amendments that would create much shorter reset periods, but they would not change fundamentally how the system will work to build in an advantage for already affluent areas with a higher business base. That advantage will just get bigger over the period between resets.

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[John Healey]

My hon. Friend is really saying that we have not had a council tax revaluation. The problem he describes is a problem for any Government, but Governments will experience a similar problem with business rates as a result of the Bill.

[Andrew Gwynne]

My right hon. Friend rightly talks of the unfairness of the possible reset in 10 years’ time exacerbating the problems for local authorities, particularly those such as mine, which need the ability to raise income locally and for acute local needs, such as those in Tameside and the Reddish part of Stockport, to be reflected.

In fact, is it not worse than that for such areas? There is almost a double whammy. For those authorities, we must not only get the reset procedure right, but set the initial baseline correctly. All of that is based on the unfair funding settlements and cuts to local authorities such as Tameside and Stockport, but if we get the procedure and the baseline wrong, 10 years down the line, the real unfairness will set in.

[John Healey]

My hon. Friend makes a powerful point. It is certainly clear from how the cuts to local government have fallen in this Government’s first two years that certain areas, including his and mine, have borne a much greater burden than others.

The other part of the double whammy, to use my hon. Friend’s expression, is designed into the system, and it should give the Committee cause for concern. It is that the local distribution of the business rates is very uneven. For instance, Kensington and Chelsea has a much smaller population than Rotherham or Barnsley—I represent part of both those boroughs—but raises five times as much in business rates as Barnsley and three and a half times as much as Rotherham.

The opportunities to grow the business base are also uneven. I have looked back at the latest gross value added statistics published by the Office for National Statistics just before Christmas. Last year’s figures showed a difference of more than 3% between growth in London and that in Lincolnshire, Cornwall or Merseyside. In other words, it is clear that from year one the gap between affluent and less affluent areas will grow. The business rates base, and therefore income for councils, will grow faster in some areas than others, as it has in the past.

Even if there were the same rate of growth in all areas, the relative size of the business base income, which is higher for some councils than others, would mean a greater actual cash income for some councils. The top-up and tariff system that the Government are designing will reduce, but not remove, that disparity. If it did remove it, it would remove the incentive element that they want to build into the system.

Having been a local government Minister for two years, introduced the first ever three-year settlement for local government and altered the formula to better reflect needs and resources, I know that there are always winners and losers from any change. The whole House knows that. However, the councils that have a big business rates base, a strong council tax take and high levels of growth will be win-win-win councils, and those that do not will find that they are lose-lose-lose councils. That is the unfairness that is built into the design of the new system. It will increase divisions and tensions in our country.

[John Healey]

The extent to which it is a step in the right direction remains to be seen. There is an element of its direction that is right, which is the desire to see greater incentives for local councils to support the growth of their business base, and greater rewards for doing so. How those incentives will work is weak and potentially perverse, but the principle is nevertheless in the right direction. The potential practical problems that we are beginning to tease out are part of the debate that we need to have.

[Andrew Gwynne]

My right hon. Friend is being incredibly generous in giving way. Is there not another problem that has not been properly addressed in the legislation? It takes no account of the complexities of sub-regional economies. For example, many of my constituents in Tameside and Stockport work in the city of Manchester or other local authorities. The scope for economic development in Greater Manchester is concentrated in the city centre, around Manchester airport, Trafford park, the Trafford centre, the media city and Salford quays, and not necessarily in Tameside or Stockport to the same extent. Although there are facilities for pooling business rates where local authorities agree, if they do not agree, will not authorities such as mine be disadvantaged?

[John Healey]

They will indeed. As my hon. Friend states, there is a double disadvantage to areas such as his. He paints that picture and concern very vividly.

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[Helen Jones]

Indeed—my hon. Friend makes a very good point. Later, we will debate the provisions for safety nets and how the Bill can cope with risks.

[Andrew Gwynne]

Will not some of the disparities about which my hon. Friend is talking be exacerbated by the new system? The analysis from the special interest group of municipal authorities—SIGOMA—shows that there will be an absolute decline over the next two years in funding across all local authority areas, that by 2015-16 some of those authorities will have recovered their position and that by 2020 there will be a huge disparity between the most rich and the most poor.

[Helen Jones]

My hon. Friend highlights a real risk of the Bill. All the modelling shows that the gap between rich and poor will become wider. That is a problem because, in my experience, local authorities have worked relentlessly to tackle these issues and to regenerate their communities. It is a long-term project, however, and it is much more difficult in some areas than in others for a whole host of reasons, including poverty, a local authority’s inheritance, its location and so on.

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[Helen Jones]

I know the hon. Gentleman made a thoughtful speech on Second Reading, but he is wrong on both counts. First, there is nothing on the face of the Bill about resets. Secondly, resetting the whole system is different from the way in which the system is run in the meantime. The baseline has nothing to do with the number of public sector workers anywhere. The baseline is the current local government financial settlement, which we argue is completely unfair to many local authorities anyway.

[Andrew Gwynne]

Because many of the children’s services that my hon. Friend mentioned are statutory, is it not the case that local authorities will have to find the money to provide them? The real pinch will come in the budgets for non-statutory services. There will be huge differentials from local authority to local authority, with some able to provide libraries, parks and other wonderful things, and other local authorities barely able to make their statutory arrangements.

[Helen Jones]

Indeed. My hon. Friend hits on a point that is important to local government as a whole. Local authorities cannot avoid their statutory responsibilities, so other services are squeezed. In future we may well see richer authorities developing a Pickles park here and there and naming public libraries after this beneficent Secretary of State, but it will be very hard for other authorities.

We have included unemployment in the factors that the Secretary of State must take into account. There are a number of reasons for that. Unemployment increases ill health, it forces more families into poverty, and it is an indicator of the state of business in an area. But high levels of unemployment also increase the demand for local authority services. As one of my hon. Friends said earlier, it will increase the demand for council tax benefit, for example. As more people become unemployed, many more rightly receive discounts on other services, such as leisure services. So unemployment increases demand at the same time as locking the authority into a cycle of falling revenue.

The theory behind the Bill is that local authorities can resolve that problem simply by expanding their business rate base and attracting more jobs. This was the theory that the Deputy Prime Minister set out when he explained the Government’s proposals to council leaders. He said:

“The new system will start on a level playing field—where you progress from there is up to you.”

It is a wonderful thing to be a Liberal Democrat. They can conduct politics exactly as if they are writing a “Focus” leaflet. But in the first place, there is no level playing field. We have debated endlessly what we see is the unfairness of the current local government financial settlement, which forms the basis for rate redistribution and penalises the poorest local authorities most. The simplest statistic is the most telling and it bears repeating. The 10% most deprived authorities lose four times as much as the 10% least deprived. The cumulative cuts in per capita spending hit the poorest hardest.

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[Mr Kevan Jones]

Again, that is part of the contradiction in the Government’s thinking and policy. As we have seen, LEPs are toothless tigers. They are not going to produce much growth or investment, as I know from the ones in the north-east. Certain people in the business community are becoming increasingly cynical and feel that LEPs are just going to be talking shops, rather than organisations that will do things to regenerate areas or attract growth.

Amendment 19 refers to “need” and, as my hon. Friend the Member for Warrington North (Helen Jones) said, it sets out the important issues that we need to take into consideration. I know from my north-east constituency that unemployment is a very important issue to take into account. The level of unemployment stands at 11.7% in the north-east of England, which is 3.5% above the national average. As my hon. Friend said, unemployment means that additional services are required and it puts further strains on local councils, which is why it is important to take it into account.

This debate is also about where we start from, which is why it is important to take the council tax base level into account. In the north-east, 50% of properties are in the lowest band, band A, whereas the corresponding figure for Surrey is just 2%, with 75% of properties there being in band D and above. It is very difficult for councils in the north-east to raise extra finance outside the business rate, so we are not starting on a level playing field. Mention has been made of South Tyneside, where 66% of properties are in band A, and that must be compared with the figure for Kensington and Chelsea of less than 2%.

[Andrew Gwynne]

My hon. Friend is making a superb point about the ability of local authorities to raise income from council tax. Is not a major issue for local authorities such as his and mine the fact that the formula grant for 2013-14 will lock in those very real cuts that such local authorities will have had to face from 2011-12 onwards?

[Mr Jones]

I am grateful to my hon. Friend for mentioning that, because I was about to discuss the baseline, as it has been set at 2011-12 levels. Durham county council had a grant reduction last year of some £10.9 million, which represents about a 4% loss, and that is now going to be set in stone for the next 10 years. Let us compare that with the situation in Wokingham, in Berkshire, whose authority actually had an increase in its grant of 0.2% and each person living there got an extra 30p in grant.

As I said on Second Reading, it is quite clear—I take my hat off to the Conservatives and do not know why the Liberal Democrats are turning a blind eye to this—that the Conservatives are looking after their own. They used to accuse the Labour party of doing so, but the Secretary of State makes no bones about the fact that he will help the people who voted for him. Does he give a stuff about the north-east and other places? No, I do not think he does.

It is important that we consider need because, as I said and as my hon. Friend the Member for Warrington North said earlier, with unemployment, a more elderly population and deprivation, people use council services more in such areas. Some 31% of the people living in County Durham, for example, live in the top 20% of the most deprived areas in Britain and 21.8% of children in the county live in homes that are classed as in poverty. In Wokingham, that figure is under 7%. The demand for local services in Durham is obviously a lot higher. Likewise, eight people go for every job in County Durham. A good example is looked-after children: in Wokingham, there are 22 per 10,000 children whereas in Middlesbrough, in the north-east, there are 104 per 10,000.

It is not just about the numbers but about the types of services. Elderly care and services for looked-after children are very expensive to provide. There is no cheap way of looking after elderly people or vulnerable children in care, so that puts added pressure on those councils. That must be taken into account in any assessment, as otherwise we will do exactly what my hon. Friend said that we would. We will start from the premise that this Government like to put out, which is that irrespective of where a local government organisation is in this country, there is a level playing field. There is not. Any system must take need into account and that is why amendment 19 is important and why I do not understand the Government's not being in favour of it.

Another issue that we heard about on Second Reading and that we have heard about again tonight is the idea that by retaining a certain percentage of the business rate councils will be able to incentivise and develop business. That might well be the case in some areas, but councils must cater for other factors, one of which is location. My hon. Friend mentioned Consett. Consett has actually done very well in attracting businesses, but it is a damn sight harder attracting jobs there than it is in parts of the south-east and London.

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[Mr Jones]

A bit far, perhaps. The Government know exactly what they are doing. As I said on Second Reading, their strategy is quite clear: they want to give freedoms to local councils, push decision making down as far as possible and then, when they have cut grants, as they will with council tax benefit and others, they will say to local people, “Well, it’s your local council that has to decide how and where the cuts come.” The Government will stand back and say, “We’re sorry, but it’s nothing to do with us.” That is the clever side of it. Part of their strategy is about making sure that they save money and cut it out of the system but that local councils, rather than themselves, get the blame for implementing the cuts.

[Andrew Gwynne]

Does my hon. Friend agree that an unforeseen consequence of the Bill could be that local authorities become overly dependent on one type of economic development—the type they can generate the most from in business rates? In an area such as mine, that would mean an overdependence on retail.

[Mr Jones]

My hon. Friend makes a very good point. In terms of economic development, local authorities might go for what will generate income rather than what will create the right mixture. Although retail shopping and warehousing produce business rates, they do not produce large numbers of local jobs, but there might be a growth in those types of business in some areas.

We should not be fooled into believing that the Government do not know what they are doing, because they do know. They are passing legislation down to local government and making sure that those in central Government do not get the blame. We need to be saying that these cuts have been implemented because of the Government—including the Liberal Democrats. It amazes me that Liberal Democrats in Durham can complain about the closure of leisure services or a leisure centre while stepping back and saying, “It’s nothing to do with us,” even though their representatives on the Front Bench in government and others are going through the Lobby to vote for such measures, as they will tonight. Without amendment 19, and without some assessment of need in the Bill, I have little faith that the Government will not do what they have a track record of doing: rewarding the areas that vote for them.