Local Government Finance Bill

Baroness Hollis of Heigham Excerpts

Tuesday 3rd July 2012 Grand Committee

[Baroness Hollis of Heigham]

Can we all do that?

[Lord Jenkin of Roding]

Surprise, surprise, but there we are. Discussing this with the Local Government Association, it seemed to me that there would be merit in building in some form of escalator. Amendment 12 in this group introduces a limit, as it were, to say that it cannot be less than the previous year. However, that only stops it going down. Amendments 21 and 22, in the names of my noble friends and me, seek to build in a regular process by which the centralised share falls and the localised share rises. I do not for one moment claim that this is the only way of achieving an escalator; obviously, there might be a whole range of different options to do that. With these amendments we are arguing for the principle that the local authorities should be able to look forward over the next few years to a steadily rising proportion, both to increase the incentive to encourage development and more jobs, and to give expression to the increased localism which the Government aim to champion.

Amendment 22 spells out our proposal. I have said that I do not think this is necessarily the only way of doing it, but the proposal is quite simple: one starts at 50%; two years later the central share declines to 45%; two years after that to 40%; and two years after that to 35%. This takes us only up to 2018, and of course one is hopefully looking further forward than that. The corresponding local shares would go from 50% to 55% two years later; then to 60%; and then up to 65%. Therefore, over the period up to 2018, we would move from 50:50 to 65:35. Perhaps we could write this, or something like it, into the Bill. I made it absolutely clear that there are a number of different options for doing this and this was the one that seemed to attract some support in the local authority world. Local authorities particularly want to see some legislative provision setting out that the 50:50 split is not to be permanent or long-term.

As I have made clear—and this is very different from what I said when I was Secretary of State for the Environment in charge of local authorities—I am a huge supporter of the principle of localism. The noble Lord, Lord McKenzie, and others have made the same point. However, I detect the hand of the Treasury in this wish to maintain a 50% share. There is a feeling that it does not want to let go. My noble friend Lord Brooke of Sutton Mandeville and I have both been Treasury Ministers—I was the Chief Secretary at the Treasury—and I recognise that temptation. It seems to me that we have a choice here. Are we really going to encourage an increase in localisation or are we going to maintain a strong central control with some modest shift in favour of localism?

In considering the Bill and this particular proposal for the division of the business rate retention scheme, I hope that the Government will be prepared to accept that their good faith and belief in the principle of localism and localisation would be demonstrated by writing something like this into the Bill. That is what we are looking for. It would give an enormous fillip to the encouragement of local government which would go the whole way back, and local government would come to be seen as a more important area of governance in this country.

There is no doubt that as, over the past 30 or 40 years, the public have seen local government decision-making increasingly being taken over by central government, there has been a great loss of public interest in and concern over lower and lower voting figures. It is to the huge credit of local councillors such as the noble Lord, Lord Smith of Leigh, and others who are here that they have kept the flag flying in these difficult times. We now have a change of direction and I think that this has given local government an enormous boost of encouragement. It can say, “We really do still count. We are still looked to as an important area of government and not just as an instrument of central government”.

To my mind, if we could build into the Bill some form of escalator so that over the next few years there could be seen to be a shift in the percentage from a 50:50 towards a 65:35 split, or whatever it might be in six or seven years’ time, that would send out a very important signal to local government that the national Government are on its side and that they want to make localism work and make it a greater reality. The advantage would be that it would increase local authorities’ incentive to encourage development and so achieve growth and jobs.

If that is not done, it will give the impression that the Government—the Treasury would carry the blame—are giving a higher priority to tight monetary control than to encouraging growth. There has been a huge amount of argument about that over the past year or two but here is one way in which we can fight back on it. I hope that we will be able to persuade my noble friend on this. She will no doubt wish to discuss it not only with her colleagues in the DCLG but with Treasury Ministers—I know that they have a lot of other things on their plate at the moment—to see whether we can do something along these lines. It would be a hugely important signal to send out and a great encouragement to local authorities, as I hope that noble Lords will agree.

--- Later in debate ---

[Lord Greaves]

The noble Lord was sacked. I think further investigations are required, and we will report back.

I was moved to speak by listening to my noble friend Lady Eaton. I support a great deal of what she said, which was in emphasis a little different from some of the contributions made by other noble Lords. In principle, these amendments are right: 50% is a remarkably low figure to be retained by local government, and certainly not what was expected when the scheme was first announced to the world. However, I want to bring noble Lords down to earth with regard to some local authorities. Retention locally of the business rate will not be a financial bonanza for those local authorities at 50% or at any other higher percentage. Many authorities, as my noble friend said, will continue to need to rely on the rate support grant, if it continues to be called that, because they will have great difficulty not only in finding ways in which to expand their tax base by increasing their business rate but also maintaining them at the present level. This is a fact of life, and the localisation of business rates in these areas, including my own region of east and Pennine Lancashire, does not have the rosy glow around it as it does in areas that will find it easier to grow a commercial base. That is not to say that people will not try to do it, but in areas such as my own it will be a matter of trying to hang on to what is there at the moment.

I give an example. A small district might have two or three large mills or factories contributing quite a high proportion of the business rate. It only requires one or two of those to close down and the position will be fairly catastrophic. It is not the same in every kind of area and whatever kind of system we have in future will have to retain a substantial element of redistribution at least for those authorities. I do not know what proportion of authorities that is, but I have heard my honourable friend Andrew Stunell tell me that about 20% will be substantially reliant in future on continued redistribution elements of the grant. I do not know whether the Minister has an idea or can enlighten us after this Committee.

The second thing that causes a certain amount of alarm is the 50%. It is really the argument about what happens to the money that is centrally controlled. How far will this kind of area, which tends to be the old, declining, industrial area—although not all as some are coastal towns that have fallen on bad times, and so on—rely on the traditional kind of government grants, particularly capital grants, for regeneration? We discussed this issue in your Lordships’ House last week in a debate launched by the noble Lord, Lord Mawson.

The noble Lord, Lord McKenzie, and I were making similar points that parts of the country are missing out on the grants that are now available, compared with the past. That is partly as a result of the reduction in funding for capital schemes and the fact, for example, that the regional growth fund is cumulatively less than the regional development agencies used to have available to disperse. It is partly because there is a tendency now to go for growth and to go for the places where growth is easiest and perhaps to go more to the south-east, the Greater London area, the big cities, the city regions and metropolitan areas. There are very exciting and worthy schemes for authorities to work together for economic growth and development in areas such as Greater Manchester. Those places that do not naturally fit into the big city regions risk missing out. I am talking about my own area in Pennine Lancashire, but there are others as well, in the north-east, in west Cumbria, and elsewhere around the country. Our concern is about how much the less fashionable and less sexy areas, or the areas which find growth more difficult and where the return on investment may be less as a percentage, are going to miss out on this 50% redistribution. There are huge questions there.

I ask the Minister whether the Government have an assessment at this stage of how much of this central fund is expected to be used for different purposes. How much of it is expected to be used for council tax issues which the noble Earl, Lord Lytton, was talking about? How much is expected to go on administration? How much is expected to go on straightforward redistribution to the sort of areas I am talking about? How much will go to traditional funds and schemes for capital investment and development around the country? How much will go on regeneration? How the Government will use this money is not clear to me at all. I can see in total the kinds of things it is going to used on, but I do not really know whether they have an estimate of how much is likely to be used for the different elements. I would find it extremely interesting and useful to have that information, if the Government have worked it out.

[Baroness Hollis of Heigham]

My Lords, I had not intended to come in on this part of the Bill; I was waiting for council tax to come up. However, the points made by the noble Lord, Lord Greaves, have triggered a set of questions for me. Does the department have a “who pays, who gains” outcome as a result of these changes? If so, can the Minister share that with us? I am very unclear.

I am delighted to see that the noble Lord, Lord Jenkin, has been converted from the error of his ways. Let me remind him that before the business rate was nationalised—I think it was the only thing that was nationalised under the Thatcher Government—authorities like my own, which were no longer unitary after the disaster of 1974, none the less received a business rate. This meant that those who lived outside the fringes of the city area and who did not pay the domestic rate, contributed through the business rate to the city’s well-being. This meant that a city could therefore serve as a regional centre while having only the property rate of a rural district council.

More important still, it meant that the leader of the council—myself—or the chair of finance would take great pains with the Chamber of Commerce. Every year, I went with a prospective budget, and it had a very direct influence over how we constructed our budget. As a result, until the nationalisation of the business rate under the noble Lord, Lord Jenkin, and as there was a direct pay-off to our revenues, I was willing to forego rateable value on new property; I was willing to invest in apprenticeship schemes; I was willing to do the environmental works, the roads and so on, to get small enterprises off the ground; and we were willing to help SMEs to develop through local enterprise trusts. We did all that because there was a direct pay-off. I could never understand the huge folly of a Conservative Government, which is above all expected to be business-oriented, cutting that link with the city authorities—admittedly, they largely tended to be Labour authorities at that time—which gave them an incentive to build their business.

After nationalisation of the business rate, the result was—I did the figures—that my local authority was contributing something like £14 million a year in business rate to the Exchequer and receiving back something like £7 million. The adjacent Conservative authorities, which did virtually nothing, were contributing about £2 million and receiving back about £4 million. In other words, they were piggy-backing off the flow of the nationalisation of our business rate to rural areas, because they had never had a concern to develop business in their areas, partly because they had high property values and did not want to be contaminated by it. It also meant that I no longer had any incentive to do something similar. I forgot to declare that I, too, am a vice-president of the Local Government Association.

I applaud this move, even if it does not go as far as I would like. However, I understand the need for an equalisation grant, otherwise Westminster would retain far too large a share and other local authorities would have very little. As a result, it will be really important for us to see what greater equity there will be now in terms of the statistics between who pays in and who gains and what the return is. Some authorities, such as my own, are district councils trying to do a unitary job with district council revenues—thank you very much to the Government for that—and they will be glad to have that money if it allows them to look after their business economy as well as the wider economy, in terms of building tourism and so on for the whole area.

For the sort of authorities that the noble Lord, Lord Greaves, mentioned, which may well need this money but may not receive it, there is a problem, too, of the distribution between those authorities whose money comes from small but highly valued premises—solicitors’ premises and so on—and those that have relied in the past on large physical premises such as factories, which are now closing due to the shift in the British economy. A reason for this request is that we were screwed the last time around and it was a disastrous policy for government, of whatever complexion, as well as for regional economies. I hope that this time around we will get a more equitable and sensible distribution. If the Minister can help us by promising to circulate some of these figures, it would be very valuable indeed.

[Lord Beecham]

My Lords, my noble friend Lady Hollis makes a very good point about the relationship between local government and business. It is interesting that the London Chamber of Commerce and Industry, in its briefing for today’s discussions, makes the point that more than a quarter of a century after the noble Lord, Lord Jenkin, perpetrated his terrible crime, 53% of London businesses apparently think that councils are currently responsible for setting the level of business rates. It says that that reveals a breakdown in communication between councils and businesses. Some of us might think that it simply betrays a complete ignorance of how local government works on the part of those who really should know a little better. However, that does not mean that the situation should not be improved.

I sympathise with the amendment tabled by the noble Lord, Lord Jenkin, because he seems, rightly, to want to rebalance this position. The Government seem to take a rather Augustinian position in respect of localism: “Lord, give them localism—but not yet”, would be one way of putting it. Another way, perhaps more familiar to the Secretary of State in his earlier days as an enthusiastic Marxist, would be to describe it as a form of democratic localism. Democratic centralism was the vogue under the Stalin regime but this is democratic localism, which is to say that all the orders come from on top and are then applied locally. This division certainly seems to portend something of the kind.

In a way, the game is given away by paragraph 9 of the statement of intent on business rates retention. Having previously said that a number of “specific grants”, which I will mention in a moment, will be included in the business rates system, that paragraph goes on to say:

“As a result, the Government is able to set the local share at 50% which delivers our objectives on growth and localism while allowing for future fiscal control to protect the interests of the taxpayer and the wider economy”.

That is a fairly clear statement that the Government are seeking to use this 50% as a controlling mechanism.

--- Later in debate ---

[Baroness Hanham]

That was an interesting, if unexpected, debate. When it started, I was very touched by the fact that I had a little note that said, “The purpose of Amendment 15 is not entirely clear”. My reply may not be totally applicable either, but somewhere along the line we have clearly raised really important points. We are going to have to look again at the amendment, but in the mean time, I will tell the Committee what we thought it was about, and if it does not quite tie up, we will sort it out, I am sure, between now and the next stage.

I am advised that the amendment in its current form could not stand as it would insert an amendment into Schedule 8 which, as a result of this Bill, will cease to apply for any purpose in England. That is the first problem. Even without this technical deficiency, we have a bit of a problem. We fully respect the noble Lord’s views that under the rates retention scheme authorities should be able to benefit from rental growth as well as physical growth. Westminster has been touched on by several speakers, but for authorities such as Westminster or, potentially, for my ex-authority Kensington and Chelsea, the potential for physical growth is much more limited than for others as there are very constrained sites with developments all through.

The efforts of local authorities to make their areas more attractive to business are not quite as limited as some would like to pretend. Efforts that have resulted in a steady increase in rental values and hence rateable values will arguably go unrewarded under the rates retention scheme. The duty of government is to legislate for a rates retention scheme that is workable for the whole of local government, not just for some authorities. For that reason, we could not devise a scheme that allowed local authorities to keep any part of the growth in rateable values. To explain why, I need to explain to the Committee how the revaluation works, although I hesitate to do that because the noble Earl, Lord Lytton, will understand this far more than I do. Perhaps for the benefit of the Committee we should go through it.

Every five years, the Valuation Office Agency undertakes the revaluation of non-domestic properties and, as a result, the aggregate rateable value of all English non-domestic properties either—amazingly—increases or decreases. In setting the multiplier for the first year following the revaluation, the Government take account of the overall increase or decrease in order to ensure that overall the same amount of tax is raised from business after revaluation as from before. For example, if the aggregate rateable value were to double, the multiplier would have to halve. In that way, it simply redistributes the tax burden between businesses on the basis of their up-to-date property values.

In the new world of rates retention, the system is set up at the outset so that through the means of tariffs and top-ups there is an initial redistribution of resources. That protects the position of those authorities that are relatively resource poor. But if, as I explained, we collect no more money from businesses following the revaluation than we did before, it follows that there is no additional money in the rates retention system. If therefore some authorities are to be allowed to keep additional resources, by the same token, some will have to receive less. Therefore, because of the uneven distribution of the rates base, this would not just mean a cut in funding for those authorities that have seen their rateable value fall. So an authority could see a funding fall, even if its rateable value had risen, if that price was by less than the national average. That could not be fair. In fact the only way to ensure that all authorities see their rateable value rise and see some income benefit is to break the multiplier link and raise the overall burden on business, and the Government are not prepared to do that.

For those reasons, I cannot accept the amendments that seek to allow any part of an increase in rateable values to be retained by local authorities. I hope that that explanation, somewhere along the line, meets the basis of the amendment. If it does not, perhaps we could discuss it between now and the next stage. I am not sure at all that it covers any of the matters raised by the noble Earl, Lord Lytton. Having looked at Hansard, we may need to come back to that. While it was a very relevant aspect to commercial improvements, I am not sure that it necessarily fits in with the amendment, but it may do. I will happily say that if the amendment is to be pursued and if the noble Earl feels that the reply is not adequate or there is something more that needs to be done, we should discuss it between now and the next Sitting and then we might be able to get us both together to decide what we are trying to achieve.

[Baroness Hollis of Heigham]

I was intrigued by the Minister’s answer. I fully understand her point about the multiplier effect and all the rest of it, but I did not understand her bald statement that the Government were not willing to allow local authorities to retain any growth et cetera under that formula, if you were to break the link. Why can the Minister not make a distinction, which most of us would expect to operate, between an increase in the value of commercial property—the amount per square foot as affected which runs across a city, which I absolutely accept has to be recalibrated given the equalisation formula—with the additional increase that comes through the efforts of local authorities for either the growth of a particular business or new business coming in? Those are two different sets of flows of money. The Minister did not distinguish between the two. The point about encouraging local authorities in this way was precisely to put a new emphasis and new attractiveness on the second of these.