Local Government Finance Bill

Baroness Thornton Excerpts

Wednesday 10th October 2012 Lords Chamber

[Lord Jenkin of Roding]

My Lords, before I move this amendment I should declare my interest as a joint president of London Councils and, like a large number of other noble Lords in all parts of the House, as a vice-president of the Local Government Association. There were lengthy debates in Grand Committee about the question of 50% of the amount of business rates being retained by local authorities. I therefore really make no apology for coming back to this issue. There have been references already, in the debates on earlier amendments, to the Government having made it clear that there will be no reset until 2020 and that therefore the main structure of the system will remain as it is.

First, I can deal very briefly with Amendment 10 because I want to direct most of my speech to the two other amendments in my name in this group, Amendments 13 and 14. When a similar amendment to Amendment 10 was tabled in Grand Committee, my noble friend explained that it was the Government’s intention to retain, as I have just said, the first reset date as 2020. That means seven years without a change. It is worth reading what she said on that occasion:

“That will give local authorities much greater long-term certainty about their financial obligations to central government and the funding that they can expect to receive from government than under the current three-year spending … process”.—[Official Report, 3/7/12; col. GC 327.]

At first sight, that sounds like an attractive proposition, but the fact of the matter, as has already been indicated, is that there are considerable other uncertainties surrounding this.

If I may say so, my noble friend might have somewhat exaggerated the degree of certainty that the system in the Bill, and her plans for it, will actually produce. What she said is really not accepted by a number of local authority associations. Perhaps I might just refer to one. London Councils suggests that while the system of top-ups and tariffs might remain constant within the business rates retention element of the system, although the adjustment for revaluation may alter this, uncertainty will continue to exist around the total level of funding that local authorities can expect to receive under this system. It points out that this really is not ideal. We have of course had references to the problem of setting budgets, not just for 2013-14 but thereafter.

To some extent, this overlaps the proposition in Amendments 13 and 14. These amendments go to the heart of the policy that lies behind this part of the Bill. They highlight what appears to be a contradiction between the laudable ambitions of Ministers to transform the system in the interests of economic growth, on the one hand, and on the other of what seem to be the instincts of the government machine to retain a very firm grip on the levers of control. This is an instinct that I of course recognise but in this context deplore.

The aim of this debate and the amendments that I am moving is to elicit from my noble friend a statement of the continuing willingness of Ministers in the department to do battle against the inertia of Whitehall’s controlling instincts and to hold fast to the vision of promoting growth and development. These are arguments that we developed at some length during the debates on the Localism Act, with, I have to say, some quite tangible results—Ministers recognised that if you were giving local authorities a general power of competence, it was rather silly to have pages and pages of the Bill telling them exactly how to do it. I am not asking for the impossible here but simply for recognition that one must resist the tendency for Whitehall to control town halls.

A fundamental principle behind the localisation of the business rates is that local residents of councils that actively promote development will see the benefit of extra growth in the form of retained tax receipts. To put it simply, it is an incentive, and that is what it is intended to be. It makes very real for councils the basic economic truth that the state prospers only if the nation does. All government, not just local government, can spend only what productive businesses earn. I recognise at once that many councils already care deeply about promoting their local economies. The evidence for that is clear as they put effort into economic development through activities as diverse as the way they operate the planning system, build up the local tourism offer—that has been referred to—tackle local unemployment, find training opportunities for young people and maintain the effectiveness and attractiveness of the local high street.

The evidence also shows that communities that know that extra development brings extra funding for public services take a different attitude to what might otherwise appear to be difficult decisions—one thinks particularly of planning decisions. That is not just my own opinion or even some abstract economic theory; we have as evidence the DCLG’s own excellent analysis, overseen by Professor Henry Overman of the London School of Economics. That analysis calculates for us the precise incentive effects from retaining business rates locally. It draws on empirical economic studies and the current academic literature. It shows that on a middle-case scenario, and of course there are margins for variability on either side, the Government’s policy could generate an extra £10.1 billion of gross domestic product as the result of the incentive effect of localising just half the business rate revenue, affecting councils’ planning decisions. Half is what the Bill provides, of course, and is what is intended to remain in place until 2020.

However, the evidence shows something more than that. According to the Government’s analysis of that best academic literature, this incentive effect works in direct proportion to the share of the business rate that is retained locally. For every extra percentage share of the rate revenue localised, the gain in GDP increases too. The more of the rate revenue you localise, the more extra-economic growth you get as a result. As I say, this is the finding of the Government’s own analysis.

I come therefore to the point of the amendments. If the Government believe their own economic analysis and if they really want to see economic growth—I cannot think of any of us who would not want to see that—the economic argument is completely compelling: we should localise as much of the business rate as we possibly can.

However, that is not what my noble friends have chosen to do. Instead, the policy is to fix 50% as the central share of the rates which councils must continue to surrender to the Exchequer. One can only speculate on the reasoning behind the figure of 50%, which seems a suspiciously round number, but the effect is clear. The mechanisms required to impose the 50% central share will mean that the DCLG will need to continue to involve itself deeply and in detail in councils’ financial affairs for some years to come. Central government will be kept busy. More than that, to go back to Professor Overman’s research, if the local share is set at 50%, so is the growth incentive of the new scheme. Are we really happy to try to escape the current choppy economic waters by going at only half speed?

Amendments 13 and 14 challenge the way in which the central share arrangement in effect contradicts the commitment to growth that lies behind the scheme in this Bill. They would require the size of the central share to reduce progressively over time—I suggest a minimum of 5% a year—and the local share to increase accordingly. They take the Government’s policy intention at face value and in the light of their own published economic evidence, and impose a framework that would allow them, over time, to increase the growth incentive built into the new system and as a consequence to increase the economic output of the nation. That seems to me to be a thoroughly desirable objective.

My noble friend has said on other occasions that 50% would not stay for all time; it is the Government’s hope, as they put it, that as the economic situation improves they will be able to increase it. But if increasing it earlier actually helps to put the Government’s economic policy firmly on to a growth trajectory, we really ought to consider that. When local authorities are looking for an opportunity to get a bigger than 50% share, that share should grow over a period of years. They are asking for something that is not only in their own interests but in the interests of the nation at large. I beg to move.

[Baroness Thornton]

My Lords, I shall speak to Amendment 37A, tabled in my name. I need to declare some interests. I am the honorary secretary of the All-Party Group on Social Enterprise, which I founded in 2001. I am a patron of Social Enterprise UK, and the ambassador for Spota, the trade body for a sports and leisure trust and an associate of Social Business International. The last two are modestly remunerated and are listed in the register of interests. I am a founding chair of Social Enterprise UK, a former trustee of Jamie Oliver’s Fifteen Foundation, Social Enterprise London and Training for Life, and I am a lifelong member of the Co-operative movement. Noble Lords will understand that with that background I know quite a lot about charities and social enterprises, but I have to say that local government finance does not rank highly among my areas of expertise. That is why I am so pleased that my noble friend Lord Smith and the noble Lord, Lord Shipley, have agreed to support this modest amendment because they certainly understand much more about the detail of business rate relief.

What we are considering today is not a partisan issue. It is in no one’s interests for the development of trusts to provide sports facilities, theatres, museums and libraries at the local level to be discouraged in any way, so it is disappointing that the issue has not been resolved since the Committee stage. When we last discussed this in Grand Committee on 5 July, it was clear that the Minister anticipated that it would be. She said:

“I understand the question of sports and leisure clubs is still under discussion, and perhaps we may be able to deal with that at a later stage”.—[Official Report, 5/712; col. GC 407.]