Local Government Finance

Brandon Lewis Excerpts

Monday 29th October 2012 Commons Chamber

[The Parliamentary Under-Secretary of State for Communities and Local Government (Brandon Lewis)]

I congratulate the hon. Member for Hyndburn (Graham Jones) on securing this debate. He has comprehensively set out the pressures that many of us recognise are facing the 12 local authorities in receipt of the 2012-13 transitional relief, as well as highlighting the potential consequences of removing that funding.

The transition grant was paid in 2011-12 and 2012-13 to local authorities that would otherwise have seen a reduction in revenue spending power of more than 8.8% in either year, based on spending power figures as set out in the provisional 2011-12 settlement. The hon. Gentleman will know from the consultation undertaken last summer, following the local government resource review, that the transition grant was not included in the establishment of the baseline for 2013-14. That is because the grant was only ever intended as a one-off, temporary funding stream. Councils will have realised that from the fact it was referred to as a transition grant.

The hon. Member for Burnley (Gordon Birtwistle) made a strong case for those councils that have done excellent work to reduce their overheads, but that is not the case for all councils. The hon. Member for Hyndburn name-checked and promoted my constituency of Great Yarmouth a number of times in his speech, and I am grateful for that. However, that is a good example of an authority that did a lot of work towards shared services and management structures, right up until this year when the Labour council came in and put an end to that. The council is now trying to find the money that it had pledged not to spend, and it realises that it should have gone ahead with the shared services deal that it stopped, thereby saving itself a huge amount of money. The council now has a transition grant that it has not used for any transitional work. At the moment, it is looking at large potential payoffs for chief executives, which it argues is for the purposes of efficiency. That is not the kind of good work to cut back on costs that the hon. Gentleman highlighted and that has taken place in some local authorities.

[Graham Jones]

I appreciate the Minister giving way given that I took some time for my speech, but this is not a party-political issue. Most of the authorities involved were controlled by the Liberal Democrat or Conservatives over the period in question—as the Minister accepted—and the problem to which he refers in his constituency is perhaps a legacy issue with the chief executive. I would not like to make this a party-political issue. It is much broader and longer than that, and membership of these councils has come from parties on both sides of the Chamber.

[Brandon Lewis]

The hon. Gentleman makes a fair point, but we must be clear that his party stood in an election this year saying that it would not do shared services. It won that election and got the political mandate to do that, but it cannot now expect the taxpayer to cover that political vanity. It has to find those savings; it was a transition grant. If they were doing the right thing, councils will have used those grants to find savings and prepare themselves for when the grant ends, as it was always intended to do.

I am aware of the concerns about possible financial pressures raised by local authorities such as Hyndburn. A number of responses to the Department’s technical consultation on the business rate retention scheme raised queries relating to the funding of a transition grant. Those queries deserve full consideration, and I am sure the hon. Gentleman will understand it when I say that the Government will consider carefully all the responses that the consultation received before finalising the design of any scheme. I have also received a number of letters directly, and met people and heard direct representations from councils. I am meeting another group of councillors —including from Great Yarmouth—over the next few weeks.

Let me be clear about why we are introducing changes to the funding of local government from next April, as that will clearly have a knock-on effect and have an impact on the situation. Allowing local authorities to keep a share of business rates will deliver a radical reform of local government funding. It will put a strong financial incentive for economic growth at the heart of the local government funding system. Currently, councils that succeed in attracting new businesses bear burdens—for example, a bigger bill for street cleaning in order to look after busier roads. Under the current funding system, councils do not see any direct financial benefit from those successes. That is why we are introducing proposals that will enable local authorities to keep a proportion of locally collected rates to help fund the services that they provide. That will create direct links between rates collected and local authority income, thereby increasing the financial incentive for local authorities to drive economic growth.

[Graham Jones]

The Minister makes a good point, but it is almost as if he is re-reading a speech about the new homes bonus. There is no housing market in Hyndburn. We need investment in infrastructure, skills and apprenticeships, and, as he said, we need to clean up the industrial estates and attract business. Without the funding, we do not have the levers to make that an attractive proposition.

[Brandon Lewis]

I will come to the new homes bonus, but I would hope that local authorities have been doing what he suggests with the transition grant to do their part for the local community’s economic growth. The incentive in the business rate scheme is there to drive that and to provide greater flexibility and freedom for local authorities to make decisions and manage their budgets efficiently.

As the hon. Gentleman suggested in his speech, for too long, the finance system has encouraged a sense of dependency. Councils have competed with one another in a race to the bottom to present themselves as being more deprived than their neighbours to secure more handouts from central Government. In place of that system, this Government have set out reforms that could deliver a £10 billion boost to the wider economy in the period up to 2020. Councils will have a key role in growing their local economy through the planning system, local transport investment and other levers of which they wish to take advantage. The business rates retention scheme will give councils every possible incentive to create the conditions for local growth.

The new homes bonus, which the hon. Gentleman mentioned, is another way in which local authorities can increase the funding they receive. We have established the bonus as a powerful, simple, transparent and permanent incentive for local communities to increase their aspirations for housing growth. In 2012-13, only the second year of the scheme, we will pay out a total of nearly £432 million to local authorities in England, with an average payment of £1.2 million. The figures will be higher in 2013-14, because they will include the year 3 allocations.

[Graham Jones]

The Minister makes a powerful argument for some parts of the country, but not for the 12 authorities. Does he agree that it is not in local authorities’ gift to purchase houses? It is a question of whether there is demand in the market. Without the infrastructure and the attraction, and the jobs and skills, there is no housing market. The new homes bonus is therefore perverse in those 12 areas.

[Brandon Lewis]

The hon. Gentleman tempts me into creating a fictitious market in any given area. The reforms, including the new homes bonus and business rate retention, are part of a package. No one magic wand will fix every problem. The package will encourage local authorities to develop their infrastructure and economy. The business rate retention could bring about economic growth, and therefore there will be demand for building the right houses in the right areas, which will mean that local authorities can benefit from the new homes bonus.

For each new build, conversion, long-term empty home returned to use or new Traveller’s pitch, a council receives a sum equivalent to the national average council tax for that band. For one band D home, the council would receive £1,439 each year for six years, which comes to more than £8,500. There is also a premium each year for every additional affordable home. I therefore strongly encourage local authorities to take advantage of the opportunities that the new homes bonus provides, not only to improve the supply of housing, but to help increase their income.

Let me return to the business rates retention scheme. The detail of our proposals will enable local government as a whole to keep 50% of the business rates. Some have said that local authorities should keep all business rates, which is not realistic. We have been clear from the beginning that, within a business rates retention scheme, some business rates income would need to be retained by central Government so that the scheme operates within the existing spending control totals.

A 50:50 split means that, although central Government benefit from a share in growth, they also share any risks with local government. Crucially, we have made it clear that all the money will be returned to the local government sector in the form of grants. We have proposed that the local share of the business rates will be split between lower and upper-tier authorities on an 80:20 basis, with 80% going to the districts. That ensures that the strongest incentive is placed on the tier responsible for the planning decisions that are often the key driver for growth.

Two-tier councils also have a greater degree of protection. All two-tier county councils will be top-up authorities. Top-up amounts will be uprated by the retail prices index, thereby ensuring that counties benefit from more protection and less volatility in their budgets. That will help them to maintain their service levels while providing them with the opportunity to benefit from a proportion of growth in their area. The scheme will also include further protections, in the form of a safety net, for those cases where business rate income falls by a certain amount. This will help to ensure that support is available to local authorities who suffer from significant shocks to their incomes, such as the closure of a major local employer—as has happened in the past, as the hon. Gentleman has said.

We have consulted on the appropriate level at which this support should be available. We have proposed that it should kick in at a point between 7.5% and 10%—a range that reflects the need to balance protection, incentive and affordability. The safety net is to be funded by local authorities through a levy on those authorities benefiting from disproportionate growth. The levy arrangements will ensure that adequate levels of funding are available for the safety net, but it will also operate in such a way as to ensure that there is no absolute cap on growth—the more a local authority grows its business rates revenues, the more it will benefit from growth.

Our proposals for business rate retention will provide a real incentive for all local authorities to be proactive in taking decisions that will help to deliver growth and jobs in their areas and to receive a financial reward for those efforts. We recognise, of course, that different areas will have different opportunities, as the hon. Gentleman pointed out, and different challenges. We are confident that these proposals have the right balance of incentive and support.

I hope that my remarks have highlighted the opportunities that our new funding reforms will offer to local authorities through the business rate retention scheme, as well as some of the other opportunities available, such as the new homes bonus. I appreciate that we are also considering the response to this summer’s technical consultation, and we are preparing for the settlement we will put forward in December. Let me be clear that at the moment it is too soon to offer any certainty on decisions about transitional funding. However, as I said at the beginning, I am actively aware of the situation—with my own authority being involved, how could I not be?—and I am actively considering all the views that we have received from across the piece for the need for transitional relief funding for 2013-14. I will be able to inform the House further on that issue should we be able to develop any proposals in December.

Question put and agreed to.