Local Government Finance Bill (First sitting)

Debate between Clive Efford and Rebecca Pow

Tuesday 31st January 2017 Public Bill Committees

[Clive Efford]

Q How much is the capacity to raise money from fees and charges a factor for different local government areas across the country?

Guy Ware: The ability to raise fees and charges makes a significant contribution to local government’s overall financial sustainability. I know that, as a sector as a whole, we will be arguing that there should be fewer restrictions on the capacity to make charges and the rates at which we can charge. A number of them are constrained not only by what you can spend them on, but the levels at which you can charge in the first place, which do not necessarily cover the costs of the services being charged for. Planning is probably the most well-rehearsed example. So, yes, it is significant to the ability of councils to budget and maintain their services, and as a sector we would like more flexibility and control over how we use that ability.

Graham Soulsby: I would like to supplement Guy’s answer. If we are going to move a simpler but more effective needs-based system, obviously a local authority’s ability to generate income in other ways needs to be taken into account, to make it fair to other authorities. To do that in a more effective way, look at the current restrictions that are in place. Many local authorities have, over the last few years and longer, tried to maximise their income base in the best way they can, because they have had to do that. There is probably less headroom than there used to be; but nevertheless if some of the restrictions were lifted it might just help with our overall funding issues.

[Rebecca Pow (Taunton Deane) (Con)]

Q This slightly relates to those issues. Mr Ware commented on incentives being important; I just wondered what your views are about abolishing the levy payments, which basically are a tax on successful business. Would it help to free up more money and make a difference?

Guy Ware: We would support that abolition; we think it does help produce a greater connection between the growth of economic activity in an area and the growth of business rates that can be retained within that area. That is currently what is funding the safety net system so, once we do that, we will need to think through the consequences and how you fund a safety net that is appropriate to manage the risk of significant reductions in resources.

There are two further fundamental restrictions on the amount of business rates that can be raised—one specifically covered in the Bill and one specifically excluded. The provision in clause 5, which changes the indexation that will be applied to business rates in future, effectively from RPI to CPI, is a good illustration of my point that it is not necessarily a fixed pot. That change alone, we estimate, will take £80 billion of spending power out of local government over 20 years. At a time when we are all discussing a crisis in funding for social care—that being a good third of local government funding—to reduce by fiat the capacity and buoyancy of the biggest single tax that local government will be collecting seems to me to be worthy of debate.

The second issue—the one that is not in the Bill— is the principle that sits behind the way in which business rates are determined. Each time it is revalued it is revalued to a fixed sum, so that the yield of the tax is determined in advance by the Treasury and the multiplier is set in order to deliver the amount that the Treasury says it should. Again, that is a policy choice that the Government make. It could allow the yield from business rates to rise with the economic activity that is underpinning it, in exactly the same way that income tax and corporation tax rise with the economic activity that they are taxing. It is only in the case of business rates that we have taken the choice to set a cap for the amount of money that can be raised.

That not only reduces the buoyancy; it also distorts the distribution. The issues between London and the rest of the country become really important here, because what happens is that within a fixed sum, every time there is a revaluation, property prices in areas where they rise faster than average—which is central London, but also lots of other places—go up faster than they otherwise would. The concentration of the tax base is getting greater and greater as a result; fewer and fewer businesses are paying a higher and higher proportion of the national business rate take. That could be cured—it could be solved—and in our proposals we have suggested ways to do so; but it is not a given, as I have said. It is a policy choice that has been made, and we think it is damaging.

Graham Soulsby: On the levy payment, I think the link to the safety net is really important because, obviously, it was used to fund that; so the system needs a mechanism so that it is still able to do that. The stuff in the Bill on the safety net, and additional flexibilities if a major business went under in this particular patch, are welcome. In reality, not having levies in the system is a sensible thing to do overall. What we found in recent times is, because most authorities operate business rate pools in any event—and by operating a pool you do not pay the levy, because you can do different things with it—it is just normalising what most authorities are doing. The evidence from business rate pools is that it is generating more economic growth. For that reason, I would say that it is a good thing to do.

Councillor David Borrow: I do not really have much to add, apart from to point out that generally county councils cover larger areas. Clearly, the risks are much less for a county council than for a district council, simply because if there were a loss and a problem in one part of the county, within a county council it would be lost in the mix, whereas for a district council in a two-tier area it could have quite a significant impact.