Business Rates (North-East)

Helen Jones Excerpts

Tuesday 25th October 2011 Westminster Hall

[James Wharton]

The excellent Conservative mayor of North Tyneside, Linda Arkley, who is doing a superb job and is no doubt looking forward to her re-election by popular acclaim next year, has raised some concerns as part of the consultation process on behalf of the people whom she represents. I do not accept that it is a criticism of the consultation; it is feeding into the consultation in the hope of influencing the result in a way that will benefit the people whom she represents. The good mayor that she is, she is doing the right thing. I am delighted that the hon. Member for North Tyneside (Mrs Glindon) has given me the opportunity to raise that point.

Another important point, apart from the consultation, is that there should be no effect on what businesses pay. When the policy is introduced, we will not see business rates rising. Levels will be set, as I discussed briefly in an exchange with the hon. Member for Hartlepool, to ensure that the funding that councils receive at the point at which the policy is introduced is kept level. No council should initially be disadvantaged by the introduction of the policy. [Hon. Members: “Initially.”] I fully accept that. It will then be a responsibility for local authorities to engage—within a framework that we must all see as fair and to which we must contribute to ensure that it is fair, so that the rules do not disadvantage any area—with that new system, grow their local economy as best as they can and reap the benefit.

What are the Government going to do? They will set a baseline, tariffs and top-ups. Tariffs and top-ups will mean that wealthy areas—we have heard of some of the wealthy areas that take a lot of money in from business rates—will see some of that money taken away from them and redistributed, often to councils such as those that many of us here today represent in the north-east. The top-ups will be the benefits that some of our authorities receive.

There will be a levy for disproportionate benefit, so if a council sees a huge rise in its business rates that is disproportionate to the benefit that that council should receive, that will be redistributed again in some way.

[Helen Jones (Warrington North) (Lab)]

The hon. Gentleman should accept that we should be specific. The Government’s proposal is to take back not the disproportionate benefit, but a share of the disproportionate benefit, which is an entirely different thing.

[James Wharton]

That is a fair point. As part of incentivising growth, it is important that local authorities are able to keep some benefit. Residents who have a large industrial complex built in their back yard may feel entitled to a share of the income that that brings to the Exchequer. There will be a levy that will allow for a redistribution of disproportionate benefit and for a safety net. For example, one of the questions raised by hon. Members was, what if a large industry disappears or if a large manufacturer or retail site closes down in the north-east? What about that potentially catastrophic effect? There is already in the consultation a potential mechanism for addressing that through the levy, which will create a pot of money that councils that find themselves disadvantaged will be able to tap into. We look forward to hearing from the Government how they will administer that and what their proposals for that are.

There will also be five-year revaluations to ensure that the system is seen to be and remains fair. Hon. Members have raised concerns about the frequency of revaluation, and the Government should look at those. The Government should also consider the balance between providing an incentive and ensuring adequate funding, and more frequent revaluation could form part of that formula. We have discussed the difference between the business rates brought in by retail and manufacturing. Again, that is a fair observation and should form part of the consultation, and I hope the Government will pay attention to that. We have also discussed dependency on small numbers of large businesses; I have just touched on that in my comments. I would like to see more detail of how a levy for disproportionate benefit will help those areas when a large industry or business closes down and potentially impacts local government finances.

Overall, however, the Government are pushing power back down to people, empowering local authorities and communities to take control of and responsibility for the areas in which they live, and incentivising councils to create and foster growth. That should be welcome in the north-east, where we need to see greater private sector growth. I hope that we can have a constructive engagement with the consultation to deliver the best for our region, not simply to score political points, which may appear on Tyne Tees later this evening—one never knows.

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[Helen Jones (Warrington North) (Lab)]

It is a great pleasure to serve under your chairmanship, Mr Amess.

I congratulate my hon. Friend the Member for Sunderland Central (Julie Elliott) on securing the debate. She is a powerful advocate for her region, as are my other hon. Friends who have spoken today. For instance, my hon. Friend the Member for Hartlepool (Mr Wright), who is a former Local Government Minister, highlighted the problems that might occur after 2013. My hon. Friend the Member for Tynemouth (Mr Campbell) highlighted the need for infrastructure to unlock potential in the north-east. My hon. Friends the Members for Sedgefield (Phil Wilson) and for Stockton North (Alex Cunningham) highlighted the work that has already been done to attract manufacturing industry to the region. However, what is clear from the debate, in all parts of the Chamber, is a deep suspicion of the Government’s motives. The Government document consulting on the localisation of business rates contains some ringing phrases, and “No more will proud cities be forced to come to the national government with a begging bowl” has been one comment. That sounds good and, to be fair to the Government, it has some history: lots of investigations into local government finance have suggested more control and more autonomy for local councils. So why are we so suspicious?

In the first place, the Government have form, do they not? In their Localism Bill, we saw all the fine phrases about devolving power to local authorities and more autonomy, yet the Bill contains 100 new powers for the Secretary of State. Their local government finance settlement manages to centralise power and devolve blame. Now they are trying it again. The whole local government resource review is based on a wrong premise. It says clearly that

“local authorities can be reluctant to allow commercial development and promote economic growth.”

I say to the Minister: name one. I know of no local authority, especially in the north-east, that is not desperate to attract jobs and growth.

The reason why our economy is not growing is not local authorities; it is this Government’s policies, which have made it flatline and stifled growth. What is more, the Government do not have a plan for growth. In fact, they are proud of not having one; they tell us there is no plan B. We are back to the ’80s and our old friend TINA—“There is no alternative”. Local authorities did not cause that recession, and they did not cause this one.

We will scrutinise the Government’s plans carefully. We support measures that stimulate growth but, as with all this Government’s policies, the devil is in the detail, and the detail is often well hidden. The Government propose to set the baseline using the 2012-13 formula grant. It must come within the expenditure controls set out in the 2010 spending review, but that spending review is inherently unfair to many local authorities. It began by making in-year cuts to specific grants in 2010, which mostly targeted the most deprived local authority areas, and over the next two years, it will make spending cuts in the most deprived authorities. Newcastle city council has produced a heat map showing where the cuts will fall: the north-east, the north-west, Yorkshire, part of the midlands and inner-London boroughs. Funnily enough, most of those places overwhelmingly vote Labour. I am sure that that is entirely coincidental.

By 2012-13, the cumulative cuts in per capita spending will be £183 in Hartlepool and South Tyneside, £156 in Middlesbrough and £144 in Newcastle—I could go on—although the national average is £47 and the average in the south-east is £31. The Government are starting from a position of unfairness before introducing their top-ups and tariffs. They say they will include equalisation, but no system can be fair unless it starts from a fair base.

Moreover, the Government will give no assurance that local authorities will not lose out after the first year. The Deputy Prime Minister told the Local Government Association:

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

Life is simple for Liberal Democrats, is it not? Both those sentences are wrong. We will not start with a level playing field, and it is not entirely up to local authorities how they will progress, as hon. Friends have mentioned. Some local authorities already have a large business rate base. Westminster has been mentioned. If it got all its business rates back, it would be £1 billion better off. By comparison, Hartlepool receives £13 million more than it collects. That is equivalent to 18 more supermarkets, which I doubt Hartlepool could sustain. Newcastle would be £39 million short, or the cost of 16 airports.

Even that is not the whole story. We know that councils that already have a large business rate base find it easier to attract more investment. Westminster, with its multi-million pound national and international company base, finds it easier to bring in investment than Consett does. Cambridge, which has a fine high-tech hub centred on the university, is much more likely to attract more such firms than a council starting from scratch. The worry is that, if the Government get it wrong—to be honest, their record so far is not encouraging—they could increase the gap between north and south. Tony Travers of the London School of Economics said to The Times:

“The risk is that northern authorities will find it impossible to attract businesses as fast as councils in the south. If that happens, the gap between the south and north will widen”.

The Government say they will deal with that using a levy on disproportionate gains. Let us be clear that they are discussing recouping not the whole disproportionate gain but only a share of it, and that the review contains no definition of “disproportionate” or any clarity about how the levy will work. They say that it could be 1p in the pound. In that case, local authorities with a high tax base will generate much more revenue from the same amount of growth than those with a lower tax base. The levy could work similarly, but place local authorities in bands. In that case, we will face the problem of a huge disparity between local authorities at the top of one band and those at the bottom of the next. The Government say that the levy could also involve an individual rate for each local authority. They could change the ratio of business rate growth to revenue growth. Would that not be returning to the central control that the Government say they want to avoid?

The Government want the power to reset the system. It is obvious that resetting will be necessary. Hon. Friends have asked for clarity on that. The Government say that they might reset the system based on a completely new assessment of need rather than on formula grant. If I were still serving on a local authority, a shiver would go down my spine at that. This Government have shown no capacity to assess need properly in any of their decisions on local government finance. The system is open to yet more political manipulation and interference.

The other point, as hon. Friends have mentioned, is whether business rate growth is a proper test of economic growth. The Government’s proposals would make large retail developments much more attractive to local authorities than manufacturing, because they generate higher income. There would be no similar incentive to develop manufacturing or to support small businesses, despite the wider benefits to the community. We need such businesses. We need the skills that they generate, the exports that they develop and the effect that they have on the supply chain, just as we need the innovation that comes from small, high-tech companies, yet the proposals carry a risk that local authorities in the north-east and elsewhere could lose out by supporting the growth that the country needs. As hon. Members have said, retail in the region will generate between £800,000 and £1 million per hectare, while manufacturing and small businesses will generate between £100,000 and £200,000. I say to the hon. Member for Redcar (Ian Swales) that it has nothing to do with the space that businesses occupy. We are talking about returns per hectare.

Regional growth often depends on national policies. Northumberland, for example, has a sparse population, a huge national park and poor infrastructure. In order to grow, it needs huge national investment in infrastructure, yet we have heard nothing from the Government about how they propose to make that necessary investment, nor have they told us how they will manage risk in the system. Most importantly, we have heard nothing about need, or about the services that local authorities must provide for the elderly, children and families in distress. The huge question that the Government are ignoring is this: if a local authority’s future income is linked to business rates, what will happen if a big business fails and the anticipated level of growth is not reached?

We will support a sensible review of local government finance, but as usual this Government are going too far, too fast. They have a system that begins with unfairness, that is progressing through muddle, and that has the potential to lead to a postcode lottery in services. They have to think again.

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[Andrew Stunell]

That is exactly what I said and it was clear in the consultation document from the very beginning. I am sure that the former Minister, the hon. Member for Hartlepool (Mr Wright), had his tongue in his cheek when he said that he thought that Hartlepool faced a drop of £13 million. That is not the case. If the figure for Hartlepool is £40 million—which is the figure that he quoted—that is the baseline from which all further development for Hartlepool will be taken.

[Helen Jones]

The Minister is being generous in taking interventions. Will he confirm that the only promise from the Government is that local authorities will not lose out in the first year that the scheme comes into operation? There is no guarantee after that first year.

[Andrew Stunell]

The hon. Lady misunderstands what the Government have said. The baseline is fixed permanently in the system. The losses and gains come from changes in the business rate income that an authority might receive. I point out to Members who represent constituencies in the north-east that, over the five years from 2006, the total business rate income in England rose by 5% per year—not 5% overall, but per year—and by 5.1% in the north-east. In other words, the rise in business rates in the north-east during that five-year period was greater than that in England as a whole. Furthermore, a rise of 5% per year is significantly higher than RPI, CPI or, indeed, any rise in formula grant that any of those authorities gained. This is not a zero-sum reform. Beyond the CSR period, there is every prospect that the north-east will do well out of this system of having an increasing flow of business rates.

A number of points have been made about whether or not this is an incentivising system. If, during that five-year period, the north-east was able to secure an annual rise of 5.1% in its business rate income without any incentive, it seems to me that, even if the incentive effect turns out to be quite weak, it is likely to be better than that, than RPI and than the increase in formula grant, which the previous Government, in their munificence, decided was appropriate for north-east authorities. It is important that we nail some of the misunderstandings that have arisen.

My hon. Friend the Member for Redcar (Ian Swales) made the point that the regional growth fund is active and effective. Fourteen companies in the north-east have had support, and that will provide more than 5,200 direct jobs and 8,300 indirect jobs.

The Chief Secretary to the Treasury has announced a £500 million growing places fund for infrastructure in England, for which local authorities in the north-east will be eligible. I am sure that the hon. Member for Tynemouth (Mr Campbell) will make sure that his local authority makes a suitable proposal to deal with the roundabout on the A19 that he mentioned.

The consultation is still—