Local Government Finance Bill

John Healey Excerpts

Tuesday 10th January 2012 Commons Chamber

[Mr Pickles]

My hon. Friend raises an important point about the very nature of business rates. There is a high degree of buoyancy within the system and there can be sudden movements, particularly where firms move out and following claims for revaluation, which is why we have built into the system adjustments to iron out those things. We have suggested to local authorities— but it will be entirely a matter for them—that they pool their resources in order to get over those fluctuations.

I shall move from the incentive effect to another aspect of the Bill: the introduction of tax increment finance. This was recommended in the 2006 Barker report and promised in the 2009 pre-Budget report but never delivered by Labour. For the first time, councils will have the ability to borrow safely and sustainably against the anticipated increase in business rates. That will give them a new means by which to fund infrastructure, attract investors and secure jobs for local people.

We are determined that the transition to the new system should be effective, fair and workable. Over the summer, we consulted widely, and we heard loud and clear that small firms, charities and voluntary groups, which play such an important role in local life, should not face adverse changes to their bills. Local firms can rest assured that this is not a means of increasing their bills by stealth; rather it is a measure to help local businesses. The Bill also proposes a replacement for council tax benefit.

[John Healey (Wentworth and Dearne) (Lab)]

I am grateful to the Secretary of State for giving way on the point about tax increment financing schemes, of which I have been a strong supporter from the outset. Will he confirm that the area and rate take in the TIFs area will be ring-fenced and protected from levies and any reset? Without that confirmation, there will not be the confidence and certainty about the revenue stream necessary to allow the borrowing to take place for the up-front investment.

[Mr Pickles]

The right hon. Gentleman makes an important point. He will know, because he has taken an interest, that we are offering two types of TIF. TIF 1 will be subject to the levy and the top-up, but TIF 2 would not be subject to either, so it would be possible to borrow over a longer period than the reset.

[John Healey]

rose—

[Mr Pickles]

Before the right hon. Gentleman responds, I would like to add something else. I can see that we are going to have one of these really interesting discussions—we might even get on to hereditaments in a little while. Because TIF 2 would affect the levy pot, as well as the level of public borrowing, we will clearly need a degree of Treasury co-operation, but authorities can proceed with TIF 1 straight away.

[John Healey]

I wish the Secretary of State good luck in seeking that Treasury co-operation. He will understand that the time horizon for TIFs stretches beyond one decade, and sometimes beyond two. He said that TIF 2 would be ring-fenced and protected from the levy; can he also say whether it will be ring-fenced and protected from any reset?

[Mr Pickles]

The whole point about TIF 2 is that it goes beyond a reset. That is why there needs to be a degree of co-operation from Treasury colleagues. The period for TIF 1, of course, is potentially 10 years. We will encourage local authorities to work together on TIFs and pool their resources—I think I recall the right hon. Gentleman speaking about this some time ago—which will be enormously liberating for them.

The Bill also sets out a replacement for council tax benefit, which is essential in supporting those who, through no fault of their own, struggle to pay their council tax bills. However, rather than having a national, one-size-fits-all scheme, designed and directed by Whitehall, we propose that councils themselves should set up council tax support at the local level. We will give them the flexibility to design schemes that reflect local priorities. Tailor-made approaches will also be essential to making the 10% saving, which is an important component of the plan for reducing the deficit inherited from Labour. Some councils are already considering how they might exercise the new powers and discretions. Westminster city council, for example, is looking into the idea of social contracts, such as linking council tax benefit with obeying the law, actively seeking employment and undertaking voluntary work. That is fundamentally no different from councils such as Manchester and Newham, which are seeking to prioritise individuals in work for council house waiting lists, ending the “something for nothing” culture while providing a safety net for the vulnerable. I believe that benefits should provide the right incentive to get people back to work and to reward social responsibility.

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[John Healey (Wentworth and Dearne) (Lab)]

The Bill brings about the most fundamental change in local government funding since the poll tax. Like the poll tax, it is a big change that is being forced through too fast and, like the poll tax, there is no consensus of support behind it. This reform and this Bill build in unfairness like a ratchet.

At the moment essential local services are funded on the basis of need. After this legislation is passed, they will be funded on the basis of the ability to raise tax and pay locally. Ninety years ago, 30 councillors from Poplar went to prison to establish the principle of equalisation in local government funding. That equalisation means that we now have a system of funding that enables each council to provide services to residents to a similar standard. That is why the current formula for grant to local councils takes into account population, need and the capacity to raise funds through the local council tax. It takes account of the fact that there are more than three times more looked-after children in Newcastle than in Surrey. It takes account of the fact that Bexley and Barnsley have similar populations, but Bexley raises more than £37 million more in council tax each year than Barnsley does.

The Bill ends the equalisation that George Lansbury and his Labour councillors in Poplar fought for just after the first world war. With council tax frozen or capped by referendums, the increased funding for increased spending and increased need must be met through increased business rates. The problem for the future is that the opportunities to grow the business rate are unevenly spread across the country, as is the business base. Kensington and Chelsea has a smaller population than Barnsley or Rotherham, yet it raises more than three and a half times the business rates of Rotherham and more than five times the rates that we raise in Barnsley.

The local government finance system is, as the Secretary of State said, complex and incomprehensible. The Bill will make it more complex and less comprehensible. It has, in my view, four big flaws. First, from year one the gap between affluent and less affluent areas will grow. The affluent areas with the higher business tax base start with an advantage that will just get bigger and the system of tariffs and top-ups will reduce but not remove those disparities as otherwise they would remove the incentives to grow, too.

Secondly, the idea that the legislation will localise business rates is largely an illusion. As my right hon. Friend the Member for Leeds Central (Hilary Benn), the shadow Secretary of State, said so clearly, some of the most critical decisions about how the system will be designed and operated will be made by central Government and not local government.

Thirdly, local government’s certainty about funding for the future and therefore long-term planning will be badly undermined by the new system because business rates income is volatile and hard to predict. The Secretary of State’s decisions about the design of the system will, it seems to me, inevitably have to be made annually, undermining the ability of local government to plan for the long term.

Fourthly, business growth is not the same as business rates growth, so the incentives to councils to see and support the economic growth of their area might prove to be weak or even perverse under the new system. Business rates are levied on buildings—the bigger the better—so supermarkets, gyms and warehouses are good, but small starter units with high-tech design and manufacturing are bad.

Finally, the changes this Bill makes to council tax benefit are a hospital pass to local government. Many people in Rotherham benefit from that support by about £15 a week. That will be cut by £2 million in 15 months’ time, and although pensioners will be protected, other groups will find the cut is even bigger. This is a bad Bill and we must oppose it.