Local Government Finance

Lord McKenzie of Luton Excerpts

Monday 18th July 2011 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I thank the noble Baroness, Lady Hanham, for repeating the Statement on local government finance and for the offer of a plain English guide to be placed in the Library. I also thank her for the prospect of another local government Bill which might keep us busy for a few days.

In a recent publication on local government finance, the Smith Institute observed that local government finance has been a backwater for most national politicians. Since the poll tax debacle, Ministers have been cautious about reforming local taxation, not least because the issue is seen as divisive and complex. The challenge is to seek a lasting consensus on how to change the system in a way which satisfies councils which are rich as well as those which are poor. Indeed, that is the test for these proposals.

That is why we will look closely at the Government’s announcement because the devil is, of course, in the detail. We should make it clear, as we did in another place, that we back a funding system for local authorities which supports jobs and growth and encourages enterprise. We support the taking forward of tax increment financing and the continuation of small business rate relief, and we welcome the publication of the responses to the consultation. Yes, we support localism—but true localism, which is why we have opposed the raft of centralising powers that the Secretary of State has taken to himself in the Localism Bill. We also support localism in matters of finance.

We hear today that the proposals on local government finance are balanced, fair and equitable, I think was the term, but the precedents are not good. Where, for example, is the fairness in the cuts we are seeing right across the country to home helps and care services, to street cleaning and bin collections? The Statement reiterates what the Deputy Prime Minister told the LGA last month: no one will be worse off when the new system is introduced. Even if that is the case at the point of introduction—and we are not all reassured by cast iron promises from the Deputy Prime Minister—what will the position be at the end of year one, year two or year three? Perhaps the Minister can tell us.

The Minister tells us that the spending review totals are to remain unchanged. Therefore, if there is a fixed pot of money for any council to gain, logically others must be losing out. Can the Minister say what assessment has been made of winners and losers, and how this squares with the assurances of the Deputy Prime Minister?

We recognise some of the weaknesses in the current system. However, a local government finance system that does not reflect needs and available resources could have disastrous consequences for some councils, while others would enjoy large surpluses compared to existing budgeted expenditure. It remains to be seen whether the proposed detailed system of tariffs and top-ups is a fair mechanism to ensure that all local authorities have resources that are adequate to deliver services that are needed and that will allow all communities a chance to prosper. Our fear is that the poorest areas, with the most deprived communities and the smallest business base, will again miss out. Those very communities that saw their area-based grant cut, putting services like children’s centres at risk, through a finance settlement that singled them out for the heaviest cuts, will now lose out on the localising of the business rates.

We know that currently the formula grant is financed significantly by local business rate income, and the latter is forecast to grow as the grant is forecast to fall. The Government are planning to hold back something like £2 billion in local business rate income to give effect to these cuts. Business rate localisation would clearly be one way of stopping this. However, what will happen to the surplus business rate, amounting to some £2.2 billion in 2014-15? Will it now be available to local authorities or will it be retained centrally? Can the Minister tell us the forecast baseline above which local authorities will be able to benefit from growth in business rates? The Statement refers to an area benefiting disproportionately from growth in business rates, which will be subject to a special local levy to capture a share of the benefit. How will it be determined that an area is benefiting disproportionately from growth in business rates?

Cutting funding to areas with the highest need does not free councils from central control or empower them. It stops them from doing the things that their communities need of them. If people do not believe that their council can make a difference, it does not encourage civic activism; it undermines it and fuels a sense of disengagement from the political process. We want a funding system that supports jobs and encourages enterprise. However, as the Minister recognised, not every area has the same ability to attract investment and new businesses. Not everywhere can be like Westminster or the City of London. Areas with the highest levels of deprivation and the weakest business base need the most support; they do not need funding cuts. We will support incentives to boost enterprise and put councils and communities in control, but fairness must be at the heart of the system.

[Baroness Hanham]

My Lords, I thank the noble Lord for his comments and contributions. From the outset, I remind noble Lords that this is a consultation. Therefore definitive answers may not be pouring out of my mouth, although I will do my best to answer as much as I can about the consultation. However, technical documents will be ready by August to back up the consultation, so some of the points will be considered there.

I am grateful to the noble Lord for his indication that he supports funding for jobs and enterprise. Naturally that is what we are trying to achieve. I am also glad that he supports the tax incentive finance, which will come about as a result of business growth and will be a useful area for borrowing.

The noble Lord referred to the fairness in cuts. The whole process will start in 2012. At the start of this spending review, for the first two years there will be no change at all. Only in year 3 will we begin to see the changes with the business rate being kept within the local community. We are proposing that in years 1 and 2 it will stay as it is, and in year 3, instead of the local authorities collecting the business rates and passing them on to the Treasury, they will collect the business rates and, under an arrangement, pass some of them on to the Treasury. The rest will be held by local government in year 3 and subsequent years.

With regard to the tariffs and top-ups, the control totals will not change within the four-year spending review. However, in areas where we believe the business rate is in excess of those totals, a tariff will be levied that will help poorer areas, about which the noble Lord spoke in terms of top-ups. There will be a swing of money between one and the others, so the poorest areas will be given the help that they need.

The £2.5 billion that will be held by local authorities will be directed to other local grants. It is suggested that the levy, which again is a matter for consultation, will be on top of the business rates, from which local authorities make what is called in the consultation paper a disproportionate amount. They will then share that through a top slice with other authorities.

[Lord McKenzie of Luton]

The Minister answered a number of the questions I raised. Could she tell us how the test of disproportionately benefiting from business rates is going to be set?

[Baroness Hanham]

My Lords, I think I am going to direct the noble Lord to the consultation, because this is one of the areas where we want to talk to local authorities to understand the nature and impact of that issue. At the moment, I do not think I can give a substantive answer, but it will be in an authority that has access to far more business rates than perhaps other local authorities comparably.