Local Government Finance Bill

Lord Palmer of Childs Hill Excerpts

Tuesday 3rd July 2012 Grand Committee

[Lord Palmer of Childs Hill]

My Lords, may I pick up on the point made by the noble Lord, Lord Beecham, about reserves? I hope that when the Minister replies to that point, as she was asked to do, she will include within it how the strong reservations of the accountants’ organisation CIPFA about how much local authorities should hold in reserves will fit in with what the Secretary of State has apparently said. I hope that she will talk about specific reserves as well as unallocated reserves. It would be great if this could be clarified at some stage.

[Lord McKenzie of Luton]

My Lords, before the Minister replies, perhaps I might return to the reference made by the noble Lord, Lord Jenkin, to London Councils. I accept entirely that London Councils has changed its position on deferment of the business rate component of this Bill—the briefing that we had a month ago certainly put us in a different slot—and I was not seeking to suggest otherwise. However, I was seeking to relay what is still its current view, as I understand it, which is that the scheme needs to be urgently revamped if it is to produce the radical shift in the structure of local government funding that the Bill proposes. I do not know what process the noble Lord might feel there is to achieve that if there is no deferment of the Bill. Are we going to follow up with an amendment Bill next year? How is it actually to come about? What is there within the Bill that would enable that radical restructuring that is apparently wanted? I do not know whether that is what the noble Lord supports.

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[Lord Palmer of Childs Hill]

While the Minister is on that subject, perhaps I may ask a question, although, first, I should have declared my interest as a councillor in the London Borough of Barnet. I apologise.

[Lord Tope]

Another vice-president?

[Lord Palmer of Childs Hill]

No, I am not a vice-president of anything. In addition to the comments that I and the noble Lord, Lord Beecham, made about reserves—specific and non-specific—one also needs to take into account the restrictions imposed on local authorities by external auditors. External auditors used to come under the Audit Commission but now they are a stand-alone operation. They require a certain level of reserves on the balance sheet, and it would be difficult if central government were to impose requirements on those reserves. External auditors say that you have to have £5 million, £10 million or £15 million in reserves to make everyone feel comfortable, but I have always said when making speeches that I think they make people feel too comfortable. However, that is what the auditors say and they will qualify your accounts if you do not do that.

[Baroness Hanham]

I return to the fact that unfortunately I did not hear, and do not know, what the Secretary of State was referring to. Of course, reserves are part of local government finance and part of control systems in local government. I should like to make some further inquiries about how that interlinks, if it does, with what we are talking about—the business rate retention scheme—so that I do not mislead the Committee. I know that the provision and use of reserves—and sometimes councils have large reserves—could potentially be used to help to ease the current financial situation. I shall not say anything more about that because I do not know what was said but I shall come back to it.

I was also asked about the police authority, and again I apologise for not picking that up. As I understand it, and I shall write if I am incorrect, the police authority will make the precept because it will be in place until November. It would be pretty unreasonable to ask a new police commissioner to come in to sort that out in the short time available. Therefore, what he or she inherits from the police authority will be what goes forward for the first year. After that, the police commissioner will set his or her own precept. I am not being prodded from behind and being told that that is incorrect but I will let noble Lords know if it is not correct.

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Moved by

[Lord Palmer of Childs Hill]

10: Schedule 1, page 20, line 35, at end insert—
“(4A) Such an amount should only be paid in place of other grants to local government if the Secretary of State is satisfied that the overall needs of local government will be met.”

[Lord Palmer of Childs Hill]

My Lords, in moving this amendment, I shall speak also to Amendments 13 and 14. It appears that the effect of the central share is to allow the Government to reduce what would have been grants outside the formula grant—that is, paid for by general taxation—and thus allow the business rates to take up the slack. The Treasury could thus substitute business rates for other taxes. I would like to ask if the Minister agrees that there is a danger of improving central government’s fiscal position at local taxpayers’ expense. That is the crux of this very short amendment.

This would not have an immediate effect; the estimates have been made by various local government bodies that the effect could begin in 2016-17, but it could be a real effect.

The central share will come back to councils, as we have discussed, but not necessarily the same councils, in the form of grants. Other noble Lords have given an example of Westminster and have said that that is why there has to be a reallocation of these moneys. I understand and appreciate that, but the real problem is that one reallocates business rates to give an incentive to local authorities to improve businesses within their areas and improve the economy in those areas. Many of them need that incentive; the current system of business rates whereby you collect the money and keep none of it is not an incentive, which is why this is an improvement. If you take away and redistribute, you lose a lot of that incentive from the places where there could be a great improvement in the economy.

Mention has been made by other noble Lords as to the 50%. I could have come in at that stage, but I thought that I would include it in what I am saying now. There is one other aspect to a 50% share, which has not been broached by other noble Lords—that 50% for the Government and 50% for the local councils is a dangerous percentage. Local authorities will lose, as they have in other instances, the difference between the half-empty and the half-full bottle. You know exactly what it is when it is 50%, but it is more difficult when they start recalculating and the share is 51% and 49%, as has been my experience in local authorities. Measuring the value of local council housing, when the example given by CIPFA was 50:50, when the local authority came to use the calculation they took the wrong half, because it was never 50%—it was always something else. Someone in Whitehall may know how to do it; there is a rumour that that is the case. But there is a danger that when you have 50:50, you will end up with 51:49, which would mean that you would not know which was the Government’s share and which was the local authorities’. I would hope that the larger share would be for the local authorities.

The amendment makes the point that the Treasury will be able to switch grants that have been paid for by general taxation into the rates system and in effect raid local businesses to assist the Exchequer. All this will, of course, be in addition to the cut of £500 million, in terms of the legislation overall. Amendments 10, 13 and 14 seek to protect local councils and central government from that usual thing of temptation, because it is not easy to resist temptation. As Oscar Wilde said, “I can resist anything except temptation”. I do not think that we should put too much temptation in the way of central government. I beg to move.

[Lord McKenzie of Luton]

My Lords, we have Amendments 11 and 24 in this group. Amendment 11 is a very straightforward probing amendment; it refers to paragraph 2(5) on page 20 and is to do with payments to local government in England. Presently it reads:

“The reference in sub-paragraph (3) to use for the purposes of local government in England includes the making of payments under an Act or an instrument made under an Act (whenever passed or made) to”—

then it gives a range of authorities.

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[Baroness Hanham]

I think I have said all I can say. The list is not complete and others can be substituted or interposed if necessary. Those will arise at other times but I do not know what they are. If we have information on or a sort of idea of which others we might be talking about, I will let the noble Lord know, but at the moment it is simply left that other bodies may be included.

[Lord Palmer of Childs Hill]

I beg leave to withdraw the amendment.

Amendment 10 withdrawn.

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[Lord Palmer of Childs Hill]

My Lords, I support my noble friend Lord Best because there is a need to take into account revalued and increasing rateable values of properties. The analogy used by the noble Lord, Lord Beecham, reminded me of development land tax where when agricultural land got development planning permission its owner had to pay substantial extra taxation. We are in danger of looking at how much individuals, companies and corporations make as a result of Crossrail or whatever. If the land has increased in value as the property has increased in value, it ought to be a factor in the calculation of what the local authority receives. The point made earlier was that local councils such as Westminster would gain by the redistribution. Projects such as Crossrail spread that gain through rural areas and the like. I do not think that the fact that some local authorities may gain because of a national or regional development is a reason not to give that local authority the benefit of having an increased rateable base. If you look at new floor space, there are many places where that will not happen. Some noble Lords showed a degree of pessimism when they spoke about how things will devalue rather than increase in value. We have to look positively at how we should encourage local authorities to do infrastructure and to encourage infrastructure, even if it is Crossrail or whatever, so that the valuations of those properties increase and local authorities can see the benefit. That would incentivise local authorities to co-operate on those matters.

[Baroness Hanham]

That was an interesting, if unexpected, debate. When it started, I was very touched by the fact that I had a little note that said, “The purpose of Amendment 15 is not entirely clear”. My reply may not be totally applicable either, but somewhere along the line we have clearly raised really important points. We are going to have to look again at the amendment, but in the mean time, I will tell the Committee what we thought it was about, and if it does not quite tie up, we will sort it out, I am sure, between now and the next stage.

I am advised that the amendment in its current form could not stand as it would insert an amendment into Schedule 8 which, as a result of this Bill, will cease to apply for any purpose in England. That is the first problem. Even without this technical deficiency, we have a bit of a problem. We fully respect the noble Lord’s views that under the rates retention scheme authorities should be able to benefit from rental growth as well as physical growth. Westminster has been touched on by several speakers, but for authorities such as Westminster or, potentially, for my ex-authority Kensington and Chelsea, the potential for physical growth is much more limited than for others as there are very constrained sites with developments all through.

The efforts of local authorities to make their areas more attractive to business are not quite as limited as some would like to pretend. Efforts that have resulted in a steady increase in rental values and hence rateable values will arguably go unrewarded under the rates retention scheme. The duty of government is to legislate for a rates retention scheme that is workable for the whole of local government, not just for some authorities. For that reason, we could not devise a scheme that allowed local authorities to keep any part of the growth in rateable values. To explain why, I need to explain to the Committee how the revaluation works, although I hesitate to do that because the noble Earl, Lord Lytton, will understand this far more than I do. Perhaps for the benefit of the Committee we should go through it.

Every five years, the Valuation Office Agency undertakes the revaluation of non-domestic properties and, as a result, the aggregate rateable value of all English non-domestic properties either—amazingly—increases or decreases. In setting the multiplier for the first year following the revaluation, the Government take account of the overall increase or decrease in order to ensure that overall the same amount of tax is raised from business after revaluation as from before. For example, if the aggregate rateable value were to double, the multiplier would have to halve. In that way, it simply redistributes the tax burden between businesses on the basis of their up-to-date property values.

In the new world of rates retention, the system is set up at the outset so that through the means of tariffs and top-ups there is an initial redistribution of resources. That protects the position of those authorities that are relatively resource poor. But if, as I explained, we collect no more money from businesses following the revaluation than we did before, it follows that there is no additional money in the rates retention system. If therefore some authorities are to be allowed to keep additional resources, by the same token, some will have to receive less. Therefore, because of the uneven distribution of the rates base, this would not just mean a cut in funding for those authorities that have seen their rateable value fall. So an authority could see a funding fall, even if its rateable value had risen, if that price was by less than the national average. That could not be fair. In fact the only way to ensure that all authorities see their rateable value rise and see some income benefit is to break the multiplier link and raise the overall burden on business, and the Government are not prepared to do that.

For those reasons, I cannot accept the amendments that seek to allow any part of an increase in rateable values to be retained by local authorities. I hope that that explanation, somewhere along the line, meets the basis of the amendment. If it does not, perhaps we could discuss it between now and the next stage. I am not sure at all that it covers any of the matters raised by the noble Earl, Lord Lytton. Having looked at Hansard, we may need to come back to that. While it was a very relevant aspect to commercial improvements, I am not sure that it necessarily fits in with the amendment, but it may do. I will happily say that if the amendment is to be pursued and if the noble Earl feels that the reply is not adequate or there is something more that needs to be done, we should discuss it between now and the next Sitting and then we might be able to get us both together to decide what we are trying to achieve.