Local Government Finance Bill

Lord Smith of Leigh Excerpts

Wednesday 10th October 2012 Lords Chamber

[Lord Smith of Leigh]

My Lords, I support my noble friend’s amendment and thank him for taking up the amendment that I moved in Committee. I need to declare my interest as leader of a local authority. I must say that I have been dealing with local government budgets for about 30 years now, and the current year is the most difficult one that I can recall. That would be so even if this Bill were not around, because already we have huge challenges with the economic circumstances. As my noble friend said, police budgeting has changed and not until after 15 November will we know whom we are going to face as our new police and crime commissioner or what their views will be. The settlement date seems to be getting later every year; the last that I heard was that we may get it in the post as a Christmas card. For those people interested in what is going on in Birmingham this week, we understand that there is going to be a new council-tax-freeze grant in the system. How might that work? We read in the papers that there are probably going to be further cuts to public spending and that local authorities will perhaps bear more than their fair share, as has happened in the past.

I thought that my noble friend dealt with all the issues in the Bill itself. However, each authority is also out to consultation on local government tax support schemes. The timescale for that is three months, and most put it out over the summer period and therefore will come back to it probably in November, or before the end of the year. Obviously we will need to respond to comments made as part of the consultation and reassess what we are doing. We have technical problems with making sure that our computers work with the new systems, whether on business support or on council tax, and we need to ensure that we have the information that my noble friend asked for. It was helpful in a sense to see the timetable that the Minister sent round, but government timetables have been known to slip in the past. As the House was hearing earlier, government departments have also been known to get things wrong, and we may need to review some of this system.

Time is becoming critical and I hope that the Minister will seriously consider the points that we are making; we are not making them simply to defer the Bill. If the Bill is going to be successful, as presumably the Government hope that it will, then we need to get the system in place properly. We need answers to some of the questions that we are raising.

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[Lord McKenzie of Luton]

My Lords, this amendment requires the undertaking of an independent review of the business rate retention system within three years of its introduction. It specifically requires a recommendation about whether there should be a resetting of the system. We have later amendments—Amendments 79 and 81—that propose additional and alternative approaches to resetting. We recognise that the changes introduced by the business rate retention scheme represent a major change to the system used for the funding of local government, and it is, in part, a step into the unknown. The changes are being introduced at the same time as the localisation of council tax benefit, together with a cut in its funding, and so far as the overall resources for local government are concerned, the change is taking place against the backdrop of a sharp reduction in the overall local government spending control total, given a further twist in July’s proposition that government should hold back substantial funds to pay for the new homes bonus capitalisation and the safety net, not to mention the early intervention grant scheme.

There is a fundamental switch in method. Under the current system, the formula grant largely determines the extent of shares of government funding for local authorities and, while accepting that it is somewhat opaque, it has the considerable merit of reflecting local needs and resources in the allocation of grant. In the new world, the revenue support grant will play a diminishing role with the retention of 50% of the business rates being the driver of resources. Of course, not all local authorities have an equal ability to grow the business rate base. Areas such as Luton, which is highly developed with tightly drawn boundaries and significant unmet housing need, simply do not have the land available for the continuous development of additional business. It is accepted that the Government are seeking to rebalance resources at the outset of the scheme through the system of tariffs and top-ups, essentially comparing business rates collected with formula grant allocations. However, once set, it is proposed that tariffs and top-ups will not be changed or reset, other than uprated by RPI, until 2020 at the earliest.

The review which this amendment would introduce could cause an earlier reset than 2020, but would not inevitably lead to one. In that sense, it is more modest than Amendment 81, which would actually require a reset every three years to coincide with each spending review period. The Government argue that the longer the period between resets, the greater the certainty in the system and the greater the incentive. All other things being equal, there is of course some merit in this argument. It begs the question of how much incentive there is in the system in any event, given the complexity of its diverse components, and whether that incentive presents itself to all local authorities equally. Conversely, the argument for an earlier and shorter period between resets in part expresses the concern that the setting of the tariffs and the top-ups in the first place may not be fair to all authorities. Each authority’s starting point under the new system will be based on what their share of the overall funding available for 2013-14 and 2014-15 would have been under the current formula grant system but, of course, the formula has been flexed, for example, to increase allowances for sparse areas. We know that the LGA has expressed strong reservations about how the proportionate shares of business rates are determined, another key component of the calculation.

However, even if we accept for the purposes of debate that, at the start of the system, the Government have achieved their objective of no local authority being worse off as a result of its business rate base at the outset, and that there are adequate protections to ensure that all authorities can maintain services for local people—an assertion we reject—why would it follow that this position can be maintained by just uprating the tariffs and top-ups by RPI until a reset? The proposition would seem to take no account of changes to the data which feed the formula in the first place, population movements being but one. It is of course possible that the manner in which the central share is to be deployed will counter any negative redistributive effects of the system, but we have only silence on this issue beyond the first two years. I am not optimistic about that.

Faced with the prospect of limited opportunities for raising extra revenue from council tax, a further freeze, a 2% threshold on referendum provisions, increasing restrictions overall on local government expenditure control totals, the central share of business rates being increasingly deployed otherwise than through formula grant and therefore, inevitably, on the basis of needs, poorer local authorities will only be able to look to their top-up, which is fixed in real terms, and any growth that they can muster in their business rates to meet their expenditure needs. For some, the retention of a share of the business rate growth will be fine, but for those who do not have the same opportunity, due not to ambition or leadership, but perhaps just the geography of an area, and those who also have a higher percentage of their spend currently met from grants—the more highly geared councils—the problem will be compounded.

We know that draconian cuts are already making it near impossible for many councils to deliver adequate services. The growing demand for some of those services, adult social care in particular, will make matters worse.

I stress that the amendment also requires the review to look at the issue and the extent to which the business rate retention scheme is actually incentivising growth. There are concerns that the level of the local share, at 50%, is too low, and that the overall scheme, as I said, is far too complex to produce a real incentive.

Under the Government’s proposal that there should not be a reset until at least 2020, these challenges could be left unaddressed for at least seven years. This, I suggest, is far too long. We should at least be taking stock after three years of the system so that, if necessary, it can be recalibrated. It will doubtless be argued that the Secretary of State has the ongoing power to do this anyway. I accept that there is the technical power, but some independent review of how it is working should be a necessary safeguard. This is all we seek by this amendment. I beg to move.

[Lord Smith of Leigh]

My Lords, again I support my noble friend’s amendment. This Bill is a huge gamble. It is the most radical shake-up of local government finance since the poll tax. Noble Lords may think that if there had been a review of the poll tax, we would not have had the riots and the other problems which led to getting rid of it. My noble friend identified two fundamental issues. First, will the proposal enable the system to be fair? Will top-ups and tariffs work fairly for all authorities—those paying the tariffs as well as those which might be in need of top-ups? We need to know that. Secondly, will it be flexible enough to meet adjustments in the system when the pressures are bound to rise?

As my noble friend has said, this proposal is being introduced at a time of extreme turbulence in the world of local government. We have the reductions in public spending, which are bearing heavily on local authorities. The timing is not brilliant for that. We also are in a period of economic uncertainty. In Committee, the noble Earl, Lord Attlee, mentioned that local authorities should try to encourage business in their areas. Perhaps I may remind the House that that is what most local authorities have been trying to do for many years but under current circumstances it is very difficult.

Over the summer, noble Lords probably heard about the problems of JJB Sports plc, which is located in my authority, Wigan. It was once very profitable and employed a large number of people across the country. The head office and its staff were in my authority but clearly it will not be an employer for very much longer.

Again in Committee, I mentioned that the impact is not just on the private sector where fundamental changes are going on. In Greater Manchester, we have learnt of a review of the provision of acute hospital places. That will almost certainly lead to the closure of two, if not three, district general hospitals. District general hospitals are not only big employers in local areas but, through their ownership of land and property, they are major contributors to business rates.

Therefore, things can change by government policy. If we wait until 2020 for this review, there could be some significant shifts. An independent review is called for. The Government have put down some noble objectives behind the Bill. Let them see whether those objectives are being met and not run away from them.

[Lord Williamson of Horton]

My Lords, in this House we are perhaps tempted to call for reviews of many things that we have slight doubts about, and sometimes we have too many of these reviews. However, in this case I support the amendment. I note that later on the Order Paper we have Amendments 79 and 81, which go further than this. They would involve a three-year repeating look at the situation, whereas this amendment proposes that there should be an independent review after three years.

I support Amendment 4A because, as the noble Lord, Lord McKenzie, made clear, the situation between local authorities is not even. They have a differing ability to generate more resources from business rates. This is determined by a lot of factors which they do not control. The most obvious factor is geography. Another is that the business rates relate primarily to buildings and structures, whereas some authorities, if they were doing their best for the economy, might put their emphasis on economic activities such as IT and particularly tourism where they will have expenditure but will not necessarily generate more in the form of business rates. They will spend money on advertising, communications and transport and so on, but they will not get back much in the way of business rates because they are not putting up big buildings and nor are their citizens.

The result of what we have here running for seven years would be changes in local authorities’ resources, which would in due course have consequences for their services and council tax payers. That would vary considerably between the local authorities. I know that there is a biblical precedent for seven lean years and seven fat years, but if I was in the local authority and had seven lean years I would be pretty unhappy about it. It is therefore perfectly reasonable to have an independent look at this. The terms of the amendment are pretty moderate, and I hope that the Government will accept it.

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[Baroness Eaton]

My Lords, first, I must declare an interest as an elected member of Bradford Metropolitan District Council. Along with many Members of your Lordships’ House, I am also a vice-president of the Local Government Association. The amendment in the name of my noble friend Lord Jenkin is an extremely valuable contribution to the consideration of this Bill and I am very happy to support it. I should make it clear that I support the localisation of the business rate and congratulate Ministers on having pushed this policy through against much resistance. I campaigned for this change as chairman of the Local Government Association and I am pleased to see it becoming a reality.

However, today we are addressing a typical problem faced by a Government who are trying to get ideas from the drawing board of policy into the workshop of implementation when there are so many eager Civil Service helping hands to pass through on the journey. The amendment forces us to face up to a basic difficulty with the Government’s decision to set the central share of business rates at 50%. It is a problem we can even put a figure on thanks to the Government’s own evidence. As we have heard, we have a £10 billion problem.

My noble friend Lord Jenkin explained fully, competently and clearly the Government’s analysis of the scheme and the economic value of localising the business rate. I am sure that the Minister will explain what in this case trumps growth. But we have a few indications from the Government already about their reasons for setting the central share at 50%. For example, the Treasury is explicit that it will use the central share mechanism in order to continue to impose control over how much councils can spend, even though that spending is self-evidently funding itself without any impact on the national taxpayer or the deficit. This control has nothing to do with the Government’s deficit reduction plans, which are entirely necessary and correct. The expenditure and the local revenue balance out without any impact on borrowing. As I see it, it is control of the amount of spending for control’s sake alone.

With such a large central share the opportunities will be legion over coming years for the Treasury to try to share responsibility for programmes which are currently funded by the Exchequer into the ambit of the central share, to which the noble Lord, Lord McKenzie, has already referred. That would go beyond mere control into a zone where local ratepayers are being asked to shoulder burdens that previously would have been funded by national taxes. Perhaps I am being cynical but I feel that this would give me great concern.

The local share escalator proposed by my noble friend Lord Jenkin is a very elegant solution to resolving this problem over time. It would recall the Government to their localist and growth-focused principles, and bring the Bill closer to its advertised purpose. I am very happy to support it.

[Lord Smith of Leigh]

My Lords, I have a couple of amendments in my name and one which I share. Before I turn to them, I should like to comment on the significant amendment moved by the noble Lord, Lord Jenkin of Roding. I agree with much but perhaps not quite all of what he said. He is right about what it reveals about the Government’s attitude to localism, which is schizophrenic at best. In some ways they push very much on to local authorities and at other times they want to put controls in. I think that this is one on which the Treasury is not willing to trust and give up control entirely to the local authority. He is absolutely right that there should be, as I am sure there is, a consensus in this House about the need to achieve economic growth. We come from every different angle. I look at the level of youth unemployment in my area and of unemployment generally and, clearly, I want to achieve growth. My own local authority is working together with colleague authorities in Greater Manchester—perhaps I should have said that I am chair of the Association of Greater Manchester Authorities, too. We put a lot of effort and resources into trying to achieve growth. At a time when local funds are being squeezed, this is discretionary spending; it is not something that we have to do as local authorities, but we do it because we believe that it is important.

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Moved by

[Lord Smith of Leigh]

18: Schedule 1, page 22, line 40, at end insert “no later than the end of November of each year”

[Lord Smith of Leigh]

My Lords, the local government finance report will be a really important document when it comes out. My two amendments in this group apply to that. In Amendment 18 we come back to this magic date of 30 November, but some date needs to be suggested. It is fundamentally important to local authorities that we should understand what is in this document within a reasonable time so that we can make budgets for future years. I recognise that it is a challenge for the department and the Secretary of State to agree to a particular date. Nevertheless, this is something that the department should aim for. We want reassurances that, due to the nature of this report, we will not be deferred even further down the line, and that we will be able to make a judgment on what each local authority’s needs will be and what the budget will be for the following year.

I do not intend to go through the detail of Amendment 73, but with this probing amendment I am trying to tease out from the Minister a good indication of what is contained within the finance report. I presume that most of these things would be in there, but I would be very grateful if she could confirm that.

[Lord Jenkin of Roding]

My Lords, I have three amendments in this group and I can put them swiftly to the House. Amendments 57 and 58 deal with what is to happen if there is a surplus, or what the Bill calls “the remaining balance”, left over after the tariffs and levies have been made. The Bill, as it stands, says:

“The Secretary of State may by regulations make provision about the basis (‘the basis of distribution’) on which an amount … is to be distributed”.

It seems to me that it should be a matter not for the Secretary of State but for the local authority. Therefore, Amendment 57 sets out a slightly longer procedure which involves a consultation with the local authority about what is to happen to that remaining balance—whether it should be retained or distributed—and the basis on which it should be distributed.

Secondly, it requires that to be dealt with through the local government finance report. That is what gives Parliament a say on this. Essentially, this seeks to provide, first, an opportunity for local authorities to express their views through consultation and then for Parliament to have the final say. It is not the end of the world, but I think that this is going in the direction in which we would want to move. If you are to have these elaborate procedures, it seems to me that parliamentary control is important.

Amendment 78 proposes a new clause, which again requires consultation. The clause states:

“The Secretary of State may not make any changes to national business rate policy which impact on local business rate yields without first consulting with all interested parties”.

For the life of me, I cannot foresee circumstances in which a Government would want to do this without consulting. It seems that this is a perfectly sensible procedure to put in. If you are going to change the basis on which business rates are collected, it should be a matter for consultation.

We had a brief discussion when debating the previous amendment in which the noble Lord, Lord McKenzie, referred to the nationalisation of the business rates. I was responsible for that policy. When they were going to denationalise and decentralise, the main point was that businesses were charged rates by local authorities and had no vote. Therefore, business rates have been set nationally ever since. However, if the national rate is to be changed, there should be a process of consultation. I hope that the Government will be able to accept that.