Business Rates (North-East)

Lord Wharton of Yarm Excerpts

Tuesday 25th October 2011 Westminster Hall

[Mr Iain Wright (Hartlepool) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Amess. I congratulate my hon. Friend the Member for Sunderland Central (Julie Elliott) on securing the debate, which I think we all agree is vital to the economic future of the north-east.

The Government’s proposals on business rates discriminate against the north in favour of the south, against smaller authorities with less potential for growth in favour of larger, more metropolitan areas with a wider economic and tax base, against deprived areas with greater social and economic problems, in favour of their more affluent counterparts, and against manufacturing industry in favour of retailing. If the proposed changes to the redistribution of business rates were to take place while everything else in local government finance remained equal, they could at best be given serious consideration. However, we all know that the proposals are made in the context of the most radical, disruptive and damaging changes to local government finance for more than a generation.

I shall concentrate on the borough of Hartlepool and the impact of the proposals there. For the two financial years 2011-12 and 2012-13, Hartlepool borough council’s cuts amount, in terms of the total expenditure slashed by central Government, to some 20%, or an annual change of £10 million. Put another way, the cuts to local government finance in Hartlepool mean a reduction in spending of some £150 for every man, woman and child in the borough, as opposed to a national average reduction of some £50. On top of that, if the business rates redistribution system were to be changed, the borough of Hartlepool could lose upwards of £13 million every year. That is the difference between the amount of business rates collected locally—£27 million—and the £40 million that is redistributed back to the town from the Treasury through the national business rates system. I think we would all agree that such a proposal could not be maintained in any sustainable way for Hartlepool.

[James Wharton (Stockton South) (Con)]

With the proposed tariffs and top-ups, is not that exactly the sort of situation that should not arise? Hartlepool would receive a benefit, added to the business rates that it collects, to top it up to the relevant level, starting at a base point to maintain its funding level in the year of the introduction of business rate retention.

[Mr Wright]

Those last few words are the key phrase. It is what will happen after 2013 that I worry about. There will be potentially very damaging consequences for the north-east economy, and for the services that local government provides to the most deprived communities in our areas, about which we are most concerned.

A further difficulty in Hartlepool is the specific nature of the tax base. It is difficult to raise revenue locally. Forty-three per cent. of council tax is raised locally, as opposed to similar areas which could raise as much as 80% or 90% locally. Three quarters of properties in Hartlepool fall within council tax bands A and B. My hon. Friend the Member for Sunderland Central mentioned a figure of 9% for properties in band D. In Hartlepool that figure is 7%, so on top of the proposed changes in business rates, the borough’s ability to raise taxes locally is limited, and the Government are doing nothing to address that. The way they are stripping demand out of the local economy through cuts is making things worse.

I mentioned earlier that Hartlepool collected £27 million in business rates. The Hartlepool economy—my hon. Friend touched on this question with respect to the wider north-east economy—depends on a small number of business rate payers. Ten businesses contribute £11 million, or nearly 40% of the annual business rate revenue collected in Hartlepool. One business alone contributes 15%, or £4 million, of the rates collected. If one of those businesses were to relocate or cease trading, the effect on the finances of Hartlepool would be catastrophic. The Minister must appreciate that it would be impossible to regain such revenue for many years in the event of such a large business leaving. What will the Government do to mitigate that risk?

In his statement to the House on 18 July, the Secretary of State said at column 672 in response to a question from me that Hartlepool would not be worse off as a result of the proposals. Following the intervention from the hon. Member for Stockton South (James Wharton), I think it is fair to say that that will be true until 2013-14, but what happens afterwards? It is important for the council’s planning that it be given more details, so will the Minister provide more information on such matters as the basis for setting the baseline; setting the initial tariff and subsequent top-ups; whether such top-ups will be uprated through RPI, CPI or some other measure; and the frequency of resets within the system, to allow councils to plan?

The policy of the Government, certainly when it comes to tackling public finances, and particularly with regard to the relationship between central and local government finance, is to target higher grant cuts on those local authorities with relatively greater dependence on grants and with more deep-rooted social and economic problems. The proposals on business rates make such problems even worse and target the north-east and authorities such as Hartlepool particularly severely. I hope that the Minister will think again.

[James Wharton (Stockton South) (Con)]

It is a pleasure to serve under your chairmanship, Mr Amess. I congratulate the hon. Member for Sunderland Central (Julie Elliott) on securing the debate.

It is not unusual, as a Conservative Member for a constituency in the north-east, to feel a little outnumbered, and today the odds are perhaps slightly on the side of the Opposition, as far as weight of contribution is concerned—although perhaps not quality; we shall find out about that.

The way we fund local authorities is very centralised and has been for some time. The OECD says that we have less funding autonomy for local government than France, Germany, Spain, the United States and Japan. That is not sustainable, and successive Governments have considered, and commissioned reports about, ways to move funding, to give local authorities more responsibility over what happens in their area, to allow them to benefit from success, and to transfer responsibility, so that local democracy can be more effective in holding to account the representatives who run an authority. More than half our local authority funding, on average, comes from central Government grant—money redistributed through the Treasury.

What the Government appear to be trying to do is to reverse that trend. We have seen in areas other than funding, such as localism legislation, that councils are going to have a general power of competence. Local authorities will be empowered to do things that are in the interest of the communities that they represent. In doing that, there is a need to reform funding and the way in which local authorities receive their funding, so that they will have autonomy, freedom and the local accountability that comes with such autonomy and freedom. I am prepared to believe—giving credit to the Government—that that is the foundation for the proposals on business rate retention.

Local authorities collect about £19 billion in business rates annually. That goes to the Treasury, which redistributes it. As the hon. Member for Hartlepool (Mr Wright) pointed out, some authorities get more back than they put in. That is quite right, because there is a discrepancy in the ability of different local authorities to raise rates from the existing infrastructure in their areas. The challenge for Government is to find a fair way of tying future growth and so incentivising councils to promote growth in their authority area without unduly disadvantaging areas that will find it more difficult to do so.

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

Does the hon. Gentleman not think that the Government’s policy at the moment is slightly counter-intuitive, given that the Tees valley local enterprise partnership has a manufacturing-led sector growth policy? If manufacturing per hectare brings in only a fifth compared with retail, does he not think that the new policy could hinder the sector growth policies of business-side LEPs?

[James Wharton]

The hon. Gentleman makes a valid point, and I will touch on that later in my brief comments. We are consulting on how the policy would work, and there is a challenge for the Government to ensure that the areas that promote a manufacturing base as the driver for economic growth are not disadvantaged. It is a valid point, but we must not jump the gun and assume that it will be a problem, because we do not yet know what the framework will be—it is a matter for consultation.

There are weaknesses with the current system, such as accountability, which I have touched on, and a weakness in the freedom of local authorities to respond, because they are so dependent on central Government grants. We have seen, over many years, the problems of the central Government grant funding system, which include its complexity and how it often plays out in ways that cannot be easily predicted and are not necessarily to local benefit. There is also a problem regarding the incentive that it gives to some local authorities and councils, which may perceive that they can get more benefit for their area by lobbying central Government for more support than by focusing on promoting growth and improving their area.

What are the Government doing? The first and most important point, which some hon. Members, to give them their due, have touched on this morning already, is that there is a consultation, which is an opportunity to feed in, talk about and outline proposals, and to ensure that the concerns of local authorities in places such as the north-east, where there is a genuine fear that they may be disproportionately disadvantaged by any move towards local retention of business rates, are properly taken into account.

[Mrs Mary Glindon (North Tyneside) (Lab)]

It is well known that the Tory mayor of North Tyneside always supports Government policies. However, on this occasion, she supports the Association of North East Councils’ criticism of the consultation. Does that not show something?

[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.

[Mr Alan Campbell (Tynemouth) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Amess. May I begin by commending my hon. Friend the Member for Sunderland Central (Julie Elliott) for securing this important and timely debate? It is a pleasure to follow the hon. Member for Bradford East (Mr Ward)—clearly the north-east has just got bigger—and the hon. Member for Stockton South (James Wharton), who, if I have interpreted his speech correctly, has just taken personal responsibility for the success or failure of Government policy in the north-east.

[James Wharton]

I have not.

[Mr Campbell]

If we are talking about what the hon. Gentleman has not done, he has not shared the information that, of all the councils in the north-east, only Stockton council stands to gain from the proposal—some £4 million.

Whatever argument there is for localising business rates, concern has been expressed on both sides of the Chamber today about the impact that the policy might have on the north-east. We welcome the opportunity to play a constructive part in the consultation and the wider debate.

Why should the north-east have cause for nervousness? I am reminded of the comments of the then Leader of the Opposition, now Prime Minister, on the eve of the general election. He said that when the changes and cuts in public spending are made, it will be the north-east that can expect to be hit hardest out of any region. That is why local authorities in the north-east are united across the parties under the banner of the Association of North East Councils in the information that they are providing to the consultation. I believe that that is also why the wider business community shares those concerns.

I want to address the concerns not from a political point-scoring perspective, but in the context of what the Government say they are trying to achieve for the region. Under this change, my local authority, North Tyneside, stands to lose £19 million, which is half as much again as the level of cuts that are necessary because of local government funding changes. The region as a whole stands to lose a third of a billion pounds. Compare that with an area such as Westminster that generates £1.8 billion in business rates each year. The fundamental question is how local economies in the north-east can compete with areas that have a large business rate tax base and the resources to invest not only in attracting future jobs, but in continuing to provide local services. The Government’s own local growth strategy aims to rebalance the United Kingdom’s economy, but if we are not careful, this proposal will have the opposite effect. London and the south-east are not the only areas that stand to do well. Scotland will continue to have Scottish Enterprise, which will attract businesses and jobs. The north-east is losing its development agency and its regional growth fund is proving ineffective.