Business Rates (North-East)

Pat Glass Excerpts

Tuesday 25th October 2011 Westminster Hall

[Julie Elliott (Sunderland Central) (Lab)]

It is a pleasure to speak under your chairmanship, Mr Amess. I am grateful for the opportunity to initiate this debate on an issue that will have a big impact on the north-east, as is evident from the number of my fellow north-east MPs who are present. The whole country is being affected by the difficulties in the economy, but it is fair to say that the north-east is suffering. Economic growth is stalling and unemployment rising. In the period from May to July of this year, the north-east had the highest unemployment level in the country at 11.3%.

Unfortunately, that is not altogether a new experience for our region. For decades, the north-east was undermined and overlooked as a place of economic growth. In the 1980s in my constituency of Sunderland Central, we saw the shipyards that had defined our city and been a source of pride for generations, employing entire families, almost disappear from the banks of the River Wear. At its peak, ours was the biggest shipbuilding town in the world. When it came to our efforts in world war two, we produced more than a quarter of the nation’s total tonnage of merchant and naval ships. However, in 1988, British Shipbuilders shut up shop. That was followed five years later by the closure, by a Tory Government, of our last coal mine, putting many thousands of people on the dole.

The economic history and future of the north-east is one of manufacturing and production. We are intensely proud of that. Sunderland is now world-famous for building cars. I applied for the debate as a result of the submission by the Association of North East Councils of its response to the consultation on the review of local government finance. That laid out a clear case of concerns about the Government’s proposals. It is worth mentioning that the response had cross-party support from across the region.

Despite our rich heritage, the north-east has not been able to keep up with the economic growth of other regions in our country, and we are still rebalancing our economy after the decline of our traditional industries. That is why the formula grant has been crucial to councils across the region, allowing them to provide the services needed for their residents, while trying to address growth in their areas. For Sunderland city council, the gap between the formula grant that it receives from the Government and the amount in business rates that the city collects is £60 million. In Durham, the figure is £80 million, and across the north-east there is a shortfall of about £400 million. Business rates make up more than 80% of the Government grant to councils, so this really is a critical issue.

No one is arguing that the formula grant could not be improved, but what the Government propose with the localisation of business rates has the potential to make things worse. I am thinking particularly of the lack of information about top-ups and tariffs. The Minister has said that the formula grant method is incomprehensible, far too complex and lacking in transparency and that councils are left at the whim of the formula setter in Whitehall. I agree that the formula grant system is not perfect and it is certainly complicated. However, it does attempt to be fair, redistributing centrally pooled funds to councils according to their needs.

Under localisation of business rates, the system will change completely. The proposed system takes no account of councils’ ability to raise council tax, no account of differing abilities to generate business, no account of future needs and no account of a council’s ability to service the needs of its residents.

Let us examine the differences in council tax yields. In the north-east, most authorities have more than 50% of their properties in council tax band A, compared with Surrey, where the figure is just 2%. In Sunderland, only 9% of the housing is in band D, compared with Surrey, where the figure is 75%. People can see the unequalness in the ability of local authorities to raise revenue. In real terms, that means that an area such as South Tyneside can raise £427 per person, whereas Kensington and Chelsea can raise £795 per person—a huge difference. The system of equalisation under the formula grant worked so that the actual difference was just £3 per person. That enabled local authorities to provide the services needed by their residents, regardless of the economic base of their area. It is a question of fairness, equality and need. If the Government are serious about making the proposed system fair, they need to deal with that issue.

Deprivation levels in the north-east are high: 33% of our population live in the 20% most deprived areas in the country; Sunderland has 34 neighbourhoods in the 10% most deprived areas nationally. That level of deprivation leads to a much greater demand on the services provided by local authorities. I am referring to more people receiving the home care service, more looked-after children and supported adults, more children on free school meals—the list is endless. As the ANEC report states, any system has to ensure that it does not create a spiral of decline in poorer areas, with an impact on health and social care.

The north-east has an ageing population. It is expected that by 2030, 23% of the population will be over 65, leading to an even greater pull on resources. It is right that any new system should take that into account. At the moment, I cannot see how the Government’s proposals will do that. I hope that the Government’s plans for top-ups and tariffs, of which we have yet to see the details, will fully respond to that situation. The gap between the north and south of England is already stark; I am concerned that with these plans, it will only grow larger.

[Pat Glass (North West Durham) (Lab)]

I congratulate my hon. Friend on obtaining the debate. Does she agree that the Government’s proposals would result in exactly what happened in America in the 1980s? Cities such as New Orleans and Detroit became derelict, with anyone who could move out of them doing so to obtain the services that they needed. What the Government propose would create derelict cities in the north.

[Julie Elliott]

There is a real danger that that could happen, which is why it is important that this debate highlights the issues for our region. The situation that my hon. Friend describes is the last thing we need. I cannot believe that is the Government’s intention, but it is the danger in the system that they propose.

--- Later in debate ---

[Mr David Ward (Bradford East) (LD)]

I thank the hon. Member for Sunderland Central (Julie Elliott) for introducing the debate. I feel that I am gatecrashing a tad, but I will not take too long. However, we have many things in common, which I hope to bring out.

I have spoken at length with Councillor Janet Battye, who is vice-chair of Local Government Yorkshire and Humber, and there are real concerns about the proposals. The deadline for submissions is 27 October, so there is still time, and the important point about having the debate now is that it might encourage people to make submissions before the deadline.

There are two overall concerns, which I will detail. First, in terms of those with buoyant business rate bases, the concern is that this will be a case of “to those who have, more will be given”, with the proposals simply sucking in additional investment. As areas get more proceeds from business growth, they will invest them, which will result in more proceeds, which will result in more growth, and so on. There is also a concern about the historic and fundamentally important link between funding levels and the overall assessment of local needs. If that link breaks down, it will be to the detriment of many authorities that serve deprived communities.

As to the details, I am a member of the Chartered Institute of Public Finance and Accountancy, and I realised many years ago that the way to kill off a conversation at a party is to start talking about local government finance. None the less, the issue is crucial to millions of people.

There is a danger that the proposals are being rushed a bit, especially at a time when local authorities—especially many in the north—face huge reductions in their tax base and income, particularly as a result of front-loading. It is also difficult to look at the long-term repercussions of the proposals when local authorities face problems with the amount of Government grant they will receive for council tax.

The second point—perhaps it should have been the first point, because it was raised before the Localism Bill was considered in depth—relates to having a fundamental review of the relationship between central and local government. Such a review should come first; then we should have the structure, followed by the financing of local government. However, we have not really had a serious debate about the sort of relationship we want between central and local government.

There is also the false belief that business rates are the same as economic growth, but that is not necessarily the case. It is certainly not the case that there is a link between business rates and needs in an area. We are in the process—I think we are all signed up to this—of rebalancing the economy in many ways. Hopefully, the economy is being rebalanced from the south to the north, but we are also looking at different sectors in industry, at the type of growth we are likely to encourage and at whether it is likely to be in accordance with our stated rebalancing policy. SMEs and manufacturing have been mentioned, and we lost 15,000 manufacturing jobs in Bradford between 1998 and 2008. We desperately need those jobs back, but will the proposals incentivise the creation of manufacturing jobs, or will we take the more easy route of retail growth?

There is also the issue of the redistribution of wealth that might take place. About £3 billion more in business rates will be generated by 2014.

[Pat Glass]

On that point, one advantage of being a little older is that we have been around before and seen things before. We should remember where the formula grant system came from. Margaret Thatcher introduced it because local authorities—largely Labour ones—in cities were increasing their business rates, and businesses called for the formula grant system. The Government need to think about that because, although we need the detail of the proposed system, they are in danger of being seen as anti-business over this issue.

[Mr Ward]

The details are crucial, and that is why there is a need to take things slowly and not rush. At times trust between central and local government is tested to the limit. We need an established, agreed and fair starting point. At the same time that there are dampening effects on local government finance and a less than accurate assessment of spending pressures on local authorities, we are talking about a base of 2012-13. Many authorities have taken a real smack in the front-loading of the local government settlement and, if the base were 2010-11, that would paint a totally different picture of an area’s needs. That issue has been raised by the Association of North East Councils. We also need regular review, because things change rapidly, certainly in the economy. We need to review the baseline, and five years is too long. I would argue for the resets to be on a shorter time scale.

The point that I was making was about the possible transfer or redistribution of wealth, because £3 billion in additional business rates will be generated by 2014, but that will be happening at the same time that local authority budgets will go down. There may be a transfer of wealth to those areas that initially prosper well from business rate growth, from authorities that have large reductions in their revenue grant.