Local Government Finance Bill (Second sitting)

Rebecca Pow Excerpts

Tuesday 31st January 2017 Public Bill Committees

[Mr Thomas]

Q As I understand it, the Bill will be fiscally neutral, so in order to get the £12.8 billion of additional business rates income, local authorities will have to do more. Where do you think that will lead? I appreciate that there is still a conversation going on between the LGA and the Department but, as I understand it, they are some way apart in the discussion on responsibilities. Can you give us a sense of the flavour of where you think the extra responsibilities will fall? What do you think the impact on your budgets will be from the end of at least the better care fund, the public health grant, the rural services delivery grant and some other funds? The consultation document from last year strongly hinted at those being ended.

Jo Miller: The gap in public service funding is well documented. I think the LGA talked to you about £5.8 billion by 2020 and £2.6 billion in social care today. I go back to the point about the amount of money that Government and the people want to spend. There is still no doubt in my mind that we can spend money better by joining things up at a local level. For example, the answer in social care is not just more money, but how well that money is spent and how well the system comes together to spend that money as effectively as possible. The same goes for the criminal justice system and children and families. I encourage Government to look at the totality of money that is spent across the piece. I mentioned skills as another matter where we have to look at how we get better bangs for our buck. While money continues to come down departmental pipelines, we are missing a trick.

[Rebecca Pow (Taunton Deane) (Con)]

Q This is more of a general question that I would like to put to Mr Spence first. The Bill is all about encouraging growth and generating more business rates, which will hopefully then enable us to pay for more services. Would you say that the way in which that has been handled until now has potentially hampered growth, and do you see the Bill changing it? Some tools in the Bill are supposed to help—pooling, the infrastructure levy and things like that. Mr Spence, would you say that that was going to happen through the Bill?

Christian Spence: The Bill opens up some opportunities where it might happen, and in a moment I will come to why I think there are some problems. On the first part of the question and whether the business rates system today as it stands hampered growth, the answer is clearly yes, it has. The nature of the economy over the past 10 years or more has changed significantly. Usage of physical space is less important to the economy today than it was a decade ago, and we would expect to see that change continue over the coming decades and beyond.

The business rates system is still locked around its old-fashioned way of looking at a predominantly manufacturing and machinery-led economy. The inclusion of plant and machinery within the valuation system not only acts as a detriment to investment and causes perverse incentives directly to businesses as to whether to invest, but is administratively complex and procedurally onerous. As one of the largest revenues for a property tax in the world, it sets us outside our international competition very significantly in terms of how we manage commercial revenue.

Does the Bill move us closer? It has the potential to do so, but to echo some comments from Mr Williams earlier, the challenge is that, by allowing 100% retention—I spoke earlier about why we support that as a high level principle to better connect the incentives through local authorities and business—the Bill has at its heart real challenges. It is still fundamentally property based. To go to Mr McMahon’s question earlier, we do not see any reason why you would particularly want to move away from that system for well-versed economic reasons, but the challenge is that local authorities are going to grow their revenue only by introducing new floor space developments. We hugely welcome the changes in business rates policy to lift 100% relief to rateable value of £15,000 and above, but it means that properties with less than that rateable value do not add any net cash to local authority business rate receipts.

The challenge is that you are incentivising local authorities to grow their business rates revenue, which can have a perverse incentive, as Mr Williams mentioned—are you looking after your existing business base and helping it to grow, because incremental growth of most businesses is unlikely to deliver significant expansion of rateable value properties that can be levied for rates? If you are focusing exclusively on new premises of a high rateable value, the question for a lot of authorities will be: “Is there physically the land available to deliver significant growth in those areas?”

[Rebecca Pow]

Q Forgive me for interrupting, but what were your views about pooling? There are some good tools in the Bill for amalgamation of bigger areas to give incentivised or different business rates to encourage more economic growth in a wider area.

Christian Spence: The views representing a national organisation would vary hugely by geography across the UK and the nature of those economies. In general, yes, the pooling opportunities theoretically give greater flexibility in how those tools can be delivered, but that comes back to earlier questions about the ability of local authorities to collaborate at a time of intense pressure to each one of them individually.

In my area in the Greater Manchester chamber, we have an under-banded city centre authority and more open land on the outside. Pooling arrangements might help to spread some of that, but it is going to be hugely predicated on the ability of individual authorities to come together and share those opportunities. The difficulty of genuine, real-terms revenue growth under this system is not clear to us at this stage.

--- Later in debate ---

[Mr Thomas]

Q In the debate about how to even out changes in the tax base, let us take the example of Heathrow. The third runway is coming. One would have thought that that would inevitably make the area around Heathrow attractive to a number of businesses. Councils such as Maidenhead, perhaps, and Hillingdon will be hoping that their treasuries will benefit from substantial business rate income down the line. How do you think that sort of major structural change at local level should be dealt with under the system?

Professor Tony Travers: I will offer a personal view. I was always surprised that the potential impact of the decision about where the additional runway in the south-east was to be located did not take into account, as far as I could see, the knock-on consequences for the local authorities in the area, given the business rate retention scheme that we are discussing. Any additional runway capacity, be it in the south-east, Manchester, the west Midlands or wherever, must have significant knock-on impacts. You are right.

In principle, when properties are revalued that uplift will be captured. Then the issue, which has always been an element of challenge to even the 50% business rate retention, is whether councils keep only the uplift on new business, or the uplift for the existing properties paying higher rates. As the Bill goes through Parliament, how much of the uplift as a result of a major national change of this kind is retained locally, and how much goes back to the Exchequer through its tax mechanisms, is a very interesting question.

[Rebecca Pow]

Q My businesses in Taunton, particularly since I have been an MP, have had a constant gripe that they pay business rates and so little is kept locally. I am told that 7.5% is what we get. Do you foresee that this new Bill will enable a much closer relationship to be forged between business and the local authorities, now that there is the concept of keeping 100% of the business rates? It has been quite antagonistic, has it not, Mr Lowman, particularly from your experience?

James Lowman: Honestly, that is not a gripe we get back. The level of business rates, the perceived fairness of business rates in comparison with neighbouring businesses, larger businesses or internet businesses—absolutely. What then happens to that income is not something we hear back about a great deal. I think that the perception of increased business rates and worsening service in areas that matter to businesses—whether that is waste, licensing or, in some cases, things such as policing—gets drawn into that. Whatever the realities of what is funded by what, the perception is, “I am funding the area I am operating in” so if the services in an area appear to be worse, that may be part of that overall perception. But I have never had a business come to me and say, “I don’t mind paying more business rates, but I have a problem with where it goes”.

[Rebecca Pow]

You should meet some of the ones in Taunton Deane.

James Lowman: I would love to. Where that does come through is with things such as business improvement districts—but people see that as slightly separate from the business rates system. That would be about saying, “This area needs support, regeneration and growth; needs things doing locally”. Yes, the business rate system is then the mechanism through which businesses make a commitment to part-funding improvements. It works more that way round, from our point of view.

Professor Tony Travers: I think that what lies at the bottom of accountability—there is an accountability— are two problems. One is that accountability for business rates has been weak for many years because it is a national tax but most people pay it to the council.

[Rebecca Pow]

Exactly. They blame central Government— so now they are going to.

Professor Tony Travers: Central Government set the tax rate and the rules for the base, so it has been central Government’s responsibility up to now. All the rules will continue to be set by central Government. But there is a separate issue, which I realise is beyond the Committee’s remit. There are significant problems with non-domestic rates, notwithstanding the fact that they are the business property tax that we have. They are not a great tax—they are effectively a tax on inputs. They are inflexible in relation to profits, and so on. But—I respect the Treasury’s, and DCLG’s, problem—they are the tax we have got. Moving away from that to something different, which might be a radical change, is a reform that successive Governments have not been willing to make. However, there are good arguments for looking at business rates from first principles—starting all over again. That is not where we are with this Bill, I fear.

[Jim McMahon]

Q This is a more rounded debate about the sustainability and funding of local public services. If we are going to move to a localised method of funding, we need to make sure that it is robust and can fund the demand for public services. I have a concern about council tax in that context. People already believe that they pay far too much council tax and that all they get in return is their bins emptied—and now that is happening less often than it used to, in many areas. People are questioning why they are paying council tax and a potential 25% increase is programmed over the life of the Parliament. Is there not a risk, with business rates, in the way there is with council tax, that although a lot of this conversation has been about cost, the real debate is about the value that people believe they get in return? I would welcome a sector view, not about the total cost, which is always a bugbear for council tax and business rate payers, but on the perceived value in return.

James Lowman: I think that our members see it as a cost of doing business, rather than a payment for something. They see their contribution as business rates, the jobs they create and the tax they collect on VAT and excise duty. Where local businesses have to use local government, they pay for that. If they go for a licence, they have to pay licensing fees. Rates do not cover all the services that businesses receive from the local authority; they are seen as just a tax and a base level that they have to contribute in order to trade.