It is not often that one gets the chance to react with a legislative proposal so soon after a Minister has made a particular threat. At the weekend, the Deputy Prime Minister, in answer to various journalists' questions, said that the Government were considering capping certain local authorities that were increasing their council tax by large amounts. I was particularly concerned to hear that, as it went against much of what Labour said in opposition and in government with respect to capping powers. I therefore felt that it was appropriate, as we had the chance to do so today, to probe this issue to see whether we could help the Labour Government put on the statute books the policy to which they subscribed in opposition: rightly, Labour in opposition was against capping powers. When the Conservatives were in power, the Liberal Democrats, with the Labour party, used to criticise the way the Conservative Government, time after time, used capping powers to stop local authorities reacting to the wishes of their electorate to invest in services, whether services in our schools, services for elderly people, services for vulnerable children or services more widely in the communities that councillors were elected to represent.
It is therefore disappointing that, when this Government came to power, they slightly changed their policy. They kept some reserve capping powers, and, to use the Deputy Prime Minister's words, they got rid of "crude" capping and somehow introduced "sophisticated" capping in the Local Government Act 1999. Some of us feel that that type of capping is still not right. The reason for that is simple: these issues should be decided by the electorate in the areas of the councils concerned.
We have some concerns, of course, that councils may be using opportunities to rack up the council tax. When I raised the issue at questions earlier today, the Minister—I think that he had Wandsworth borough council in mind—responded that some councils had cut the council tax before the election and were now raising it significantly. He has a problem with that case, as he well knows, because while I would not wish to support Wandsworth's methods—the way in which it cut the tax before the election and has now put it up is outrageous—the people who should judge that are the electors of Wandsworth.
The Minister has another problem: the comprehensive performance assessment of various councils has for some reason rated Wandsworth an excellent council. The Government, under their policy of freedoms and flexibilities, have said that they would not apply capping to those sorts of councils, so they have a real problem with the way in which they approach the matter. It would be simplest to get rid of capping powers altogether, which is the effect of new clause 19. I hope that we will have some support from Conservative Members on that.
Has not the new formula in fact created a situation in which some councils, in order to move up to what the Government suggest they ought to be spending at formula spending share, would have to introduce large council tax rises? Bridgnorth district council, for example, set a band D rate of around £65 last year, although the assumed national council tax level is £185. The figure is used in the calculation of how much Government grant the authority receives. However, if the authority were to spend at the formula spending share—the level that the Government suggest might be appropriate—it would have to put in a 200 per cent. council tax rise. It has not done that; it has put in a 13 per cent. rise. However, this case illustrates the problem that the Government have created.
My hon. Friend is exactly right, in the sense that the grant changes this year have been part of the problem. Therefore, it is not right for the Government to blame individual councils. The Government's policy of reforming the grant distribution formula has led in some cases to the large council tax increases. Ministers will say that they have protected local councils by the introduction of floors. However, we all know that those floors were not high enough for many local authorities. Those authorities faced significantly increased costs, such as the national insurance increase, above-inflation salary increases for many local authority employees and increases in insurance costs that were way above inflation. We therefore know that the floors were not sufficient.
When we take into account the effects of ring-fencing and passporting, particularly in respect of education—which is often a large part of the budgets of unitary authorities and county councils—we understand how local authorities have arrived at this position. Not only have they received insufficient grant and faced large cost increases, but they have been given no room to manoeuvre because much of the grant that they receive has been predetermined by central Government diktat. It is the fact that there is no wriggle room or ability to move the budgets round to meet communities' needs that has created the problem.
I have much sympathy for the hon. Gentleman's views, not least because my authority—as he knows, it is led by the Liberal Democrats, even though they are somewhat ashamed to admit it—increased the council tax by a small amount before the most recent local elections and subsequently increased it by massive amounts in the following two years. There is a good case for removing the power of council tax capping, but it is difficult for local authorities to set a rate that is decided locally when they are subject to national pay bargaining and do not have discretion over whether they implement that.
The hon. Gentleman repeats a point that I was making. Local authorities face such problems even when they are given, as the Government keep saying, grant settlements that are above inflation.
The Minister must recognise that, because of what is known as the gearing effect whereby authorities raise only a small proportion of their total revenue locally, a 1 per cent. cut in the grant sometimes translates into a 5 per cent. increase in the council tax so as to replace lost revenue. That is one reason for the large increases in council tax. When the gearing effect is added to cost pressures and ring-fencing, that means that the council tax has to rise by a large amount for an authority to meet the demands on it. That is one reason why we oppose the council tax and want it abolished. The other reason is that it is such an unfair tax.
The Government should not use capping powers even though the council tax is such an unfair tax. They should introduce a policy that would cut the council tax by £100 per council tax payer and use central Government money to fund that. If capping powers were used, there would be arbitrary cuts in services such as education and social services. We do not want that. By providing money from the Treasury—our alternative Budget showed that the Government could do that in the forthcoming Budget—we could ensure that councils were able to deliver cuts in council tax and maintain services. That is surely a much better approach than going ahead with capping.
I am intrigued that the hon. Gentleman believes that the introduction of a local income tax would remove the gearing effect. Surely a local income tax would have to be supported by Government grant in some authorities to a lesser extent than in others. How would that remove the gearing effect?
The hon. Gentleman is right to pick me up on that. A local income tax gives us the potential to get rid of the gearing effect. Income tax is fairer than council tax. A local income tax would allow us to cut national income tax and increase local income tax penny for penny, so reducing the grant and the gearing effect. It is a mechanism by which we could reduce the gearing effect, although obviously not immediately. Council tax does not provide us with that potential. That is the problem. In the balance of funding review, the Government are trying to discover whether they can put more demands on the council tax, but because the tax is so unfair, it cannot bear that weight. So the gearing effect will never be abolished or even reduced while we have such an unfair tax. By replacing it with a fair tax, we have the chance radically to reform local government finance.
In most other western democracies, local government finance is not the bugbear that it is in Britain. The prime reason for that is that many of them have a fair local income tax. Their local authorities are able to raise more of their revenue locally and are accountable to the local electorate. We should follow that model. People have been debating it for many years and it is about time our Government faced up to it.
I have listened with care to the hon. Gentleman's explanation, but surely a 1p reduction in income tax would reduce the money that the Government receive and they would then reduce the local government grant. A 1p increase in income tax imposed by the hon. Gentleman's local authority would generate far more money than a 1p increase in income tax imposed by my local authority, because people in his area have much higher incomes. How would that reduce the gearing effect?
The hon. Gentleman is right to make that point. We want to increase the revenue that is raised locally from 25 per cent. to 70 or 75 per cent. That would reduce the gearing effect hugely, but we would always need an equalisation grant—a redistribution grant—for the reasons that he outlines. We would not want poor authorities not to have resources because they have a lower income tax base. Similar aspects of the grant system have existed before. However, by having a fair tax, such as a local income tax instead of council tax, we would enable that shift to be achieved over time—
Order. I have been generous enough in allowing the debate to be shaped this way. I remind the House that we are discussing a new clause on capping powers.
You are right, Mr. Deputy Speaker.
Only time will tell whether the Government will use capping powers this year. I hope that Ministers will tell us that they have decided not to use them. I also hope that the Minister will go further and tell us that, with cross-party support, capping will end altogether. We should take one step towards reviving local democracy and improving local accountability. Let us build on that in the next stage by reforming the local government finance system entirely.
The debate has been interesting and I listened with care. I fully accept that Conservative Governments in the 1980s used capping powers against some of the most profligate authorities—mostly Labour controlled—that were wasting taxpayers' money outrageously. There was, and is, another problem—in some authorities, the majority of council tax payers do not pay the full amount of council tax, so they have an interest in their council providing ever more subsidised services. One could argue that those who pay the council tax in full need the protection of capping. On the other hand, the Conservatives strongly support the principle of devolving as much power as possible to the lowest possible local level. Provided that the ratio of the highest to the lowest band of 3:1 is maintained so that council tax cannot be unfairly skewed to the top band or two, the Government have plenty of powers to force poorly performing authorities to restore their services to a reasonable and cost-effective level. Many more powers, for example, have been given to the Secretary of State in the Bill.
We have complained about the Bill's centralising tendency, but one consequence is that the Secretary of State has many more powers to deal with councils that overstep the mark, waste money and provide poor services to local people. The Government have powers, including one involving the Audit Commission, over the comprehensive performance assessment and star rating that have been introduced, and ultimately they can send in officials to run council functions or, indeed, the council in cases of grossly incompetent management. Such powers have been exercised over Walsall council. On the other hand, it will be interesting to see what the Government will do about one of the top-performing councils—Wandsworth. It would be nonsense if a top-rated council in the Government's new comprehensive performance assessment and star rating were capped because it tried to maintain local services.
While we fully support the Liberals' aspiration and aim of getting rid of capping, it is difficult to see how they can do so under the Government's unfair and skewed mechanism for funding local authorities. We are keeping an open mind, and I must tell the Liberal Democrat spokesman that although I have considerable sympathy with his new clause, regrettably I cannot support it tonight as we need to consider the matter in greater detail. With those few remarks, I wait with interest to hear what the Minister has to say.
I have considerable sympathy with much of what Mr. Davey said when he moved the new clause. Local government functions are effectively controlled from Whitehall and three-quarters funded by it. To meet the targets effectively imposed on it by the Government, my county council is obliged to increase council tax by 14 per cent. or so just to stand still. West Mercia constabulary, one of the precepting authorities, gave a demonstration to hon. Members from Worcestershire, Shropshire and Herefordshire of the impact of the Government's grant, which Matthew Green attended. He and I heard a convincing reasons why a 12.9 per cent. increase in the precept was necessary just to stand still.
I am therefore worried about the capping powers available to the Government. Worcestershire county council could be in an invidious position if the Government used those powers, and might have to cut services, including social services inspection and teachers in schools. Yet it has to impose a monstrously high council tax increase because of the Government's treatment. Quite outrageously, it is between a rock and a hard place.
My hon. Friend is making an important case. His police authority is in exactly the same position as mine in Gloucestershire. It has had to impose a double-digit precept for the past three years because of the funding that it has received from the Government. Had it not done so, the only alternative was to cut the number of police officers in Gloucestershire.
I entirely share my hon. Friend's concern, and am glad that he made that point. Last year, West Mercia constabulary increased its precept by 33 per cent. to enable it to have a useful increase in the number of police officers on the streets and in the villages of my constituency, but I imagine the Government were tempted to use their capping powers. Large increases are being forced on local authorities, police authorities, county councils and district councils by the Government's funding arrangements, which have skewed money away from "leafy" shires to northern Labour strongholds. No wonder we see that council tax increases are typically highest in a line south of the Severn and lower north of the Severn. If the Government used their capping powers on authorities such as Worcestershire county council, it would be an outrage.
Although I have sympathy with the comments of the hon. Member for Kingston and Surbiton, I recognise that there is a need for the Government to have reserve powers to use against outrageously profligate authorities, but not authorities like Worcestershire, which is put in an invidious position by the Government's own policies. If the Minister can reassure us about the use of capping powers this year at least, that would provide some comfort while more careful, calm consideration is given to the long-term future of the powers.
We have had an interesting debate. I can say that as there have now been three speakers. Mr. Clifton-Brown described it as an interesting debate after we had heard just one speaker. That raises the interesting intellectual question of whether a debate can take the form of a monologue.
The fact that the hon. Member for Kingston and Surbiton introduced the new clause today strikes me as bizarre. It is surely a strange sense of timing to choose to make the case for the abolition of capping powers on the day when the Chartered Institute of Public Finance and Accountancy has published provisional figures suggesting that council tax demands from local authorities will be up by some 12.9 per cent. next year.
At a time when many people all over the country are naturally worried about the prospect of large council tax bills landing on their doormat, it shows an extraordinary degree of insensitivity on the part of the Liberal Democrats to suggest the abolition of capping. That sends a message that anything goes, and indicates that their priority is not the poor council tax payer, but the local authority—the producer interest, rather than the public. That, I am afraid, is all too often characteristic of the Liberal Democrats.
Can the Minister tell us how he intends to use the powers this year? Which councils will he cap?
If the hon. Gentleman is patient, I will take him through the policy and its implications. We made our position on council tax capping clear in our 2001 local government White Paper. That built on the Local Government Act 1999, which abolished the crude and universal capping provisions introduced by the Conservatives when they were in government, about which they now clearly feel a little guilty. The hon. Member for Cotswold could not quite bring himself to admit the errors of the Thatcher period, but he clearly indicated a shift in the Conservatives' position.
We have done away with those provisions and accepted that it was wrong to have those blanket powers, which were used in an insensitive and inappropriate way. However, we retained more selective reserve powers that can be used, if necessary, in cases where local authorities impose an unreasonably high council tax demand. We can cap a budget increase in-year; we can pre-set a maximum budget which an authority can set in subsequent years; or we can set a notional budget requirement against which future years' capping decisions can be taken.
The hon. Member for Kingston and Surbiton suggested that the Government were being inconsistent in our approach. We are not. We do not wish to use capping powers, but we believe, as any responsible Government should, that it is right to have reserve powers against circumstances where a local authority has behaved in a dubious way and imposed an excessive council tax increase for no good reason. That is the right policy stance to protect the interests of the public.
As regards this year, we are still waiting for all the information on council tax rises. The CIPFA figures to which I referred are based on approximately two thirds of local authorities. It will be a while yet before we have received all the data for all local authorities. It would be wrong to make any decision on the use of the powers just yet. We do not rule out their use, but we have no current plans to apply the capping powers. We do not wish to use the powers, but we recognise that in certain circumstances that may be necessary. The retention of the powers is important to send a message that local authorities should always act responsibly and should have proper regard for their council tax payers—for ordinary people who have to pay the cost and who would see a bill increasing by rather large amounts, as some, I am afraid, will do this year, as a very serious imposition and a cause of deep concern.
Looking at the figures for the current year, it is clear that there are some very wide variations in the council tax demanded in different areas. For example, the west midlands has a number of metropolitan authorities that are of roughly similar size and are getting roughly similar levels of Government grant. However, their council tax demands range from 4.4 per cent. in Coventry and Birmingham and 5.8 per cent. in Sandwell and Dudley to 14.4 per cent. in Conservative Solihull. I do not know why Solihull finds it impossible to budget for a modest council tax increase just as Birmingham and Coventry do, given that its grant increase was in line with those received by other west midlands authorities.
The Tory party has tried to pretend that the Government grant is responsible for council tax increases this year. That is an outrageous suggestion, because this is the first year ever when every local authority in the country has received an above-inflation grant increase. That has never happened before. During the years when the Tory party was in government, councils more often than not saw a reduction in their grants in real terms and sometimes in actual terms. This year, every council in the country has had an increase. The overall increase has averaged 5.9 per cent. in general grant. When special and specific grants are added, the average is 8 per cent. That is a good settlement that is substantially ahead of inflation.
I have heard the Minister repeat that assertion several times on the radio, but it is simply not true. Out of the average increase of 5.9 per cent., at least 3 per cent. has been taken up by Government-imposed taxes—increased pension contributions in respect of advance corporation tax changes, increased national insurance and non-funded increases for public sector employees. Those increases take up 3 per cent. of the 5.9 per cent. average. In addition, many councils have received an increase of only 3.5 per cent. under this Government's settlement. How are they supposed to maintain services with such a grant increase and such increased costs?
I am surprised that the hon. Gentleman can bring himself to say that with a straight face. When his Government were in power, councils got cuts in the grant. They saw reductions and cuts, but while this Government have in been in power local authorities have seen year-on-year grant increases. This year, they are getting an increase averaging 5.9 per cent. in general grant and 8 per cent. when specific grants are taken into account—a total of £3.8 billion. Let me deal with one or two of the points that he raised about that. Does he know how much is taken up by national insurance?
Roughly, out of the 3 per cent. cost increase that I have just mentioned, 1 per cent. relates to the issue of ACT and pension contributions, 1 per cent. to underfunded public sector pay increases and 1 per cent. to national insurance changes. Those costs mean that 3 per cent. of the Government's so-called 5.9 per cent. average increase is immediately taken up. Furthermore, they do not fund the amounts passported through education. How are local authorities supposed to maintain services without increasing council tax?
In an earlier debate, the hon. Gentleman gave us an interesting insight into his mathematical skills by suggesting that an increase of 5p a week was equivalent to an increase of £25 a year, rather than £2.50 a year. [Laughter.] That is true; it is an indication of just how out of touch the Opposition are. He is out of touch once again in respect of the figures that he has just given to the House. The total increase attributable to national insurance increases is £230 million, which compares with £3.8 billion of additional grant. That is the reality. That is what the Tory party is trying to hide, as it is Tory authorities that are increasing council tax unreasonably this year. When the full analysis is carried out, he will have to explain why Tory councils are making the largest council tax increases by far this year. It is not because of the grant. As I have pointed out, many Tory councils have received a very similar grant to that received by Labour councils, and they include Solihull, which, although its grant is similar to that of Labour Birmingham or Coventry, has introduced a council tax increase of four or five times the size. Why is that? Why is Tory Wandsworth, which reduced its council tax by 25 per cent. last year— an election year—imposing a 55 per cent. increase this year? Tory authorities are taking such cynical action because they are trying to blame the Government for their decisions.
My hon. Friend, who chairs the Office of the Deputy Prime Minister: Housing, Planning and Local Government Committee, knows only too well that if the Conservative party ever came back to power, we would return to the days of cutting Government grant year after year. A Conservative Government would do that even more savagely if they fulfilled their leader's pledge and made a 20 per cent. reduction in overall public expenditure. A 20 per cent. reduction in council grant would lead to huge increases in council tax.
Indeed, it would. However, there is no such plan and I wish that the Government would stop talking such nonsense.
Will the Minister do Worcestershire county council the kindness of accepting a delegation from the relevant portfolio holder and the director of finance and reassure them that spending will be not be capped? Receiving such a delegation would enable him to understand why the council is obliged to increase its council tax by so much simply to deliver standstill services.
It is slightly odd that Mr. Luff takes that view. Worcestershire county council has received a 6 per cent. grant increase from the Government. That is more than twice the level of inflation. There is no basis on which a council that receives that amount of grant can justifiably claim that it has no option but to impose an unreasonably large council tax increase.
If one considers the council tax that different local authorities set this year, one realises that it is possible for prudent and sensible authorities to budget in a way that does not impose unreasonable demands on their council tax payers. Let me tell the hon. Gentleman, who is so keen to support the county councils, a few home truths. Two years ago, in an election year, the average increase in county councils' council tax was 6 per cent. Last year, when no elections took place, it increased to 9 per cent. This year, the provisional figures suggest that increases will be 13 per cent. That is far greater than the increases of most other authorities.
Why does that happen? County councils have the same social services and educational responsibilities as other authorities—I referred to some in the west midlands—which have set substantially lower council tax increases. There is no good reason for unacceptable council tax increases.
Earlier, I referred to Wandsworth, but let me give one more example to kill for ever the myth that Government grant is somehow responsible for council tax rises in a year when all councils have had an increase in grant that is above inflation. The district council of Weymouth and Portland in the south-west threatens to impose a council tax increase of more 50 per cent. Yet Government grant to that authority has increased by 12.5 per cent. What does it need to avoid imposing an unreasonable increase on its council tax payers? It raises serious questions if 12.5 per cent. is not a sufficient increase on which to budget prudently.
All the evidence suggests that authorities can budget prudently. This year, authorities that are getting good Government increases should be able to impose a council tax demand that is not unreasonable.
Against that background, it is clearly inappropriate to accept the amendment this year. As I have already made clear, we do not wish to use capping powers. We want local authorities to budget but we expect them to act prudently. We cannot turn a blind eye to authorities that not only impose unreasonable tax increases on their residents, but act in a way that appears to be motivated by electoral considerations or profligacy. Every hon. Member should condemn that.
The hon. Member for Kingston and Surbiton must surely have learned a lesson from the fate of Richmond upon Thames council, which last year had an unenviable reputation for imposing the highest council tax of any authority in the country. Not surprisingly, the Liberal Democrats no longer control Richmond upon Thames council. I therefore put it to him, in the nicest possible way, that it might be in the interests of his party if he were to take a more prudent and rigorous attitude towards those members of his party who do not believe that they have a responsibility to moderate their council tax demands. If we do not send out from this House the message that we expect local authorities to act prudently, the public will take a very dim view of our responsibilities—our serious responsibilities—towards the ordinary people who ultimately have to pick up the tab.
We cannot accept the new clause. I hope that the hon. Gentleman will withdraw it and send out a message that authorities should act prudently and responsibly.
Ministers will not blind council tax payers with science. Even "The World at One" today ran an item on whether the Government were skewing the local government finance distribution system through resource equalisation, taking money away from prudent and well-run southern councils to give it to their friends in the north. People are tumbling to that, and they will certainly tumble to it when council tax bills fall through their letterboxes.
The hon. Gentleman seems to believe that the louder he shouts, the better his chance of persuading people. I have to tell him that usually the opposite is true—if one has a sound and strong case, one needs only to put it across in a sensible and modest voice. In a year when every local authority in the country has had an above-inflation grant increase, there is no justification for some of the profligate council tax demands that are coming through, particularly from Conservative authorities. I am surprised that the hon. Gentleman—who, in his opening remarks, referred to the Government of the party of which he is a member taking action in the 1980s against councils that, in his view, were acting unreasonably—cannot bring himself to condemn those Tory authorities that are imposing wholly unreasonable council tax increases on their residents.
We cannot accept the new clause. I hope that the hon. Member for Kingston and Surbiton will withdraw it, but, if not, that the House will reject it.
I am afraid that the Government's argument will not wash with the electorate. They know that the blame for many of the high council tax rises lies with this Government. It is not good enough for the Minister simply to say that every council has had an above-inflation increase. He should look at analyses that show the effects of ring-fencing, or of the passporting requirement that his colleague, the Minister for School Standards, imposed in respect of the education grant on the ability of councils to manage their budgets. The right hon. Gentleman knows, because he will have heard many local authority councillors and council officers make this argument, that although they may have had an increase, their ability to manoeuvre in using that money has been sorely limited. Therefore, in areas where they have not had sufficient grant, where there are huge demands and huge cost pressures, they are having to make good the lack of grant through council tax increases. The Minister knows that, owing to the effects of gearing, a small shortfall in grant revenue means that council tax has to increase significantly to make amends. His argument does not wash under analysis and it will not wash with the electorate.
To make it clear, it is Liberal policy, then, to make sure that some of the extra money that was to go to education does not go to education. Can the hon. Gentleman tell us which schools will face the cuts that will result from that policy?
The hon. Gentleman makes a typical centralist argument. As the normally very good Chairman of a Select Committee, he should be ashamed of doing so. His Committee is supposed to stand up for local government, and the whole point about local government is that local democracy should determine such issues, not Ministers in Whitehall. He should be aware that there was a huge row in Whitehall when the Minister for School Standards sent a letter to every head teacher in the country telling them exactly how much money they should expect from their local education authority, because that was not the message that was coming from the Office of the Deputy Prime Minister. When Ministers are quizzed about that, they are very embarrassed by what their colleagues in the Department for Education and Skills said. The hon. Gentleman's Committee made that very point, so he ought to know that. He should also know that this problem will not go away until the Government refund the local government finance system more effectively.
The Government will have to come clean in the next few weeks. When they have the full figures, rather than the two thirds that the Chartered Institute of Public Finance and Accountancy reported on today, they will have to decide whether they are going to use the capping powers. The Minister gave us no real answer, but what he did say is that they do not really want to. If they do not want to, they should accept new clause 19. They should return to what they said in opposition—that capping powers are undemocratic and unfair, and that the judgment on how a council is performing in managing its budget should be made by the electorate, not in Whitehall.
We will not withdraw the new clause. We will push it to a vote, and I hope that hon. Members on both sides of the House will consider whether they believe local democracy to be important. If they do, I hope that they will vote to get rid of these centralised capping powers, which have been on the statute book for far too long—
On a point of order, Mr. Deputy Speaker. The Government have timetabled this afternoon's proceedings in such a way that we have discussed only six out of the 13 groups. We have had no opportunity for the Minister to put on record what Government amendment No. 24 is all about, and therefore I request on behalf of the Opposition a separate vote on it, so that we may have an opportunity in future to discuss that matter.