Local Government Finance

– in the House of Commons at 7:00 pm on 17th May 2004.

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Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister) 7:16 pm, 17th May 2004

I beg to move,

That this House
notes that council tax has risen by 70 per cent. since Labour came to power and that the Budget Red Book forecasts a rise in council tax receipts next year of over 7 per cent;
further notes that these rises are hitting particularly hard those on low and modest incomes because of the way council tax was designed by the last Conservative Government;
is concerned that this manifest unfairness of council tax now means that the poorest 10 per cent. of people pay over four times more of their income in council tax than the richest 10 per cent;
notes that the whole system of local government finance needs major reform owing to the problems caused by the dependency of councils on central government grants that produces the gearing effect whereby on average councils must raise council tax by 4 per cent. to offset a grant reduction of one per cent;
believes that the Labour Government have made the bad situation they inherited from the Conservative Government even worse by their excessive reliance on ring-fencing, passporting and centrally-imposed targets and regulations;
and therefore calls on the Government's Balance of Funding Review to make far-reaching proposals for reform when it reports shortly, including the introduction of a local income tax to replace council tax, the return of business rates to local authorities, reformed in line with land values, and a radical reduction in central government interference.

The high rises in council tax and the unfairness of council tax are issues that have rightly been raised in the House many times in recent years, not least by the Liberal Democrats. Yet the size of the rises in council tax and the extent of the unfairness in the council tax system suggest that we are right to raise these issues again, and to continue raising them until something is done to deal with the problem.

The House will be aware that the Liberal Democrats have published detailed proposals for our alternative, and those are outlined once again in our motion today. Later in my speech I will set out our alternative to the unfairness of council tax.

Photo of Annette Brooke Annette Brooke Shadow Spokesperson (Home Affairs)

What would my hon. Friend say to accusations in Conservative leaflets that a local income tax will cost the average household considerably more?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The problem with the Conservative leaflets, of which I have seen a few, is that they assume that the average household is earning an income of nearly £50,000, when the actual Government figures show that the average household income is nearer £22,000. That shows that the Conservatives live in a rather different world from the rest of us—and, indeed, from their own constituents.

I want today to focus on the wider context of the problem of council tax—the local government finance system in its entirety—and that is why we have worded the motion in the way that we have. It is timely to do that because just over a year ago the Government set up the balance of funding review, which was tasked with considering many crucial aspects of the whole system of funding councils. I think that it is scheduled to complete its task and report to Ministers in July and, I hope, report back to the House before the recess. I should be grateful if the Minister would confirm later that that is what is planned. This debate gives Parliament a real chance to make a serious contribution to that balance of funding review before it concludes and reports back.

Photo of John Redwood John Redwood Conservative, Wokingham

Will the hon. Gentleman confirm that it is the intention to charge the south-east more? Will he further confirm that my constituents on the average earnings that they earn will be a lot worse off, and is not this really a rip-off tax from a spendthrift party?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

That was very predictable, except that I was talking not about local income tax, but about the balance of funding review. Obviously, the right hon. Gentleman was not listening for a change. I gave the answer to my hon. Friend Mrs. Brooke a minute ago, and he clearly was not listening even then.

We need to start by acknowledging that the balance of funding review is dealing with some of the most complex and difficult problems in public expenditure, although its core question can be expressed quite simply, and I want to do that now. In essence, the balance of funding review is asking how much of the budget that a council spends should be raised locally and how much should be met from Government grant, and, at the extremes, whether councils should raise all their money locally or whether it should all come from Government grant. Put like that, I think that most hon. Members could readily see the arguments against 100 per cent. locally raised budgets or 100 per cent. centrally financed budgets.

If it were all done locally, the equity problems would be huge, with poor areas being badly affected because they would be unable to raise the funds they need for vital services. Most people acknowledge the need for some central Government grant to equalise and redistribute resources to poor areas, and therefore reject 100 per cent. locally raised budgets, and my party takes that view.

Photo of Patrick McLoughlin Patrick McLoughlin Opposition Deputy Chief Whip (Commons)

One tier of the council structure, parish councils and town councils, raises 100 per cent. of its spending. How would that tax be levied under a local income tax so that the people living in those parishes or towns pay for the services that they receive?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I am grateful for the hon. Gentleman's intervention on that point. We have examined low levels of government in other countries equivalent to town and parish councils, and they use a local income tax system. The issue is whether the Treasury can estimate the income tax base. I accept that it is impossible to estimate that figure from information currently held by the Inland Revenue, such as the personal survey of incomes, but that is because no Government have ever tried to introduce local income tax. That information is, however, available in countries where local income tax has been introduced.

Photo of Mr Peter Pike Mr Peter Pike Labour, Burnley

The previous Government had to get rid of the poll tax following the Ribble Valley by-election, and Michael Heseltine had quickly to introduce a replacement scheme, which he rightly described as "seriously flawed". It is important that we allow the balance of funding review to complete its examination of the position, because unless we correctly balance national and local funding, any replacement system will have serious flaws and problems. We must not rush into a new system, only to find in five to 10 years' time that it is equally appalling, and the scheme proposed by Mr. Davey would prove to be exactly that.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I am grateful for the hon. Gentleman's intervention. When Lord Heseltine introduced council tax, a BBC journalist asked him why he did not support local income tax. He looked at the camera and said, "That is the Liberal Democrats' policy." In other words, he had no strong argument against it. [Interruption.] I watched that interview with relish.

The point of this debate is to give us a chance to contribute to the balance of funding review. We have made submissions to the Government, who, we believe, are right to carry out the review. We also welcome the way in which they have gone about the review. They have taken a year to gather evidence, receive submissions and commission papers. For example, the Chartered Institute of Public Finance and Accountancy examined local income tax, which it thought was a good idea. I welcome the balance of funding review, but I do not see why Mr. Pike is concerned by the debate, which is about getting the matter right.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

No, I want to press on and make some progress.

The balance of funding review is important to today's debate. If local councils raised none of their own finance, which is another option, it would create huge accountability problems, and local democracy would be severely undermined. If 100 per cent. of council funding came from central Government, as some hon. Members argue, it would mark the end of meaningful local democracy. If we reject the extremes of raising all funding locally or of raising all funding nationally, where should the balance lie?

On average, a council currently raises 25 per cent. of its budget locally and gets 75 per cent. of its income from central Government. Many hon. Members believe that the balance of funding is wrong and that it must be addressed urgently—I hope that the Government address the matter in the review. However, we do not know whether they think that the balance of funding is a major problem, and part of the review's remit is to decide whether the 75:25 split is a problem.

The first message that I want to get over to the Government in this debate is that the balance of funding causes serious problems. The Minister should not listen to those who argue that the current balance of funding is an advantage—some Conservative Members advance that argument—or to those who argue that the problems can be fixed without altering the balance of funding. Specifically, the current balance of funding causes three serious problems that cannot be brushed aside. The first problem is the well-known gearing effect, which relates to the second problem, accountability. The third problem, which is often ignored, is the effect on the health of local democracy and local government that comes from the imbalance in funding.

The gearing effect is perhaps the most alarming problem for council tax payers because, as the Audit Commission reported last December, it is a major contributor to some high council tax rises. At its most simple, the gearing effect means that for every 1 per cent. increase in a council's budget, on average that council must increase council tax by 4 per cent. Average council tax rises in 2003–04 were 12.9 per cent., but councils actually increased spending over and above what the Government said that they should spend by an average of only 1.9 per cent. However, the gearing effect translated those increases into an average council tax rise of 7.6 per cent., which completely distorted the picture. That issue directly results from the balance of funding.

Photo of Anthony Steen Anthony Steen Conservative, Totnes

The important point is not who pays 75 per cent. and who pays 25 per cent, but how much the individual pays—apart from the Liberal Democrats, nobody cares how the calculation is worked out. The Liberal Democrats have increased council tax in Torbay by 10.1 per cent., but they blame everyone else. The problem is that too many laws made in this place go down to local authorities, which have to carry them out but cannot afford to do so. If we passed fewer laws here, council tax would not be so high. If the Liberal Democrats got their way, people would pay more but would not get better services, so I do not understand what the hon. Gentleman is talking about.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I am not surprised. I agree that we pass too many laws in this place and that the burdens that we place on councils are too heavy. The idea that that is the complete explanation for council tax rises, however, is nonsense. If Mr. Steen listens, he will learn that the Audit Commission, not the Liberal Democrats, blames the gearing effect, which I am discussing, for some high council tax rises.

There are three possible solutions to the gearing effect. First, revenue raised locally could be increased by, for example, re-localising business rates, and I shall return to that approach because we favour it. A second solution is to cut local government responsibilities and centralise a major spending area such as education. We understand that No. 10 Downing street has considered that solution, but I was glad to hear reports from the Minister for Local and Regional Government that that will not happen, and I hope that he will reconfirm that the Government are not examining the centralisation of a major spending area such as education.

A third solution—a technical change to the grant system—is touted in the Government review. Rather than grant allocations being fixed at the time of the local government grant settlement, the idea is that the allocations become variable, which happened in the 1970s and part of the 1980s. Broadly speaking, the solution works like this: if a council raises its budget by, for example, 3 per cent., its council tax should go up by only 3 per cent., and any difference required because of the gearing effect should come directly from extra central Government grants.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I urge the hon. Gentleman to listen, because the proposal is not ours. The proposal has been put to the balance of funding review and I am trying to knock it down because it is a bad idea. It would allow variable increases in grant, which could dispose of the gearing problem in one move, but it would create its own problems. For a start, it would lead to huge uncertainties, which is a problem that the Conservative Government experienced when it tried to operate such a system in the early 1980s, because final grant allocations for a specific year would not be decided for months, even years.

Above all, variable grant allocations would create perverse incentives. Much of the money for a new project or dollop of spending—indeed, any marginal increase in a council's budget—would effectively come from central Government, which would lead to higher tax bills overall.

Many councils would perceive an advantage in setting higher council tax as it could be argued to the electorate that that would mean extra central Government subvention of two, three, four or even five times the amount for which the council tax payer was being asked. I therefore hope that while that technical solution might appear preferable and neat, the Government will reject it. I believe that that will be the case, given the nods and shaking of heads from the Front Bench. I welcome that.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

Let me put the hon. Gentleman out of his agony. I assure him that we considered the matter approximately a year ago and it held no attraction for, and found no support from, the balance of funding review team. He is tilting at a false windmill.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

My hon. Friend is right and I am glad about it. The purpose of the debate is to try to tease out the Government's position on balance of funding. It is important for those who will vote in the June elections.

Another problem with the imbalance of funding is that it distorts local accountability. Changes in the local council tax bill often have little or nothing to do with councillors' decisions. Of course, they do in some cases, but far too often they do not. Council tax rises are sometimes caused by factors that are completely out of the local council's control.

Photo of Hugo Swire Hugo Swire Opposition Whip (Commons), Shadow Minister (Culture, Media and Sport)

I am grateful for the hon. Gentleman's clarification and I am sure that he will reach the relevant points because he is on a voyage of discovery, not least after the Liberal Democrats won Brent, East with £100 vouchers, which have been scrapped. Does it remain Liberal Democrat policy that regional assemblies, were they established, would have tax-raising powers? Would they be in addition to the extra powers about which he is talking? If so, would not that add further distortion to the inequalities about which he is so worried?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The key point is that we would begin by getting rid of the council tax. There would therefore be no council tax precept, which the Government oppose for regional assemblies. Unless and until regional assemblies were elected, there would be no question of their having tax-raising powers. Unless and until central Government funds were given to local assemblies and national income tax was cut pound for pound, there could be no question of giving income-tax-raising powers to regional assemblies.

Several hon. Members:

rose—

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I want to make some progress. I was talking about accountability in local government. I thought that I was generous in answering the question of Mr. Swire, which had nothing to do with that.

I was trying to argue that small changes that have nothing to do with councillors can affect the council tax. A small change in the amount of grant from central Government can make a major difference. A small change in a council's cost base because of central Government targets could cause a major change. A small change in the demand pressure, for example, in social services could lead to a major change in council tax. Any such changes are magnified four times because of the gearing effect that we have already discussed. That means that accountability is utterly distorted.

Photo of John Hayes John Hayes Shadow Minister (Communities and Local Government) (Housing and Planning)

I suppose that some people—the hon. Gentleman may be one, but he has not made that clear thus far—believe that there should be a closer relationship between what people pay and the services that they get. That is perfectly proper. However, a local income tax would relate not to what people get, the quality of the services or their cost, but to their income. How does he square that with Liberal Democrat policy on hypothecating tax, which is mentioned many times in manifestos and elsewhere? Would we have regional taxes, local taxes and hypothecated national taxes?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I am not sure what the hon. Gentleman meant by his last point, but I am glad that he mentioned services and local taxes. Some people claim that local taxpayers should pay only for local services. People have in mind emptying the waste bins and clearing parks and streets. They forget that most local residents, I am pleased to say, do not use many services that local government provides—for example, social services and child protection. Does the hon. Gentleman suggest that because local residents do not use child protection services, those services should not be financed? Many services fall into that category. For example, pensioners do not use the schools. Does that mean that they should not contribute to them? That is nonsense and I am glad that the hon. Gentleman has given me a chance to put the theory to bed.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

Does the hon. Gentleman accept that his proposals for local income tax could increase gearing in several local authorities on the ground of the need for greater equalisation because of the differences in tax take in different parts of the country? Indeed, CIPFA said that the ratios in several local authorities would be greater. Does he accept that the proposals in his document and end-of-year reorganisation fall into the precise trap into which he suggests that the proposals in the review for ending gearing through technical changes fall? People would not know how much they were paying at the end of the year.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The hon. Gentleman is wrong on both points. On the first point, CIPFA assumed that the central Government grant would remain the same as a portion of the council's budget on average. However, local income tax creates a foundation for decentralising power to cut national income tax and reduce some central Government subventions. It enables national income tax to be cut penny for penny as local income tax increases. That reduces the gearing effect—that is the experience in many other countries.

Let me deal with the second point about the end-of-year collection mechanism, which is only one of two possible mechanisms for administering local income tax. That would enhance local accountability as people could see rebates or extra charges at the end of they year, before the local elections. The hon. Gentleman is therefore wrong on both counts.

Several hon. Members:

rose—

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I need to make some headway. I have given way several times and it is time for me to have a chance to get on with my speech.

I am trying to focus on the way in which the local voter holds the council to account in any meaningful way when the council tax bill may have nothing to do with councillors' actions. The Office of the Deputy Prime Minister's website on the balance of funding review shows that some people do not believe that accountability is a problem. They argue that the current balance of funding and the associated gearing effect enhances local accountability and they are trying to persuade Ministers not to worry about it. They believe that the gearing effect magnifies the changes to council tax and thus acts as a weapon to control council spending. They argue that all one needs is what is called marginal accountability so that marginal changes in the council's budget are properly signalled and, indeed, exaggerated through changes in a tax bill. That effect was introduced by the previous Conservative Government when they nationalised the business rate. I do not know whether it was deliberate or whether it happened by accident or coincidence, but it has greatly worsened the problem for local government.

Photo of Mark Francois Mark Francois Shadow Economic Secretary (Treasury)

I am sure that the hon. Gentleman knows that, since its inception in the 1990s, the Liberal Democrats have run Rayleigh town council. They increased the precept by 22 per cent. this year. When they had a chance to defend their record, only a handful of councillors stood for re-election and when nominations closed last week the Conservatives took 17 of the 23 seats unopposed. There will be no marginal accountability in Rayleigh town council or any marginal seats because all the Liberal Democrats have run away. Why is that?

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

It was wishful thinking that the hon. Gentleman would talk about marginal accountability. It is a complex notion so perhaps I should have guessed that he would not deal with it.

Marginal accountability is dangerous nonsense. For it to work, all local government spending would have to be fixed and under easy control so that councils were genuinely responsible for the marginal changes in their budgets. Yet we know that council budgets are not like that, because so many services are demand-led and cannot be predicted. Demand pressures for services such as special educational needs and care for the elderly are massive in some areas and explain by themselves most, if not all, of some councils' tax rises. Such real-life demand pressures totally destroy the theoretical notion of marginal accountability.

Just as damaging is the implicit assumption that councils should be held financially to account for changes to the budget only at the margins, for new services. For proper accountability, councillors and voters should ask questions about existing services and the way in which the budget is spent on them, not only on new projects.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

No, I shall not.

I simply ask Ministers to reflect on how they would feel if the notion of marginal accountability applied to them. I agree with the Minister that accountability can be a tricky notion to pin down. In its fullest sense, it requires voters to have large amounts of information, which, with the best will in the world, we cannot expect them to have.

Despite those problems, I am convinced that the Layfield notion of accountability—what the committee called "average accountability"—is the right way forward. That approach gets closest to the committee's ideal that whoever was responsible for spending the money should also be responsible for raising it, so that that amount of money was subject to democratic control. Subject to the constraint of equalisation, that is the approach that the Liberal Democrats take. We believe that the balance of funding problem is a serious one which undermines accountability and that it can be fixed only by serious devolution of financial power.

Photo of Adrian Sanders Adrian Sanders Liberal Democrat, Torbay

Is it not the case that those in high house-price areas—where the central Government grant is related to the tax base—which are also low-income areas will always be chasing a gap between what the Government give them and what local people can afford to pay? The council tax will always disadvantage such areas.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

My hon. Friend is right. That is part of the problem with the gearing effect and with the whole system of local government finance.

When councils have to rely so much on central Government funding, it is deeply corrosive for the local democratic system. This corrosion might be seen in lower turnouts, or in the esteem in which councils are held and the status of those councils. A system that relies on central subsidy is always going to breed dependency. It feeds a political culture in which the voters, the press and the councils too often look to central Government for solutions. We need councils to take greater responsibility. We need people to go into local government, both as officers and as councillors, because they believe that they can make a significant difference to their community. We want a more powerful, vibrant local democracy that can innovate in the public services and make major long-term decisions. However, the current imbalance in funding is one of the major obstacles to that vision. Councils inevitably spend huge amounts of time analysing in detail the grant formula distributions and lobbying MPs. We have debates in the House which are effectively zero sum games. We need to end that dependency in order to move forward and to reinvigorate local government.

There is a flipside to this argument. When so much local government money comes from central Government, central Government start to regard the grant money as their money. Ministers in all the Whitehall Departments with an interest in local government seem to have an allergic reaction to seeing grants going to local councils from their global budgets. They want to micro-manage all that money. If we are to grasp the localist agenda and stop Whitehall Ministers and civil servants second-guessing local authorities in any policy area that we care to mention, it is best that most of the money spent by councils does not come from Whitehall in the first place.

Several hon. Members:

rose—

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I will not give way.

I have deliberately spent some time talking about why the balance of funding review is important and why it has real and serious problems to tackle. This is a key factor behind high council tax and behind the decade of above-inflation council tax rises that we have just seen. The review is critical because we need to improve accountability.

I want to end by outlining our solutions for the balance of funding review. Let me start by describing the number of taxes that councils have. It is wrong to expect councils to rely purely on one source of revenue. That is why we advocate, in addition to reforming the local personal tax system, the denationalisation of business rates, coupled with their reform. It was a huge mistake when the Conservative Government nationalised business rates, and that decision alone has already made a difficult problem much worse. Giving councils a second source of revenue would quickly make a huge difference. After all, that was one of Labour's election promises before 1997.

I should make it clear that, in denationalising business rates, we want to reform them too. We want to give an allowance, so that small businesses would have an allowance similar to the personal allowance in the income tax system. We want to base rateable values not on the property but on the land. That would have two big benefits for businesses. First, it would ensure that the tax base was widened, so that land that had been zoned for commercial use but had not yet been built on would be brought into the tax base, thus reducing the bills for existing small business rate payers. It would also end the perverse incentives against developing such land.

I know that the Minister is toying with that idea. We have seen reports in the press on whether the Government are going to go ahead with it. Concern has been expressed in No. 10 Downing street and in parts of government that this reform would be controversial, but I urge the Government to grasp it for three reasons. First, with the reforms that I have outlined, I believe that the proposal could be sold to business. Secondly, there is an argument for keeping one central control over localised business rates, which would be to ensure that any rise in the business rates would be no higher than a rise in the local personal tax. That would ensure that business rates rose by no more than personal taxes and possibly, if councils wanted, by less. The third reason why denationalising business rates is important is that the voice of business could be heard again. Many businesses criticise the Tories' nationalisation of business rates because it means that they have been excluded from many of the councils' discussions on important local issues.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

No, I shall not give way any more.

The second part of our solution is a radical reduction in central Government interference. We may have some common ground with the Conservatives on this. We want to see ring-fencing and passporting brought to an end, and to ensure that when responsibilities are passed down to local government, they are fully funded and the money actually goes with the responsibilities. We want to see the Government's very timid agenda on freedoms and flexibilities for local councils massively expanded, so that we can reduce the level of regulation and inspection not just for a few councils but for all of them. This sort of policy would have major benefits for councils. It would restore control of their costs and flexibility over local priorities.

Our final proposal is the most radical, the most controversial and the most well known. It is the proposal to scrap council tax and replace it with a local income tax. Many of the arguments on this were rehearsed on 10 February when we last debated these issues, but I want to add one major point, linking local income tax with the balance of funding review. The key issue is that if we can extend the personal tax base—and make it a fair tax base—it will be able to take more weight. If we chose a local income tax, the national tax collected by the same authority—the Inland Revenue—could be reduced penny for penny so that the overall tax burden did not increase.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

No, I will not.

The key problem with council tax is that it cannot bear the weight that the balance of funding review would want it to do in order to get rid of the problems that I have outlined. The council tax is already an unfair tax. The idea of doubling it—or of increasing it even by 10 per cent., or whatever the Conservatives' proposal of the week might be—would exaggerate the unfairness of it even more. I do not believe that council tax is the way to go. Local income tax could bear the weight because it would be based on fairness.

The balance of funding review offers an historic opportunity for the Government to end the decades of feuding between councils and central Government over local government finance. It will give them an opportunity to decentralise financial power in our over-centralised country and to strengthen and revive local democracy. Above all, it will provide an opportunity to get rid of Britain's most unfair tax—the council tax. I hope that the Government are up to this challenge and that they listen to the voters on June 10. I commend the motion to the House.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government) 7:48 pm, 17th May 2004

I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:

"welcomes the Government support for local government with its 30 per cent. real terms increase in grant since 1997;
notes that the average increase in council tax in 2004–05 is the lowest for nine years;
supports the Government's proposals to take action against a number of authorities which have set excessive budgets and council tax increases in 2004–05;
and looks forward to the report of the Balance of Funding Review of how local government in England is funded which is due in summer 2004."

I welcome the opportunity to debate this important and complex subject. The Government take this issue very seriously, and it is currently the subject of our balance of funding review. I listened with great interest—and, I have to say, growing incredulity—to the speech by Mr. Davey. Rarely has a political party shot itself so convincingly not just in the foot, but in the arms, legs and head as well. I have never thought of the hon. Gentleman as an ancient mariner, but I have to say that he has truly hung an albatross of enormous proportions round his party's neck in the form of its proposal for a local income tax.

More of that anon, but first, I would like to set out some background. The hon. Gentleman's motion curiously refers to "grant reduction". I am not sure where he has been for the past seven years. Under this Government, local authorities have not been facing year-on-year grant reductions. That was certainly their experience in the early and mid-1990s when the Conservatives were in power, but this Government have been significantly increasing the levels of grant paid to local authorities. The latest settlement, for 2004–05, involves a total formula grant of £46.1 billion, an increase of 5.5 per cent. compared with 2003–04.

On top of that, specific grants take the overall increase to 7.3 per cent. That is not a one-off increase but part of a programme of sustained growth in investment in the vital public services delivered by local government. In 2004–05, for the second year running, all local authorities received a real-terms increase in formula grant on a like-for-like basis. Overall, Government funding to English local authorities is up by 30 per cent. in real terms over the past seven years. That is in stark contrast to the previous four years, when year-on-year cuts were the norm—a 7 per cent. real-terms funding cut over the last four years of the Conservative Government.

It is sometimes argued that the grant increases are not sufficient to match new demands that are placed on local authorities, and that they are forced to spend money on Government priorities by ring-fencing, but both concerns are being addressed. We operate a "new burdens" doctrine, which requires any new obligations on local government to be matched by appropriate funding from the responsible Department. Furthermore, in the recent grant settlement, we have removed ring-fencing from some £750 million of specific grants. We have thus reduced the ring-fenced grant from over 13.3 per cent. to around 11 per cent., and on current plans, ring-fencing will be less than 10 per cent. by 2005–06. For authorities categorised as excellent, we have gone even further by removing virtually all ring-fencing, except for those grants intended for schools.

Photo of Anthony Steen Anthony Steen Conservative, Totnes

The Minister mentioned excellent authorities. Is he aware that Torbay council, which is run by the Liberal Democrats and is very poor, had a 10.1 per cent. increase and the Government have capped it? Is he also aware that, in spite of the speech by Mr. Davey, the £100 rebate, which every council tax payer was going to receive if the Liberal Democrats got into office, has gone out of the window? Did he hear the hon. Gentleman mentioning the £100 rebate, which we have all been looking forward to?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

I shall return to the £100 rebate, and I hope that the hon. Gentleman enjoys that passage of my speech. Although I have to say that he is right in saying that Torbay council is not an excellent authority, his party, which was responsible for running it for a long time, was probably as responsible as the Liberal Democrats for its current position.

As the hon. Member for Kingston and Surbiton rightly said, it is local authorities, not the Government, that set the council tax paid by householders. As I told the House on 29 April:

"The average increase in council tax . . . this year is 5.9 per cent." —[Hansard, 29 April 2004; Vol. 420, c. 1019.]

That is less than half the previous year's increase and lower than many people predicted. It is also the lowest in the past nine years.

A large number of authorities have set lower council tax increases than they originally proposed, not least because of the Government's strong messages to local authorities to the effect that high increases were both unnecessary and unacceptable. Nevertheless, some authorities' budgets and council tax increases are still too high and impose unreasonable burdens on council tax payers.

The Government made clear their intention to take action against those authorities whose budget requirements they consider excessive. People who are troubled by the fear of large council tax increases—I am thinking particularly of pensioners living on fixed incomes—will appreciate that this Government have taken action to protect council tax payers from unnecessarily large increases. They will be aware of, and perhaps shocked by, the attitude of the hon. Member for Kingston and Surbiton, who described this action as absurd during the debate on 29 April, at column 1025 of the Official Report. Indeed, I believe he owes council tax payers throughout the country an explanation as to why it is apparently not absurd for a Liberal Democrat council to impose a 29 per cent. council tax increase, while it is absurd for the Government to take action to protect council tax payers from such an increase.

The Liberal Democrats have a lot of explaining to do, too, for their councils have an unenviable record of introducing the largest increases in council tax. On average, in a year when Labour councils kept their increases down to 4.7 per cent., Liberal Democrat councils showed average increases of 6 per cent., and Liberal Democrat Shepway district council headed the list of the biggest increases, at 29 per cent.—an interesting warning to electors who are thinking about which way to cast their vote in June.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

Can the Minister tell the House what the average increase in council tax over the past five years has been in councils controlled by different political parties? He will find that the Conservatives have presided over the highest average annual council tax increases over the past five years, and Liberal Democrat and Labour-controlled councils have had roughly the same increases—about 6.9 per cent. Will he put that on the record?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

I cannot, off the top of my head, give the hon. Gentleman the figures for the last five years, but I can tell him that last year the Conservatives had the highest tax increases of 16 per cent., and Liberal Democrat and Labour councils had increases of around 10 per cent.

This year, the Government said that they expected councils to budget for low single-figure increases. Only Labour councils delivered, with an average increase of 4.7 per cent. Conservative councils averaged 5.4 per cent., and Liberal Democrat councils 6 per cent.—the highest increases of any of the three parties this year.

Rather than trying to pass the blame elsewhere, the hon. Gentleman ought to be talking to his party's councillors and telling them to get a grip, although I appreciate that that is a concept largely unfamiliar to Liberal Democrats. If he did, it would have an influence on one of the other issues raised in the motion, although he did not refer to it, which is the so-called Treasury forecast of next year's council tax rise. As I have frequently explained to hon. Members, that figure is based on average increases in past years, so the fact that there is a large figure this year reflects the very large council tax increases last year. The figure is not, repeat not, an estimate of increased costs, or a target, or the Government's view of what would constitute an acceptable rise in council tax.

The best way to get the figure down, of course, is to get average council tax down. That is where the Liberal Democrats have the greatest opportunity, because they have the largest increases in council tax this year.

Photo of Andrew Turner Andrew Turner Vice-Chair, Conservative Party

The Minister has made a number of sensible remarks about the Liberal Democrats, but is he really saying that the Treasury can forecast what is going to happen next year only by reference to what happened last year?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

As I was saying to the hon. Member for Kingston and Surbiton, this is not actually a forecast. It is based on the trends over the past three years. Therefore, if there is a large increase in the previous year, as was the case, that is reflected in the figure. I have explained that repeatedly to the House.

I want to continue by referring to the balance of funding review, and it is probably helpful if I start by providing a little background to it.

Photo of David Taylor David Taylor Labour/Co-operative, North West Leicestershire

Let me declare an interest as a member of the Chartered Institute of Public Finance and Accountancy, whose review this is. Is the Minister about to point out the Liberals' suggestion that about 3p on local income tax should be sufficient to fund necessary public services, when the range suggested in the review is between 3.2p and 6.5p? Does that not suggest illiteracy on a grand scale?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

My hon. Friend is right about those figures, but we have set up the review and it is taking evidence from various players, including CIPFA. We have been pleased with the detailed and thoughtful submissions that it has made, but this is not CIPFA's review. My hon. Friend is right about the figures ranging between 3.2p and 6.5p, which is rather at variance with what the Liberal Democrats say in public.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

Can the Minister confirm that that CIPFA review has an average figure of 3.75 per cent., which is also our average figure? CIPFA has 3. 8 per cent. as the average. [Interruption.] Yes it does. I have that in the report, if the Minister needs it. Will he also confirm that the range that David Taylor mentioned relates to keeping the same grant system, which includes a council tax base within it, which would be absurd? Will the Minister therefore accept, as CIPFA makes clear in its report, that that is a first best guess, not a proper analysis?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

For the benefit of the hon. Gentleman, who finds this difficult, I shall quote the CIPFA report. He will see in paragraph viii on page ii of the introduction and summary that a local income tax

"substituting for the Council Tax in England in 2003/04, might have resulted in areas precepts ranging between 3.2 p and 6.5 p on the existing personal rates of income tax."

Those are CIPFA's figures. Will he withdraw his remarks and apologise for attacking my hon. Friend David Taylor for giving correct figures from the CIPFA report?

Let me also put to the hon. Gentleman something that he might think about before I give way to him again. Those remarks relate to 2003–04. When updated, the figures will probably increase above even those levels.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

If the Minister had read on, he would have told us that that paragraph says:

"This assumes broadly similar grant calculations relating to formula spending shares. However, the taxbase relating to personal incomes, upon which the above range of precepts is based, is distributed differently to the banded property values used for Council Tax purposes."

In other words, the point I was making is that the grant system would change under local income tax, but that was not actually being measured.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

The hon. Gentleman is digging an even deeper hole, and I must counsel him not to pursue that point. I shall come later to some interesting comments taken from his website about the CIPFA report. For now, however, let me tell him that the passage that he has cited in fact highlights one of the problems implicit in his proposals, which is that the regional yield of a local income tax would be much higher in London and the south-east, so disproportionate increases in taxation would be likely there unless the grant distribution was changed. I would be interested to know whether the hon. Gentleman proposes to change that distribution, which would involve a significant change in the distribution of resources.

Photo of David Drew David Drew Labour/Co-operative, Stroud

Part of the problem with local income tax, as with the poll tax, is non-payment, and one assumes that people would be very clever in trying to avoid tax. One of the biggest difficulties is that any assumption of tax take must build in losses that might result if people chose not to pay or were able not to pay. Does my right hon. Friend agree?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

My hon. Friend makes a very good point, to which I shall come in a moment. I should like first to discuss the purposes of the review before turning to the Liberal Democrat proposals.

As our 2001 White Paper "Strong Local Leadership—Quality Public Services" recognised, many local authorities are concerned about the balance of funding and the proportion of local spending financed from central as against local sources. Nationalisation of the business rate in 1990 shifted the balance of funding so that the proportion raised locally was reduced from about 50 per cent. to 25 per cent. National taxes, including the business rate, now account for about 75 per cent. of local government revenue. Although the average proportion raised locally is about 25 per cent., the figure varies widely across England. For example, in Newham, one of the more deprived parts of London, it is about 11 per cent., whereas in Chiltern, a more affluent area in the south-east, the figure is at the upper end, at around 60 per cent. My hon. Friend Dr. Whitehead was absolutely right to highlight the fact that in many deprived areas, because the wealth of an area is more varied in terms of income tax receipts than in terms of property valuations, the problem would intensify, and those areas would require even more Government subsidy if a local income tax came in. I am sorry that the hon. Member for Kingston and Surbiton did not understand my hon. Friend's sensible point.

In general, deprived areas with high needs and a low council tax base receive much more central grant than more affluent ones. The equalisation of needs and resources aims to ensure that all areas receive sufficient resources to deliver services to acceptable standards. Whatever their individual balance of funding, however, many councils argue that they cannot be properly accountable to their taxpayers if they have to rely heavily on central grant funding. They also criticise the impact of the balance of funding on gearing, which was a point made by the hon. Member for Kingston and Surbiton. In the 2001 White Paper, the Government stated their view that there was no quick or easy way of securing a major shift in the balance of funding. We did, however, agree to set up a high-level working group to look at all aspects of the issue and to consider reform options. The balance of funding review started work in April 2003, and it aims to report in the summer. Our target is July, and I hope that, before the House rises for the recess we can report to the House on the options that the review sets out. I chair the review's steering group, which comprises representatives of local government—several from the Local Government Association—central Government, business, the unions and other experts. The review group has met several times. It has discussed the principles of a successful local government finance system, held a consultation and commissioned independent research, all of which is publicly available. It has examined a number of possible reform options.

The review is looking at four main reform options, which were suggested in response to public consultation: re-localisation of business rates; introduction of a local income tax; reform of council tax; and a mixed option of smaller taxes or charges. I should emphasise that the fact that the review is hearing evidence on those different options is not an indication that the Government favour any one of them.

I will start with council tax. Many consultation responses said that there were serious problems with council tax, but most suggested that it should be reformed rather than abolished. As recent work by the New Policy Institute points out, the tax has been widely accepted until recently. Almost all countries have a local tax on domestic property. Council tax has advantages: it is well established and relatively easy to understand, its yield is predictable, and it is easy to collect, as houses do not move. Indeed in 2002–03 local authorities in England collected more than 96 per cent of the council tax due within the financial year.

Of course, one major change is already planned. Under the Local Government Act 2003, there is a statutory requirement for a revaluation of domestic property in 2007, based on 2005 property values. Revaluation is not designed to raise more tax overall; the 2001 local government White Paper made it clear that its overall impact will be neutral. As the New Policy Institute showed, however, revaluation will have different effects across the country in line with house price rises, and we will consider carefully how best to manage that. One option would be the introduction of regional banding.

We will consider the case for change to the existing bands, although we would need carefully to examine the impact of any changes. As the NPI made clear, improvements can also be made to council tax benefit, which makes an important contribution to the financial security of many people on low incomes but does not reach as many people as it should because of relatively low take-up. There is real scope for improving take-up, and my colleagues at the Department for Work and Pensions are making changes to address that.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

May I return the Minister to the point on revaluation? He criticised local income tax by arguing that there would be a larger local income tax base in such regions as London and the south-east. Does he think that his comparison with the council tax base would change after revaluation? Does he admit that many households in London and the south-east will see large increases in their council tax bills as a result of revaluation, particularly those in London who live in band C properties?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

There are two separate issues there. I have made it clear that we accept that there will be variations, depending on the relative increases in house prices since 1991. It is completely unrealistic to go on indefinitely with a tax system based on 1991 values, so revaluation must come. That is why we are considering the possibility of regional banding as one way to address the issue that the hon. Gentleman raises.

The issue that I was highlighting is a different matter, and the hon. Gentleman may not fully have understood that. There is a wider gap between the highest and lowest levels of people's incomes, as assessed for income tax, than there is between property values, and that would create a different issue if a local income tax were introduced. I shall not push the point further since the penny has, I hope, now dropped for the hon. Gentleman.

Re-localisation of the business rates—a return to the pre-1990 system—is not something that the Government have favoured, but there is strong demand for it from many in local government. Most consultation responses from councils argued that re-localisation would help to resolve the balance of funding problem and encourage better partnerships with local businesses. The business community has stated, however, that it would strongly oppose re-localisation. There are also major disparities between areas in their business rate yield, so equalisation would be needed, which would reduce the link between resources raised and what would be available locally.

The review's discussion of business rates threw up another issue. The LGA presentation made the interesting point that when business rates were nationalised, they met about 29 per cent. of local government funding, whereas they now pay for only 22 per cent. That is because rises in the business rates multiplier are capped by law at the level of inflation. Some may argue that it is not fair that business contributions to local funding are capped while domestic taxpayers' council tax bills are not. Is there, then, a case for reconsidering how the cap is set? Well, there are two sides to the story. Business organisations have warned that any changes to the cap would be very sensitive and could damage the UK business tax picture and perhaps endanger businesses' comparative advantage internationally. The balance of funding review is looking carefully at the issue, considering the pros and cons of any changes.

Next I shall say a word about local income tax. The review consultation showed support in some quarters for that, or at least for considering the case for it, as most people admit that the proposal is inherently complex and needs much more work. CIPFA, which presented a paper to the review, highlighted a number of difficult issues, such as set-up costs, costs to business and the treatment of investment income. It would not be an easy option. It is technically complex and challenging, with much of the devil in the detail.

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

The Minister clearly has quotes from the CIPFA report in front of him. Early on, on page 3 I think, CIPFA lists some advantages and disadvantages of the local income tax. Perhaps the Minister would like to read out the four main advantages cited.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

No, because I should then have to read out the six disadvantages that follow. The hon. Gentleman can no doubt consult the report for himself.

The hon. Member for Kingston and Surbiton has clearly not taken to heart the lesson of complexity. Let us compare his blithe assurances with CIPFA's more measured views.

I take as my evidence the hon. Gentleman's website, which I assume is an authoritative source for his views. Under the question "How quickly could a local income tax be introduced?" he states confidently:

"Within two years maximum. As it is using an existing system, the only major delays would be consultation on details and getting legislation through parliament".

Well, that is pretty clear. So let us see what the experts—CIPFA—say.

"The legislative requirements might be completed within two or three years . . . Then appropriate guidance and support would need to be given to taxpayers and employers. A roll of local taxpayers would need to be collated. Most previous observers concluded that the implementation of a LIT would take five years to effect. Despite the advance made in the technology . . . the preparations required would be no less elaborate and consequently the proper implementation might well take five years to complete. There would be considerable risk in forcing the pace."

So there we have it. "Seven to eight years and do not rush it", says CIPFA; "Two years and it would be easy", say the Liberal Democrats. I know whose judgment I trust.

After that not very encouraging start, let us look at the Liberal Democrats' specific proposals. They leave a great deal to be desired and would, I fear, lead to disruptive and complicated changes to the tax system without providing the much trumpeted benefits. First, the proposals would do little to improve the flexibility available to local authorities. As authorities in poor and deprived areas would be able to collect less income tax than the richest areas, the proposals would mean that the poorer authorities would become more heavily dependent on grant. There would be less flexibility, and a worse gearing effect, for those authorities, than at present.

Secondly, the proposals would involve substantial costs that are not mentioned by the Liberal Democrats. They plan to combine their local income tax proposal with an increase in the personal allowance to £5,000, but taking into account this year's increase, that would cost an extra £1.5 billion. Of course, we know that the Lib Dems are not very good with figures. Their back-of-the-envelope approach to local government finance usually collapses the moment that it is subject to any serious scrutiny. Even the simplest of their pledges prove problematic.

We all recall the Lib Dems' promises last year of £100 off the council tax, and Mr. Steen reminded us of it earlier. We were assured that they had done their figures and could deliver that benefit. The voters of Brent, East were lured into voting Lib Dem with the overt promise of that bonus. But six months later it has vanished. Mr. Kennedy has huffed and puffed about reviews and reconsideration, and when asked recently on "Today" whether people would not be receiving the £100 they had been promised, he replied as follows. I quote from the verbatim transcript:

"well, what we are (nervous chuckle) what we are pledging to people is a local income tax".

So there we have it: the promised £100 has been withdrawn. Even though the leader of their party made that admission a week ago, his message does not appear to have got through to individual Lib Dem MPs, at least one of whose websites today continues to hold out the promise of a £100 refund under an "Axe the Tax" headline. It is no wonder that the leader of their party gave a nervous chuckle. Not only is his party in a shambles, but his proposals would have severe and, in many cases, inequitable consequences. They would impose substantial additional tax burdens on hard-working families, especially those with two or more earners, including those doing vital public service jobs.

At the same time, as the embarrassment of the hon. Member for Kingston and Surbiton demonstrated when he was questioned on "The Westminster Hour" a week ago about investment income, the back-of-the-envelope Lib Dem proposals would open up huge loopholes, allowing wealthy company directors and others living on unearned income to avoid making any contribution to local services—so much for the supposed fairness of their proposals. The whole issue of investment income would not be covered by their PAYE system, and that would be an obvious incentive for evasion.

Finally, the proposals they have made have weaknesses that they do not consider.

Photo of Richard Younger-Ross Richard Younger-Ross Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions

The Minister belongs to the supposed party of fairness and justice. Is it right that under the present council tax proposals an elderly couple should spend 11 per cent. of their income on council tax when under the LIT proposals put forward by my hon. Friend Mr. Davey, they would pay 4 per cent.? Is that just or fair?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

If the hon. Gentleman had been listening to what I said earlier, he would know that I highlighted the contribution to that situation of councils—including many Lib Dem councils—that have pushed up their council tax to an unreasonably high level. I also highlighted the scope for trying to ensure that those who should receive council tax benefits do so. Some of the examples that the hon. Gentleman mentioned are in that category. Some 1 million people are probably paying more than they should because they are not getting their benefit entitlement. We want to tackle that problem, and we are doing so, but it does not mask the fact that his party proposes a wholly inequitable tax system that would create a massive loophole, enabling some of the richest people in the country to evade any contribution to local services. It is nonsense, and the Lib Dems know it.

Several hon. Members:

rose—

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

I must make some progress.

The proposals have weaknesses that the Lib Dems have not considered. They have two ideas for how the tax would be collected. One is to collect it during the year through tax codes, and the other is to collect it at a standard rate across the country, and then to settle up with the individual taxpayer to cover what they should have paid through an end-year adjustment.

The first proposal would impose substantial additional burdens on employers, who would need to deal with local income tax rates for every local authority in which their employees lived. The website of the hon. Member for Kingston and Surbiton even suggests that employers would also have to take account of the precepts from the 9,000 parish councils. Can hon. Members imagine the administrative chaos and confusion of taking into account precepts from 404 local authorities and 9,000 parish councils? I assume that the hon. Gentleman has made a mistake and that he did not mean that. I cannot believe that he would be so unwise as to make such a suggestion. The process of having to account separately for the different amounts of local income tax that employers were subtracting from their employees' wages would impose serious administrative burdens. The more councils with separate precepts, the more complicated and intractable that burden would be.

Photo of Parmjit Dhanda Parmjit Dhanda Labour, Gloucester

The Lib Dem proposals would not only involve collecting money through the PAYE system. Part of the saving is meant to come from doing away with the existing property-based tax, but they would still need to take tax on second properties. Therefore, they would not make the savings they predict by reducing that layer of bureaucracy.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

My hon. Friend makes an appropriate point. The need for a system to value every property in the country for the application of the site value tax that is proposed in cases in which owners were not liable for local income tax would make it impossible to make any administrative savings, as the Lib Dems implied would be possible by reducing the work of the Valuation Office Agency.

I do not believe that the Lib Dems have even considered the burden on business in their costings for the local income tax. I have seen no evidence of them having made any allowance for the additional cost—it would probably be some £100 million—to business that it would entail.

The second option of an end-year adjustment would be an odd compromise, satisfying no one. It would be a local income tax in which, most of the time, the bill paid had nothing to do with the rate set by one's local authority. How would such a system promote local accountability and flexibility, and how would it aid the taxpayer in understanding how much money their council was asking for or spending on services? In addition, given that the mechanics of the tax system mean that under or over-payments would not be fully settled for months or years, that approach would be doubly complex and unpredictable both for individual taxpayers, who could be presented with unwelcome retrospective demands, and for local authorities and the Inland Revenue.

Photo of David Wright David Wright Labour, Telford

Under that system, what would happen in communities that were reliant on one or two big employers if one went under before the end of a tax year? How would local councils collect their cash?

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

My hon. Friend makes a valid point about the unpredictability of depending on a tax that is not predictable—as council tax is—as a main source of revenue. The closure of a major employer in an area would result in a significant reduction in income tax revenue, but it would not affect the council tax yield because those who had lost their jobs would be entitled to council tax benefit.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

No, I must make some progress.

I particularly enjoyed—as, I think, will the House—what the hon. Member for Kingston and Surbiton says on his website about the proposal for end-year adjustments:

"if your local authority has set a rate of"— local income tax—

"lower than the national average, then you will get a rebate. If your authority has set a rate higher than the average, then you pay a little extra."

We should note the selective use of the word "little". He does not say, "You will get a little discount"; nor does he say, as he should, "You will pay a little more unless you are unwise enough to live in a Liberal Democrat area where you will pay a lot more because they charge a lot more."

The final significant option for reform put forward during the public consultation was for a range of smaller taxes or charges. The Local Government Association has been keen to explore that option, and it presented a useful paper at the steering group meeting on 27 April. It includes a wide range of possibilities, including localising existing taxes such as vehicle excise duty or stamp duty on property transfers, or introducing new taxes such as land value taxes, tourist taxes and more charges for local services. The steering group accepted that that is not a panacea, not least because most of the options would not raise sufficient revenue to make significant changes to the balance of funding. It has agreed to look more closely at some of the options, although it has ruled several out. The balance of funding review has just finished hearing presentations on the individual reform options. The next step at our meeting at the end of May will be to start to pull the threads together and to consider what the report will say.

These are important issues. Many Members will remember the consequences of the previous Administration's rushed reform, which gave us not only the disaster of the poll tax, but the hiking of VAT to 17.5 per cent. That lesson of past failure is one good reason why we are adopting a cautious and considered approach, not a knee-jerk response based on slogans. It is clear to the Government that many people, whether council tax payers on fixed incomes or those working in local government who would like a more transparent funding system, have serious concerns about many aspects of local government finance.

The Government are clear that there are no easy fixes or quick wins and that we need to analyse the options carefully. I am sure that hon. Members will recognise that we must take a measured approach. We will not hold out false promises, as do the Liberal Democrats, to the effect that reform is easy and solutions are painless. "Axe the Tax" must be one of the most mindless slogans ever put forward.

The hon. Member for Kingston and Surbiton may fancy himself as the Arnold Schwarzenegger of south-west London, but it is a bogus prospectus. The Liberal Democrats are not a low-tax party—their councils are increasing council tax by more than any other party's. Their councillors do not want to cut council tax, but at the same time as they are busy increasing the burden, their Members of Parliament try to pretend that there is a quick and easy solution that can magically deliver lower tax bills. That is simply not credible. As I said before, they are no better than snake oil salesmen peddling quack remedies which would, if taken, leave the patient worse not better. Their motion deserves to be rejected with contempt.

Photo of Anthony Steen Anthony Steen Conservative, Totnes

On a point of order, Madam Deputy Speaker. I wonder whether you could give the House some advice. As the Liberal Democrats' motion has been totally and utterly demolished by the Government, is it possible for them to withdraw it so that we can all go home and not listen to any more?

C

I would guess that Mr Steen's testiness in this debate is because he is an MP in an area with an older-than-the-average age profile, and has the Lib-Dems breathing down his...

Submitted by Chris Cook Continue reading

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

That is not a point of order for the Chair; we will continue the debate.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party 8:23 pm, 17th May 2004

My hon. Friend Mr. Steen makes a tempting suggestion.

In rising to speak against the motion, I should refer to my entry in the Register of Members' Interests.

This is my first outing on the local government finance ticket, and it is a great pleasure to take part in the debate. I listened carefully to the Minister, who gave us an interesting walk through the balance of funding review. I think that we can take it from his speech that the Government have formally ruled out local income tax as part of the review; otherwise, he would have quite a few words to eat. He said that he expects to make an announcement before the recess. I think that he mentioned a debate, and I hope that the Under-Secretary will be able to give us a guarantee that we will have a debate in Government time before the recess.

I listened carefully to Mr. Davey. Although I am new to the subject, I found his speech rather odd, because he did not say much at all about local income tax. I wonder whether that was due to the fact that next to him was the brooding presence of Dr. Cable, who speaks for the Liberal Democrats on finance. His speech was a bit like a lecture on the principles of local government finance, and I was taken back to a university lecture hall. I have to tell him that one does not need to try to make this topic boring and impenetrable. I thought that any minute we were going to hear about neo-endogenous growth theory, but we did not quite get to that.

Given that my Sunday papers told me that a leadership election is now under way in the Labour party, I was impressed by the number of Labour Members who stayed in the Chamber, as I thought that they might be in the Corridors being canvassed or canvassing. It was good to see them staying. [Interruption.] It is all true—I read in my newspaper that the Chancellor is getting his dream Cabinet ready, and thought that the Minister, who has been knocking on the door for so long, would certainly be making a guest appearance in that dream Cabinet. We will have to wait and see.

The debate is a good opportunity to shed some light on a subject that is normally kept in the dark—official Liberal Democrat policy. I know that many other Members are waiting to speak, so I will restrict myself to three points. First, in recent years the council tax has risen far too far and far too quickly. That has caused real anger and real pain. Every year under this Government, council tax has gone up by at least three times the rate of inflation. Every year, the Minister comes here and talks in his reasonable way about a generous settlement, yet every year we have these significant council tax increases. In England, council tax levels are up by 70 per cent. for a band D property since 1997. In 1997, the average bill was £689—now, it is £1,167. Council tax receipts are up from £11 billion to almost £20 billion. That has happened pretty much across the country—the Minister cannot point to authorities that have been immune. The Prime Minister promised us "no excessive rises" in council tax, yet that is precisely what we have had, year in, year out.

That brings me to my second point: why has that damaging and painful increase taken place? It is possible to identify three separate causes, all of which, interestingly, can to a large extent be laid at the door of central Government. First are the additional and largely unnecessary bureaucratic burdens. My own local authority, West Oxfordshire, has calculated that complying with just two of those—comprehensive performance assessments and best value—adds £14 to each council tax bill, yet it is hard to find anyone who has a good word to say about them or thinks they have altered policy or practice in a meaningful way.

Next are the unfunded liabilities. To be fair to the Minister, some of those include worthwhile goals. A classic example would be the targets for waste recycling. We all want those to be met, but where is the money to make that possible? Let us consider the list. Council leaders have to comply with the Licensing Act 2003, the Care Standards Act 2000, the Homelessness Act 2002 and the Freedom of Information Act 2000. Once they have finished doing that, they can try the School Standards and Framework Act 1998, the Special Educational Needs and Disability Act 2001, a range of transport Acts, and requirements to develop plans on everything from litter to landlords.

After that, councils have to pay the Criminal Records Bureau, bed-blocking fines, higher national insurance contributions, pension liabilities, landfill tax and, of course, higher fuel duties. Next, they have to meet EU environmental directives, extra travel concessions, e-government targets and the cost of asylum and all that it entails.

O

His entry in the register of members interests includes a non-exec directorship of Urbium PLC (a bar and night clubs business: www.urbium.com); remunerated employment as a Consultant to Carlton Communications PLC, providing advice on press and investor issues. (£20,001-£25,000) and being an unpaid Member of Advisory Board of Investis; an on-line investor relations company.

Submitted by Owen Blacker

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

Time is limited and I have probably left out many things. I am trying to give a sense of the enormous range of burdens that councils are expected to meet without extra funding. They must be starting to feel like Elton John's hairdresser: each year, they are asked to do more and more with less and less.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

The hon. Gentleman read out an interesting list. What is Conservative policy on all those measures? Would the Conservatives scrap all those local authority responsibilities, or would they give the authorities extra money to pay for them?

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

That is a reasonable question—[Hon. Members: "What is the answer."] The first thing to do is to stop making things worse. We have to stop adding burdens to local councils without giving them the funding. We could do one or two things straight away to improve the situation. I have already mentioned comprehensive performance assessments and best value; my constituents are paying an extra £14 for those two bits of red tape, which everyone says are worth nothing.

The third cause, which was mentioned by the hon. Member for Kingston and Surbiton, is the Government's obsession with two nouns that they have turned into verbs: to ring-fence and to passport through—I hope you can see that I am trying to get the hang of the jargon, Madam Deputy Speaker. As the hon. Gentleman said, the more that one ring-fences and the more one insists that a certain amount of money is passported through, the more one restricts local freedom of manoeuvre and the more likely it is that any increase in local spending will lead to a significant increase in taxes. Combined with the gearing effect of local government finance, that has led to the huge increases. As the hon. Gentleman said, a 1 per cent. increase in spending typically means a 4 per cent. increase in bills. Add all that together—the burdens, the legislation, the unfunded liabilities, the plans and the restrictions—and the rest, as they say, is history. Tax rises of 70 per cent: nobody was warned, but everyone pays—it has been the biggest stealth tax of them all.

Photo of Parmjit Dhanda Parmjit Dhanda Labour, Gloucester

The hon. Gentleman made a key point when he referred to the range of measures that he feels have been imposed on local government. Which of those would he remove?

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

With respect, I do not think that the hon. Gentleman quite heard what I said. I said that the measures included many worthwhile objectives, but we must try to have honest government. We should tell people what we plan to introduce and how much it will cost, and provide the funding for it. The Prime Minister said in the manifesto on which Labour Members stood for election that there would be no excessive council tax increases, yet that list of measures—many of them worth while—was bound to lead to large council tax increases. The Government have a problem with stealth taxes. The biggest stealth tax of all is council tax. That is the cause of the problem.

Photo of Nick Raynsford Nick Raynsford Minister of State (Office of the Deputy Prime Minister) (Local and Regional Government)

I welcome the hon. Gentleman to the Dispatch Box and look forward to many further interesting debates. He has mentioned his local authority, which originally proposed a council tax increase in excess of 30 per cent. yet has now managed to get it down to low single figures. Would he like to reflect on why that happened? Was it because the Government said that we would get tough if authorities went for unreasonably large increases? I do not think the reduction had much to do with the legislation to which my hon. Friends have referred.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I reflect often on that point and I think Labour Members might like to reflect on it, too. In West Oxfordshire, council tax is £63. I suspect that Labour Members—or at least their constituents—go to bed at night dreaming of council tax of £63. The reason the council considered increasing the tax from £60 to £80, which is still a good £60 short of the average figure, was the waste recycling issue. A new waste recycling contract had been signed to meet the Government's very worthwhile targets, and the cost of that alone means that the council will have serious liabilities this year, for which it has not been funded. However, council tax of £63 in West Oxfordshire, compared with the average of £140 for a band D property in a shire district, is staggeringly good value. The council is of course Conservative controlled, and has been for several years.

Photo of Clive Betts Clive Betts Labour, Sheffield, Attercliffe

The hon. Gentleman rightly drew attention to the problems of gearing, which all local authorities face—some to a greater extent than others. To deal with that problem, local authorities will, ultimately, have the right to raise a larger amount of their resources locally. What is current Conservative thinking about how that could be achieved, bearing in mind especially the fact that the Conservative party was responsible for two measures that gave rise to the current situation—the nationalisation of business rates and the increase in VAT to keep poll taxes down?

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

Like the Government, we are holding a balance of funding review. All parties are considering the subject. The speech of the hon. Member for Kingston and Surbiton was all about the fact that we had to consider such things. There is common ground on both sides of the House. We all think that local authorities need to be able to raise a greater proportion of what they spend, but there are different ways of addressing that—some of them are covered by the balance of funding review but some go beyond it. We are committed to looking into the matter.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I shall give way to the hon. Gentleman before I deal with local income tax in slightly more detail than he did.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I welcome the hon. Gentleman to his new position. It is generous of him to admit that I was making a serious contribution to the balance of funding review and putting forward some ideas. Will he now put forward some ideas from the Conservatives?

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

When I read the Order Paper, I thought it said that this was a Liberal Democrat Opposition day, so I thought that it would be chiefly about Liberal Democrat policy. I do not think that we have had a proper airing of local income tax. The Minister had a pretty good stab at it, but I thought I would say a few words about it, too.

Photo of Anthony Steen Anthony Steen Conservative, Totnes

I, too, welcome my hon. Friend to the Front Bench. He is doing a first-class job and we look forward to the destruction of the Liberal Democrats in the next part of his speech.

The problem is not just the amount of council tax, but how councils deal with Government requests to reduce it. Is my hon. Friend aware of what has happened in Torbay, where a by-election for a council seat is to be held on Thursday? The first cut to its £130 million budget has involved a reduction in the number of public lavatories available to tourists all over the bay.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

Like me, my hon. Friend probably has a copy of the Liberal Democrats' little yellow book. I recommend it if one wants to see even greater nonsenses than that.

Before I come on to local income tax, I cannot go on without mentioning the commitment to £100 off every council tax bill and the mystery of what happened to that. I have the leaflet from Brent, East in which the hon. Member for Kingston and Surbiton is pictured holding a very attractive cheque for £100. I am not sure what happened to the cheque. Perhaps we have been paid it or it did not arrive in the post. If the council tax had gone down, he would not need it any more. However, the most likely explanation is that the Liberal Democrats decided that, because they won that by-election, they would not need the cheque any more.

Local income tax is no more credible than the £100 bribe. It is a workable soundbite, but that is as far as it goes. That is why we did not hear any detail today. The Liberals have taken two things that sound very good. They have taken the word "local"—we all want to be local—and the phrase "income tax", because they want to sound fair. They have put the two together but, as soon as one considers the detail, it is clear that the result is neither fair nor local. Liberal Democrats do not care about the detail; they want to be able to say, "Axe the tax." That is what this is all about.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

I was warned that the hon. Gentleman has great expertise in local government finance, so I give way to him with some trepidation.

Photo of Alan Whitehead Alan Whitehead Labour, Southampton, Test

The hon. Gentleman is very kind, but he need not worry; I just wish to be helpful in pointing out where the £100 may have gone. The website of Mr. Davey is a useful source of information. It claims that the £1.7 billion allocated from the proposed top rate of income tax for those earning £100,000 would not be an additional source of local government tax, but would go to keeping the rate of local income tax down to 3.75 per cent. As my hon. Friend David Taylor suggested, the Liberal Democrats realised that their estimates were towards the top end of the Chartered Institute of Public Finance and Accountancy's estimates and have had to put the money that would have previously constituted a £100 saving into keeping the rate down. They have had to make the £100 vanish in that process.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

As well as being a lecturer on the subject, the hon. Gentleman is a detective. The hunting of the snark is over; he has found out what happened to the £100. However, I warn him not to spend too much time looking at Liberal Democrat websites. All sorts of things could follow from that.

Let me deal with some of the arguments that the Liberal Democrats are not considering in enough detail. The first point relates to the effect that a local income tax would have on working families. We all know such people. We meet them while canvassing and in our surgeries. They work hard while not earning more than average incomes and are struggling to get on to the housing ladder and to build a better future for themselves. A couple with someone on male average earnings and another on female average earnings would have to pay £630 more than the average council tax—an increase of 65 per cent.

I know that the hon. Member for Kingston and Surbiton will ask about a house that contains just one average earner. Just as I do in Witney, he will find many couples in Kingston in their 20s and 30s who are struggling to get on to the housing ladder or who are making big mortgage payments because of house prices. If they were at or just below or above average income levels, they would be hit very hard. He simply has not thought that through. I predict that, in the local election campaign that is under way, the Liberal Democrats will not talk about that at all.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

Of course, it is well over £40,000. However, the hon. Gentleman has not published his figures showing the breakdown district by district for local income tax. We have done the work for him and, if one takes the current council tax rate, one finds that the rate in Kingston would be 5.2 per cent.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

The hon. Gentleman thinks it is nonsense, but I expect that our leaflets will be going out shortly in Kingston and we want to get the figure right. If he does not think that our figure is right, he should publish his own. If he does not, we will be forced to use the figure of 5.2 per cent. and I offer it to Labour Members, too. They should make a note.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

No, I am going to make progress because many Back Benchers want to speak.

The second point about local income tax is that it would mean a return to high marginal rates of tax. To raise the same amount as council tax this year would mean a local income tax rate of nearly 4 per cent. It would be higher in some areas, Kingston being one of them. We know—in a rare outbreak of candour a Liberal spokesman told us so—that in time there would be a regional income tax as well. So the basic rate of tax would soon be pushing 30 per cent. in some areas. The marginal rate for someone on the current top rate of tax—41 per cent. now, not 40 per cent.—would soon be pushing 50 per cent. A person does not have to be rich to pay the current top rate. It is paid by some school teachers, police officers, health workers, taxi drivers and many others. Are the Liberals really saying that those people should pay getting on for 50p in every £1 through income tax? Almost every hon. Member has come round to the view that high marginal rates of tax are bad for incentives and bad for the economy. Someone once said that the Liberals are the party for a better yesterday. On the evidence of their plan for a local income tax, that person was only half right: there would be nothing better about it.

My third point about local income tax is the complexities that it would involve for councils. The tax year of many people would not marry up with the council's revenue year. Some 3 million people are self-employed and pay in arrears. There are also all the disputed income tax revenues. What would happen when the country as a whole, or a particular part of it, had a bad year and revenues fell? How on earth would councils plan their expenditure? You can bet your bottom dollar that the Liberals will not talk about that in the local election campaign.

My fourth point is that we must consider the complexities that such a tax would mean for everyone else. Imagine a small business in London or any other big city that employs lots of different people from lots of different local authorities. Each would have a main local income tax rate—all different. Each would have a precepted rate from their fire authority and town council—all different. There would be more rates from their parish, police force and, in time, their regional assembly—again, all different.

Companies complain to me, as they probably do to other hon. Members, that with all the tax credits and other complications, the Government have turned businesses into tax and benefit offices, but that would be a picnic compared with the complication of the local income tax. We can bet that when the hon. Member for Kingston and Surbiton goes around Kingston and talks to businesses, he does not tell them about that either.

My fifth point is that the local income tax does nothing to address the grant system or the problem of gearing. As other hon. Members said, it could, and will, make them far worse because some areas have higher tax bases than others. There would have to be much more equalisation and even more grants from central Government to make up for the inconsistency. That means that it could not be called a local tax.

My final point—I can give a copper-bottomed guarantee that the Liberals will not talk about this in the local elections—is that local income tax will be paid by millions of people who are not well off. The student nurse, earning just about £10,000, who is barely able to pay rent, who perhaps lives at home or with friends, would pay the local income tax. The school leaver, starting to earn good money, but still living with parents and trying to save for a deposit for a flat, would pay local income tax. The pensioner grandmother, with some income from savings, who is living in the main family home so that she can be looked after, would pay local income tax. So there we are: it is not simple; it is complex. It is not good for the economy; it is bad for incentives. It is not local; it is just a new national tax, backed by an ever-more interfering national grant system. Above all, it is not fair.

Photo of Evan Harris Evan Harris Liberal Democrat, Oxford West and Abingdon

As a neighbouring MP, I wish the hon. Gentleman well in his new Front-Bench role. I want to ask him about pensioners in Oxfordshire, including those in his constituency. He talked about the two people on average earnings of more than £40,000. There will, of course, be winners and losers. We have always said that there would be, but the winners will in many cases be those on fixed incomes who earn less than £40,000. So the winners will be people in Oxfordshire and the rest of the country who are less well off. The losers will be people who are best able to afford to lose. What is the Conservative position on fairness like that?

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

As a neighbouring MP, I shall look carefully at the leaflets that the hon. Gentleman puts out in Oxfordshire, and I hope that they draw as much attention to the losers as they do to the winners. An economy like Oxfordshire's cannot go back to the high marginal rates of tax that did so much damage.

It is clear that we need to get to grips with the situation that we face. We need a recognition that the current crisis has been caused above all by the rises in the council tax and its level, rather than its inherent nature. We need a recognition that we should strip away centrally imposed bureaucracy from local authorities.

We need a recognition that we cannot go on asking local authorities to do more things without giving them the money. We need a recognition that the issue of gearing, and the percentage of spending that is paid for and performed locally, must be addressed. Those are the issues that we will be looking at.

In this debate we have heard many figures. There is one, above all, that counts for Conservative Members, and that is the average band D council tax. If one looks at that, one finds that Conservative councils cost £57 less than either Labour or Liberal Democrat councils, yet they have a better record on waste collection and disposal. All the audits that the Minister has produced show Conservative councils in an excellent light. I say to Labour Members that the Labour Government caused this crisis and the Liberal Democrats have come up with entirely the wrong answer, so it falls to the Conservatives to get it right.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio 8:45 pm, 17th May 2004

I welcome Mr. Cameron to his position. In grappling with his new-found role, he might like to go back in history a little and remember exactly what the Conservative party did to local councils when it was in government. When I was a councillor in Wigan in the 1990s, we faced cuts in the Government grant of £10 million a year, and still we were having more and more policies imposed on us by central Government. The hon. Gentleman might like to consider that before he criticises this Government. They have undoubtedly given local government more to do, but they have given it extra money to carry out those duties.

It would be nice if we were lectured on local government by experts, but that is certainly not true of the contribution from the Liberal Democrat Front Bench. I was reminded of fifth-form debates, although the content was usually better at school. We should not really be surprised because the Liberal Democrat record in local government is dreadful. Of the excellent councils in the country, Labour controls Wigan plus 11 others, the Conservatives have nine and the Liberal Democrats have nul points.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I thank the hon. Gentleman for allowing me to intervene to nail that canard. Will he confirm that most Liberal Democrat authorities are district councils, most of which have not yet been assessed by the comprehensive performance assessment process? Will he comment on the performance of Liverpool city council? When the Liberal Democrats took it over in 1998, it had the highest council tax in the country; now, after six years of Liberal Democrat rule, it is 70th. Will he make fairer, more balanced comments, rather than just taking his lead from the Labour Whips Office?

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

I have looked at the record put forward by the independent auditors. The CPA process says that there are no excellent Liberal Democrat councils. I am very sorry about that. The hon. Gentleman may have a problem with that, but it is his problem and he ought to sort it out.

When we look at council tax, what do we see? For Labour councils, the average council tax paid this year is £870; for Liberal Democrat councils the figure is £971; and for Conservative councils it is £1,072. The increase this year is 4.1 per cent. for Labour, 5.4 per cent. for the Conservatives and 6 per cent. for the Liberal Democrats. It is no wonder that the Liberal Democrats' record with the electorate is so lamentable. In council after council, they get elected and get control—then the franchise falls apart, they mess it up and they get voted out. As Julius Caesar might have put it, "We came, we were elected, we got found out, we were rejected."

The problem is that the Liberal Democrats have no history of running major councils for any length of time.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

For how long did the Liberal Democrats run Liverpool council—four, five or six years? Wigan has had more than 60 years of Labour control. That is the sort of period that I am talking about. I am sure that there are many councils that have been run by the Conservatives for a similar length of time. The Liberal Democrats have never run a major local authority for any length of time, and that is the problem.

That problem has been made clear by the £100 rebate fiasco. In February 2003 the Liberal Democrats were offering a

"£100 cut for every Council Tax bill".

In May 2004, their leader was asked:

"So they won't be getting the hundred pounds you promised them?"

He answered, "Correct." We see it and then, pouf, it vanishes. It is the Keyser Soze policy of local government finance.

Everyone recognises that gearing is a huge problem under the present council tax system. That can be addressed only by reducing the amount that central Government pay and increasing the amount that local people pay, yet the Liberal Democrats do not propose any change in that ratio—they do not propose that extra money be paid from local income tax to replace council tax. The gearing issue would therefore not be altered, even though that was one of the main points advanced by Mr. Davey. The Liberal Democrats' costings are calculated on a cost-neutral basis. The difficulty they face is that changing from council tax to local income tax would not alleviate the gearing effect. In fact, it would get worse because central Government funding would increase—by £1.7 billion, as my hon. Friend Dr. Whitehead said. That increase in Government grant would be funded from the Liberal Democrats higher rate of income tax. By changing the ratio between local and central funding—putting in more money from central Government—they would worsen the gearing effect.

The story gets even worse because of the greater variations in the income tax base than in the council tax base—the property base. Let us examine the effects of council tax and local income tax in four authorities. Wigan's share of the England tax base is 0.534 per cent. under council tax, and 0.402 per cent. under local income tax; its tax base would decrease by 25 per cent. under the Liberal Democrats' proposals. Stockport has 0.575 per cent. of the tax base under council tax and 0.666 under local income tax, so its tax base increases by 16 per cent. Torridge in Devon faces the problem of the number of pensioners living there: its share of the tax base under council tax is 0.122 per cent., but 0.066 per cent. under local income tax; it would face a 46 per cent. reduction in its tax base. Kensington and Chelsea's share of the tax base would increase 125 per cent., from 0.528 per cent. under council tax to 1.19 per cent. under local income tax.

Those four examples illustrate that much greater central Government support would be required to iron out the greater variations resulting from the change from council tax to local income tax. If central Government did not get the equalising formula right, they would face huge problems. We all know what difficulties were caused by the relatively minor changes made to the formula a couple of years ago. The Liberal Democrats would have huge difficulty explaining away the 25 per cent. reduction for my local authority and the 125 per cent. increase for Kensington and Chelsea in ensuring that the formula to redress the balance was fair.

Photo of Clive Betts Clive Betts Labour, Sheffield, Attercliffe

My hon. Friend makes an interesting point. Although he dedicated the first part of his speech to the gearing problem in local government, Mr. Davey did not say that extra money would be put into the system to deal with the problem. In addition, the greater disparities in the resource base under local income tax than under council tax would make the problem of gearing worse, especially in councils with a low resource base, which would need more money from the centre.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

My hon. Friend makes my point better than I did. I am grateful to him.

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

The hon. Gentleman read out an interesting set of figures about Wigan, which confirms that tax payers in Wigan would pay less under our policy than they do under council tax. He is arguing in favour of his electorate paying more.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

I do not accept that. We are saying that the income tax base in Wigan is less than the council tax base; therefore, unless a system of equalisation is devised, ensuring that Wigan's tax payers pay less will be extremely difficult. Our base from which to supply our needs will be 25 per cent. smaller, but our needs will not change. I am not clear about how the hon. Gentleman can argue that reducing the resource base by 25 per cent. but retaining spending at the same level will reduce the amount paid in tax. I hope that he will explain in greater detail when he winds up.

The Liberal Democrats claim that their proposal would be fairer, as everybody would pay on the basis of need, but that is not true, as the hon. Member for Witney and the Minister for Local and Regional Government pointed out. Many people whose income is not pay-as-you-earn will not make a contribution, including individuals who receive the majority of their income from dividends. It will be difficult to ensure that contributions are made by the 3 million self-employed, and certainly not in the year when payment is requested.

We have just heard that a cap will be set at £100,000. People on such an income will pay 5 per cent.—that is a reasonable average accepted by the Chartered Institute of Public Finance and Accountancy—or £5,000. Millionaires, however, will pay the same amount, or 0.5 per cent. of their income. That is not fair, and it will be difficult for the Liberal Democrats to explain to Wiganers, who are good at doing their sums, why it is fair that millionaires should pay only 10 per cent. of the proportion paid by others.

The Liberal Democrats have not taken into account the cost of raising the personal allowance to £5,000, which the Inland Revenue estimates will cost £2.4 billion. Dr. Cable, who speaks on Treasury matters for the Liberal Democrats, did not explain in the Budget debate where the money to meet those costs would come from. My hon. Friend David Wright made an interesting point about recession. In the late 1980s and early 1990s, virtually every mine in the country, and certainly every mine in the Wigan area, was closed almost overnight. Manufacturing industry, which depended on those mines, closed down alongside them, so there was a catastrophic drop in the amount of money for our local economy. How on earth would local councils cope in such circumstances? When there is a dramatic drop in income there is an equally dramatic rise in needs, as local councils must pay for school meals and other benefits. How could Liberal Democrats overcome a recession on such a scale? Indeed, if they were elected with their policies such recessions would be likely.

The Liberal Democrats want to reform business rates in line with land values. However—and this is a problem with which we will have to wrestle under the balance of funding review—property rates vary dramatically. A property in Wigan will not have the same value as a similar property in Warrington, which will differ in value from a property in Manchester, which will differ in value from a property in the south-east. Yet again, the Liberal Democrat policy will be subject to equalisation. More money from central Government will have to be put into local government and the gearing rate will have to be changed.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

I shall come to that later.

Cliff-edge problems were another difficulty that was not mentioned. Local income tax cannot be levied in Scotland and Wales, as such revenue-raising powers are devolved. What will happen on the cliff edge dividing Cumbria and Northumberland from Scotland, or Wales from the adjacent English counties? What happens to people who work in Wales or Scotland but live in England, and vice versa? My right hon. Friend the Minister and the hon. Member for Witney spoke about the costly problem of collecting revenue in two-tier authorities, which has not been addressed by the Liberal Democrats. The hon. Member for Kingston and Surbiton glossed over the difficulty of collecting money in 9,000 parishes.

The whole idea of a local income tax is crackpot policy from a tin-pot party.

Let me address some of the problems with the council tax. All hon. Members understand that the council tax raises difficulties. It is far from perfect, having been cobbled together almost overnight to dig the Conservatives out of the poll tax hole into which they had got themselves. Gearing is a huge problem. We recognise that the 25:75 per cent. local to central Government ratio does not produce good Government. It leads to a lack of transparency, as local people see large rises in council tax but almost minimal increases in the service that they receive.

The bands are certainly not wide enough at either the bottom or the top ends. That needs to be addressed dramatically. Certainly the three times ratio, 6/9ths to 18/9ths—in other words, the ratio of the very poorest household to the very richest household—is not a way to deal properly with those differences in income. Revaluation has been mentioned already by my right hon. Friend the Minister. Of course revaluation needs to take place, but we also need to ensure that we allow local councils to revalue much more regularly than 10 year intervals. I suggest five years, so that some buoyancy is built into the council tax base.

Hon. Members have rightly raised the problem of benefits, which we need to address. Research carried out for the Select Committee on the Office of the Deputy Prime Minister seemed to indicate that between bands B or C up to about bands F or G, and given 100 per cent. take-up of benefits, the council tax was quite fair. Hon. Members on both sides of the House must address how we ensure that benefits are taken up on a realistic and full basis.

Let me throw in my pennyworth to my right hon. Friend the Minister. I hope that he will take on board the idea of that we might want to consider allowing people to self-assess their benefits. We could get rid of the stigma by allowing everyone to send in a self-assessment. All local authorities would then determine whether someone was entitled to council tax benefit, rather than leaving that to 60 per cent. or so of people who apply for that benefit now. In other words, everyone should apply and most would say that they are not entitled, but at least everyone could to get their forms to the local council, which would assess eligibility for benefit.

If we address those issues and consider the balance of funding review, revaluation, the ratios and the bandings, we will be able to put local government finance on a much better footing. Clearly, we must also widen the base from a single council tax to include the other elements that are being considered in the balance of funding review. I hope that my right hon. Friend the Minister will take on board those issues in a realistic way in reaching his assessment, so that the council tax base is not the only way that councils raise their money.

Photo of Malcolm Moss Malcolm Moss Shadow Minister, Home, Constitutional & Legal Affairs 9:02 pm, 17th May 2004

I congratulate my hon. Friend Mr. Cameron on a truly outstanding contribution at his first outing in his new brief this evening. He achieved something unusual on the Floor of House: he carried both major parties with him in his argument. The only Members who seemed a little upset by his comments were Liberal Democrats, who, in his own words, seem to have missed a great opportunity this evening to put their case for local income tax. Those on both Front Benches have demolished that proposal quite superbly.

The debate has focused on various other types of local government finance, but there are not many alternatives. There is the status quo or a rejigged version of it; a fully fledged property tax; some form of local tax, either on sales or income; or a combination of some of those. There is nothing fundamentally wrong with the current council tax that a good dose of adequate Government grant and reduced Government directives could not put right.

Why has the council tax, as my hon. Friend told us earlier, gone up for a band D property by 70 per cent. since Labour came to office? Why has council tax soared by three times the rate of inflation? Why are council tax receipts up from £8.7 billion in 1997–98 to more than £19.7 billion in the current year? That is a massive hike of some 80 per cent.

Such is the increase that, for the typical pensioner and pensioner couple, a third of the increase in pensions has been taken up in council tax.

It is not just in my own constituency in Cambridgeshire that we have seen a massive increase in council tax. There have been increases across the board throughout England. The reason is primarily that the Government grant has not kept pace with mandatory service provision. As with many Government Departments, centralisation has not produced the efficiency savings and value for money that were promised and which the Government thought would be delivered.

Who, then, is to blame for the current state of affairs? According to the Audit Commission, it is the Government who are to blame. The Audit Commission report "Council Tax Increases 2003–04", published last December, states:

"National cost pressures taken together account for about £2.3 billion of the total increase in councils' spending of £4.3 billion. In other words slightly more than half the total increase is due to national pay and price inflation, increased national insurance and general population growth."

The report goes on to say:

"The causes of increased spending by councils included . . . national policy priorities, such as the requirement to increase funding for schools by an amount determined by government or to meet waste recycling targets"— we have had comments on both those issues from the Floor of the House this evening. The report continues:

"Grant redistribution—which moved grant from London and the south to the midlands and the north— led to some councils putting up council tax more than others."

In conclusion the Audit Commission states:

"We found a clear association between the size of grant increase a council received and their increase in council tax."

Council taxes, as we well know, have been spiralling, some would say out of control, for some years. In the past few months, the Government have belatedly decided to wield the big stick. That brings me to capping. In the Minister's recent statement on capping only a few weeks ago, he said:

"some authorities' budgets and council tax increases are still too high and impose unreasonable burdens on council tax payers."

He repeated some of those phrases tonight. He also said in his statement:

"The Government attach great importance to local accountability and believe that first and foremost it is for local authorities to set their council tax and justify it to their electors."

Finally, he said:

"Of course, it is not just the percentage increase in council tax that is relevant. We have first to decide whether an authority's budget requirement is excessive."—[Hansard, 29 April 2004; Vol. 420, c. 1019.]

There are three key statements there that I should like to test against the proposal to cap one of my own local authorities, Fenland district council. Those key statements concern, first, "unreasonable burdens", secondly, "local accountability" and thirdly, "an authority's budget requirement is excessive".

Is the council tax in Fenland district council an unreasonable burden? One of the essential problems in the area is the low tax base. That was a point ably made by Mr. Turner. Some 85 per cent. of our dwellings in Fenland fall into the first three bands of council tax—that is, band A, band B and band C. The average council tax band in Fenland is band B, not band C as in the case of councils in Cambridgeshire as a whole, the English shire districts and the east of England as a whole. In terms of the average bill per dwelling, therefore, Fenland is £54 cheaper than Huntingdonshire district council. It is £63 cheaper than councils in England as a whole. It is £73 cheaper than East Cambridgeshire district council. It is £83 cheaper than the average of councils in Cambridgeshire as a whole.

It is £132 cheaper than the English shire districts, and it is a monumental £183 a year cheaper than the neighbouring South Cambridgeshire district council.

If one compares the average council tax bands, the differences are similar. I remind the House that in Fenland the average band is B, whereas in Cambridgeshire as a whole it is C. It is £33 cheaper in Fenland each year than in Huntingdonshire, £49 cheaper than in Cambridgeshire as a whole, and £115 cheaper than in the English shire districts.

Where, then, is this unreasonable burden by which the Minister and the Government have set such great store? Would the Minister take some time to explain to the House what the Government mean by this unreasonable burden? Is it to be expressed in terms of the finite or actual amount that people physically have to pay in their council tax, or is it based on a percentage increase in any given year?

We had the example from my hon. Friend the Member for Witney of West Oxfordshire, which had an extremely low council tax of some £63. When it sought to increase that towards the level of—though not as high as that of—other district councils in the area, it was threatened with capping because the percentage increase was deemed too high.

The Government must come clean and tell my constituents in Fenland, and indeed people in Oxfordshire, that what they really mean by an unreasonable burden is just the percentage increase, not the finite amount in the bill that people have to pay.

However, because of the relatively low tax base, which is reflected by the number and the value of properties, council tax increases in Fenland have to be much higher than in neighbouring councils to raise the same amount of income. The gearing effect is much exaggerated. For example, in Huntingdonshire and South Cambridgeshire, a £1 increase in council tax raises £56,000 and £55,000 respectively, whereas in Fenland it would raise only £28,000—100 per cent. less. To put it another way, Fenland has to increase its council tax by double the rate of its neighbouring councils to raise the same amount of money. Is that really fair? Is that not the real burden for the council tax payers of Fenland?

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation

Surely the question is why Fenland council was having to raise its council tax so high in the first place, given that Government grant to Fenland was 4.8 per cent., which is twice the rate of inflation.

Photo of Malcolm Moss Malcolm Moss Shadow Minister, Home, Constitutional & Legal Affairs

I will explain the situation later.

On accountability, we realise and accept that the difficulties with the low tax base are to some extent addressed by the local government grant formula with which the Government have now come forward and the number of properties at the lower end are taken into consideration. We also welcome the fact that under the new formula, the districts will receive extra money in lieu of what used to be called the area cost adjustment. This is the first time that the districts and the county of Cambridgeshire will enjoy this extra money from the new calculation and formula. But in the first year of the new grant, which was last year, the Government, under their floors and ceilings policy, held back some £566,000, and that is 8 per cent. of Fenland's budget. In fact, at that time last year the Government said that they capped the grant at a ceiling. Of course, they have dropped the word "capped" this year and replaced it with the phrase "scaled back". Obviously, they could not cap their own grant distribution and at the same time wield the big stick and cap local councils. But in the current year, under scaling back as opposed to capping, the Government have withheld £422,000, which is 6 per cent. of Fenland's budget.

Where is the logic behind a Government policy that on the one hand calculates the budget for the district council under the new formula while withholding some of the grant required to deliver that budget, but on the other threatens to cap the council when it proposes to raise sufficient funds from council tax to replace that withheld funding?

The effect of scaling back grant is clear: if the Government had paid the grant that they calculated the council was entitled to and made no other changes, the council tax rise in Fenland would have been 8.17 per cent., which is less than the 8.25 per cent. threshold that the Government chose as the trigger point for capping.

Who is accountable now? Is the council accountable for wanting to deliver the required services, or are the Government, who held back rightful grant, accountable? Why have the Government changed their mind on capping? In March last year, they indicated that they would not cap those councils categorised as excellent or good under the Audit Commission's comprehensive performance assessment system, but they are reneging on that pledge. Telford and Wrekin council is one of the councils in the list for capping, and it has an excellent grading under the CPA.

As I said earlier, the Government are not only withholding grant but piling extra financial burdens and responsibilities on to councils. My hon. Friend the Member for Witney gave us a long but not exhaustive list of extra burdens that the Government have piled on to councils since they entered office. I accept that many of those extra pressures are supported by capital grants, but we all know that capital expenditure has a knock-on effect on the ongoing revenue expenditure required to keep services going, and that that money is provided from local resources and is not met by Government grant.

Let us consider recycling targets, which have been mentioned more than once in this debate. Recycling is not currently mandatory, but the Government strongly recommend and encourage it. If one talks to district councils, none of them thinks that recycling will not be a Government statutory requirement in the near future. This year, Fenland district council put £204,000 into its budget to meet recycling targets, following Government guidelines and encouragement. A similar story can be told about the e-government targets, which are, again, non-funded targets—Fenland district council put £125,000 into its budget to meet e-government targets. Added together, those two amounts meet the Government's required budget savings of £300,000 following capping. Are those examples of excessive budget requirements?

Fenland district council has submitted a medium-term financial strategy that identified higher increases this year, reducing significantly in future years. Those increases are part of a short-term strategy, and do not indicate a continuing trend. Next year and in future years, the strategy, which was submitted to the Government, outlines efficiency savings of £350,000, and a reduction in the general fund reserves totalling £800,000 spread over the three years from 2004–05 to 2006–07, which will mitigate the increases on council tax payers.

Finally, I come to the issue of re-billing. As a small district council, Fenland has particular problems this year. The current billing system will not allow for automatic re-billing, and the bill for software reprogramming for a new system will come to some £85,000. It is also important that a decision is taken quickly, if the Minister and his Department can do that, because if some council tax payers take the view that substantial savings are to come their way as a result of capping, they may not pay their council tax bills as early as they might have done.

That withholding of payment can create havoc for a council's budgeting and financial position and the final cost according to the Local Government Association could be more than £200,000.

If we take into account the lower estimate for the re-billing exercise, the saving for a band D taxpayer is calculated at only £7 for the year. After all that, we shall save a band D taxpayer 13p a week. For 85 per cent. of taxpayers in bands A, B and C, the amount will be less than 13p. We must ask the obvious question: is the whole exercise not rather pointless?

If Fenland council can demonstrate planned lower increases in its medium-term strategy for the next few years and if it receives a good, if not excellent, category from the recent comprehensive performance assessment review—the outcome is due at the end of the month—surely common sense will prevail and the threat of capping be lifted this year. After all, Fenland district council is not profligate. Its council tax is not an unreasonable burden compared with its immediate neighbours'. Its budget is not excessive; it is a well-run council, which actively and positively seeks to implement Government policies, namely recycling and e-government, and has a clear idea of where it is going, as the CPA review will doubtless bear out.

I invite the Minister to bring the full weight of his acclaimed knowledge, common sense and understanding to bear to foster the correct and logical outcome.

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation 9:21 pm, 17th May 2004

When Mr. Davey rose to move the motion, the Liberal Democrat Benches were packed with Members desperately willing him to deliver the knockout blow in the local government election campaign. As his speech continued, they crept out of the Chamber one by one and now only two remain. Neither looks especially happy.

Most hon. Members agree that the council tax needs reform, especially in Liberal Democrat areas where the biggest increases in council tax this year took place. Those increases are 6 per cent. on average, compared with 5.4 per cent. in Conservative-controlled councils and 4.7 per cent. in Labour areas. Although the increases are considerably lower than last year's, they have led to discontent among many people, especially the elderly. The pensioner council tax revolt started in the south-west of England, where there are many Liberal Democrat councils. However, it is not confined to Liberal Democrat areas; there is genuine anxiety among elderly people throughout the country.

I applaud the Government for establishing the balance of funding review. It is an all-party review, which includes local politicians who are nominated by the Local Government Association and it will report this summer. If the Liberal Democrats genuinely wanted a considered improvement on the status quo, they would not try to pre-empt the review but await the proposals from that all-party review team. We therefore need to ask why the Liberal Democrats have jumped the gun with a muddled and costly local income tax proposal.

The answer is simple: it diverts attention from the Liberal Democrats' record in local government throughout the country of poorly controlled spending and poor-quality services. Hon. Members have already mentioned the interesting fact that, of the councils that the Audit Commission independently judged to be excellent, some 12 are Labour controlled and none is Liberal Democrat controlled.

Photo of Hugh Bayley Hugh Bayley NATO Parliamentary Assembly UK Delegation

The hon. Gentleman has a bit of a cheek. When he was speaking, with all the benefits of a Front Bencher who can speak for more than 30 minutes, I asked four times whether I could intervene on him. He declined and now he wants to intervene when hardly any time remains for Back Benchers to speak and when a Liberal Democrat Back Bencher, miserable though he looks, hopes to be called next. So I shall decline to give the hon. Gentleman the opportunity to intervene.

Until this time last year, City of York had the lowest band D council tax in Yorkshire. Indeed, it had the lowest council tax in Yorkshire in each and every band. Then, a year ago, the Liberal Democrats won control of the council, and I applaud their electoral success. Now, one year later, we no longer have the lowest council tax in Yorkshire; we have the fourth lowest. The band D rate in York is £1,078 this year. In Bradford, it is £1,061; in Wakefield, it is £1,048; and in Leeds, it is £1,040. York has gone from lowest to fourth lowest in just a year.

Last year, when the Liberal Democrats took control, they promised in York, as elsewhere, that they could deliver a £100 a year reduction in council tax. What actually happened this year was an average increase of about £80 a year. The plan for a £100 cut in council tax has been quietly shelved and replaced by another completely uncosted—and, frankly, equally undeliverable—promise on local income tax.

The Liberal Democrats cannot blame the Government for this increase. The Government increased the grant for City of York council by 5.5 per cent. this year, which is twice the rate of inflation. The provisional settlement gave us a 4.3 per cent. increase—a Government grant of more than £100 million for the first time. I went into battle for the City of York, and I will support the council tax payers in my constituency irrespective of which party controls the council. My right hon. Friend the Minister for Local and Regional Government listened to what was being said, saw what was happening on the ground and increased the Government's support for the City of York by a further £1.2 million, taking the overall increase in Government grant to 5.5 per cent. So the 8.5 per cent. increase in council tax imposed by the Liberal Democrat council in York has not come about because of a poor funding settlement from central Government. It has come about because of a failure of the Liberal Democrat administration in York to control its own soar-away spending.

So, although York still has one of the lowest council taxes in the country, thanks to a legacy of prudent financial management by a Labour council for a good many years, it came within a hair's breadth of being capped this year. The limit set by my right hon. Friend the Minister was an 8.5 per cent. increase in council tax or a 6.5 per cent. increase in the overall council budget. By luck rather than judgment, City of York came in with a council tax increase of exactly 8.5 per cent., and a budget increase of exactly 6.5 per cent. So, had it come in with a council tax increase that was any higher, and had there been just one more council in England to be capped, it would have been the City of York. That is a remarkable turnaround in its financial fortunes in just one year, and it ought to be a stark warning to the Liberal Democrats in control of the council that they have to get their soar-away spending under control before next year.

The Liberal Democrat income tax proposal is a magician's sleight of hand, because it seeks to move attention from the real world of high-cost Liberal Democrat councils to a fantasy world in which everybody is led to believe that somebody else will pay their council tax bill. Who will pay? Hon. Members should not look at the Liberal Democrats' costings, because, like the £100 cash-back offer last year, they will vanish overnight. Instead, they should look at CIPFA's analysis, which was prepared for the cross-party balance of funding review.

CIPFA estimates that the Liberal Democrat income tax proposal, which will vary from council to council because it is local, would raise the basic rate from between 3.2p to 6.5p in the pound. That proposal will hit many people on low incomes in places such as York who do not pay council tax at the moment, while excluding some people on high incomes who pay council tax.

Yorkshire has on average the lowest council tax in England, but it does not have the lowest average incomes, so the Liberal Democrat plans for a local income tax would mean higher bills for working families in Yorkshire. What about people with second homes in York, Harrogate, the Yorkshire dales, or the North York moors? They will not have to pay a penny under the Liberal Democrat local income tax proposals. What about millionaires, who, as my hon. Friend Mr. Turner said, are not on PAYE and live off investment income? They will not be touched by the Liberal Democrats' proposals.

I do not want to prejudice the outcome of the balance of funding review, but tonight I seek an assurance from my right hon. Friend the Minister that, at this stage at least, the Government do not intend to increase income tax for hard-working families while at the same time letting off some better-off households from paying local taxes altogether. That is precisely what the Liberal Democrat motion proposes.

Photo of Adrian Sanders Adrian Sanders Liberal Democrat, Torbay 9:32 pm, 17th May 2004

Over the years, each Minister who has spoken on local government has presented to the House the claim that their local government settlement is the best ever. Of course, it always is, because with inflation that will always be so, but Government inflation is based on retail price inflation, not the inflation rate that councils across the country have to meet.

According to a survey by Barclays bank, the public sector inflation rate in the past 12 months was some 7 per cent. If the average council received an increase of 5.5 per cent., every council received a real-terms decrease in central Government funding. The claim that such and such a council got well above the retail price inflation rate is true—it is not a lie—but it is never the whole story. It misleads and confuses the public over whether the Chancellor should get a pat on the back for his Budget, or whether councillors should get it in the neck for the high council tax.

The council tax has three failings. I shall speak from the point of view of my constituency in particular. Labour Members—Mr. Turner, for example, cannot see that under local income tax the people of Wigan would pay less in tax than they pay under council tax—are misunderstanding local income tax, or are happy for their constituents to pay more.

Photo of Neil Turner Neil Turner PPS (Rt Hon Ian McCartney, Minister without Portfolio), Minister Without Portfolio

I realise that the hon. Gentleman is short of time, but I have to point out that well over 90 per cent. of households in Wigan are in bands A and B, and that is why they would pay more in income tax than in council tax.

Photo of Adrian Sanders Adrian Sanders Liberal Democrat, Torbay

The hon. Gentleman has read the tax base figures, but he is incorrect. People in Wigan would pay far less under local income tax, given local incomes.

There are three fundamental flaws in the council tax. First, the grant system is based on historic spend. An authority such as mine, once part of a large shire county with historically low spending patterns, never catches up.

Photo of David Cameron David Cameron Shadow Minister (Communities and Local Government), Deputy Chair, Conservative Party

The hon. Gentleman says that the council tax is fundamentally flawed. Why, then, are the Liberal Democrats not getting rid of it in Scotland?

Photo of Adrian Sanders Adrian Sanders Liberal Democrat, Torbay

We would like to, if we were in government in Scotland, but we are not. We believe in devolution and different solutions fought for by different people.

Historic spending patterns mean that our grant is kept low and that we never catch up. Secondly, the grant formula is linked to the tax base. If an area has a high base, it gets less money in central Government grant. The third flaw lies in demand for services. In an area such as mine, where there is historic low spending, high house prices and low incomes, and simultaneously there is ever-rising demand for services, as is often the case in seaside resorts because of demographic changes as economically inactive people migrate there and elderly people remain alive longer, demand for services rises faster than the grant formula can keep up with.

There is a further problem, too. Out of the chunk of central Government money that goes to local government, increasing amounts have been top-sliced for a few local authorities that have been able successfully to bid for them. In a sense, the year-on-year increase of that which is available to all councils goes up, but for those that cannot access that top-sliced funding, the amount does not go up by anything like as much as the Government would claim.

I received figures from the local government Minister following a written question last week that show the impact of that. In my constituency, residents are worth £26 per head less than those in the average unitary authority; I compare like with like because it is unfair to compare unitary authority figures with those for other tiers of local government. For a council that is successful in getting access to top-sliced funding, the ratio is even bigger. Our nearest successful neighbour is Plymouth, where residents get £101 per head more than the residents in my council area. If my local authority got the same per head Government grant funding as Plymouth, we could have cut council tax by a quarter this year without cutting services.

Let me put straight something referred to earlier that needs to be corrected. There are toilet closures in my constituency, but we are gearing up for a bumper summer season and our lifeblood is tourism. I am not aware of any beach or tourist area that will be without a public convenience. The closures have been carefully chosen, and some of those closed will reopen as a result of a local initiative. Mr. Steen, whose constituency covers part of Torbay, which is a tourist resort, must be corrected. No tourist should be put off as a consequence of his misinformation.

Photo of Bob Russell Bob Russell Liberal Democrat, Colchester

He was talking down Torbay.

Photo of Adrian Sanders Adrian Sanders Liberal Democrat, Torbay

That is right.

There is a perverse capping logic. Our council tax in the past two or three years has been lower than those of our neighbours in Devon and Plymouth, and our council tax is the second lowest in Devon. Why, then, are the neighbouring authorities not capped? Simply, the answer is that the increase has come this year, and this year brings important elections for the Labour party in metropolitan areas. Capping will therefore fall on my constituents because of Labour's electoral chances.

I must finish now to allow my hon. Friend Matthew Green to wind up, but I have one final question for the Minister. He attacked a local income tax on the grounds that many people could evade it. If it is such a big problem, what are the Government doing about all those income tax evaders who fail to make a contribution?

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities 9:40 pm, 17th May 2004

This debate has shown the House at its worst. The public always say that there is too much yah-boo in the conduct of our business. When my hon. Friend Mr. Davey stood up today, he had a well written speech—

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

The hon. Gentleman is still at it. My hon. Friend had a well written contribution to make to the debate on local government finance, but the representatives of the Labour and Conservative parties clearly had no intention of debating local government finance. They just wanted to play yah-boo politics. However, I will try to answer some of the questions that have emerged from the debate.

The Minister claimed that the Government were reducing ring-fencing. We could achieve a cross-party consensus on that, but the Minister must accept that passporting is ring-fencing in all but name. As long as the Government passport education, which is more than 50 per cent. of local government finance, the funds are dictated by central Government. It does not matter whether it is called passporting or ring-fencing: it is the same thing. The change of word does not let the Minister off the hook. If the Minister promised to tackle passporting, we would be happy, but I suspect that he would then invent another word for it and claim that he had dealt with the first two problems.

The Minister said that the Liberal Democrats should tell our councils to get a grip and lower their council taxes. That comes from a Labour party that has a policy of new localism. I understood that new localism meant giving extra powers to councils and letting them decide issues for themselves. The Liberal Democrats believe that councils should be left to take their own decisions and to face the electorate on that basis, but this Labour Government think that such matters should be decided by central diktat. The Minister cannot have it both ways: he must choose between new localism and capping.

The Minister mentioned capping and I shall give a local example. West Mercia police have been nominated for capping for next year. That authority has had some large council tax rises recently, including 33 per cent. a few years ago. However, I have not had a single letter of complaint about that rise, and I am sure that my hon. Friend Mr. Marsden and David Wright, who is no longer in his place, would say the same. That is because the authority was waiting for extra money from central Government, which never came, so in order to deploy 200 extra officers the police authority—

Photo of Mr Paul Marsden Mr Paul Marsden Shadow Minister, Transport

My hon. Friend is right, but I had thousands of letters about soaring council tax increases—even though the Government said in 1997 that they would make the council tax fairer. People are happy with the increase in the council tax precept by West Mercia police authority that will supply 15 extra bobbies on the beat, because the authority is accountable and people feel that they have more control over that decision.

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

My hon. Friend is right. The Government have capped an authority that the public support because it has increased the number of officers. The Government are getting it wrong and they should withdraw the proposals to cap that authority.

The Minister would not read out the four advantages of local income tax that were identified by the Chartered Institute of Public Finance and Accountancy. He clearly has not read the document in detail, as he did not know that it mentioned five, not six, disadvantages. I want to pick up on the first of those advantages, because a lot has been said about the balance of funding. CIPFA says that one of the main advantages of LIT would be that it is

"capable of effecting a real shift in the balance of funding".

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

Because once it is in place, one can, over successive years, reduce national income tax and shift it on to local income tax. That shift in the balance of funding could be effected in other ways. For example, the shadow Chancellor proposed in a speech in February that the proportion that is raised locally should rise and that the amount coming through central Government grant should be cut. However, he also said that council tax is the vehicle to do it. That would effectively mean that were one to, say, double the amount raised locally, council tax would double. One might cut national income tax, but one would double council tax. However one looks at it, shifting the balance of funding means reducing national tax and increasing local tax. The easiest way of doing that is through local income tax, as CIPFA says.

I am short of time, but I do not want to miss the opportunity to welcome Mr. Cameron to his post. Speaking for the Conservatives on local government finance is a bit like being handed a hospital pass. If the hon. Gentleman has ever played rugby, he will know what I am talking about. We would love to be able to debate the issue across all three parties, but the difficulty is that the Conservatives have no policy at the moment.

We know that the Government are thinking about, and consulting on, a new policy. However, I have here the Labour party's local government supplementary manifesto to its 1997 general election manifesto. [Hon. Members: "Yah-boo!"] It is not yah-boo—it is a serious point. The manifesto said:

"Labour proposes to return the business rate to local control as part of our commitment to improved partnership with local business. We are consulting widely on our plans to ensure that any changes bring maximum benefit to local businesses."

We share the aim of restoring business rates to local control, but I hope that the first question that the Under-Secretary addresses is this: what was the response to that consultation, and why are the Government still consulting seven years later?

Mr. Turner asked about millionaires and why we would cap the tax at £100,000. I am not sure how many millionaires' houses he has seen, but at the moment even if they live in the biggest of houses they pay only three times what is paid by the occupants of the smallest of houses—that is, about twice the amount of band D. The highest amount that a millionaire anywhere in the country pays is about £2,500. Under our proposals, they would pay quite a bit more.

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

The hon. Gentleman says that it is not enough, but what do his Government propose to do to make millionaires pay more? If they had any such proposals, we would welcome them.

Hugh Bayley mentioned excellent authorities, but I am afraid that his Whips' briefing missed one out—Cambridge is an excellent authority with majority Liberal Democrat control.

Photo of Mr Matthew Green Mr Matthew Green Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions, Young People, Non-Departmental & Cross-Departmental Responsibilities

I cannot give way, because I have only a minute left.

The hon. Gentleman—this is the most telling point—described the idea of local income tax as being for people living in a fantasy world. Clearly, then, people in the United States, Japan and most of Europe live in a fantasy world, because that is where local income tax is used and works. The fact is that local income tax is a fair solution, whereas council tax is an iniquitous tax that hits the poorest and pensioners hardest. The Government should agree with us about scrapping that unfair Tory tax instead of trying to defend the status quo.

Photo of Phil Hope Phil Hope Parliamentary Under-Secretary, Office of the Deputy Prime Minister 9:49 pm, 17th May 2004

We have had a short debate led by the Liberal Democrats. If they were intending to use it to try to boost their chances in the forthcoming local elections, it was an utter failure. We have yet to see a more lamentable performance in the House.

I welcome Mr. Cameron on his first appearance at the Dispatch Box. Although we are never quite sure who is who on the Tory Front Bench, it is good to see him there. His performance was good on style but somewhat lacking in substance—I shall come to that in a moment.

As we are debating local government finance, I remind the House about Labour's record over the last seven years: a real-terms grant increase of 30 per cent. and the longest period of sustained investment in local government in recent decades. This year the grant increase for local councils was 5.5 per cent. Furthermore, we have removed some of the ring-fencing, and that process will continue.

As my right hon. Friend the Minister reminded the House, Labour councils have the lowest council tax increases this year: the figure is 4.7 per cent. for Labour councils and 5.4 per cent for Tory councils, but Liberal Democrat councils are top of the shop with council tax increases of 6 per cent. I am also pleased to say that Labour councils are doing well in their comprehensive performance assessments.

The missing Liberal Democrat £100 has been mentioned but Members have neglected to mention the extra Labour £100. This year, there is a one-off payment of £100 for pensioners aged over 70 to help them with their council tax costs.

I turn to the substance of the debate—the Liberal Democrat motion. There has been a noticeable absence of Liberal Democrat Members in the debate, although one or two are coming into the Chamber at this late stage. My hon. Friend Hugh Bayley gave an eloquent and devastating exposure of what it is like when Liberal Democrats are in control of local authorities. They lose control of their budgets and find that they are at risk—a clear message to every elector that if they want sensible budgeting and good-quality services they should support Labour councils.

We have heard that the Liberal Democrats propose to sweep away all council tax—to abolish property taxes entirely and replace them with a local income tax under their popular slogan, "Axe the Tax". Of course, when they say "Axe the Tax", they forget to say, "Oh, by the way we'll have to put up another tax to pay for it": only a minor point of detail. We would not want to remind them too much about that but for the fact that it will mean between 3 and 6 per cent. on income tax. So, "Axe the tax (oh, and we'll put up your income tax)" might be a rather more accurate description of Liberal Democrat policy.

Moreover, the Liberal Democrats are not actually going to axe the tax. What do they plan to do about second homes? Second homes will still be subject to a form of property tax. There will continue to be a business levy, or rate, on every second home in the country, which means we shall have to count all those second homes, value them and then tax them. That sounds to me like a property tax, which they have just pledged, under "Axe the Tax", to sweep away. Not only will the Liberal Democrats maintain a property tax, they will also increase income tax. We shall get a double whammy from the Liberal Democrats.

By introducing a local income tax, the Liberal Democrats will attack people such as students. As most Members know, students or nurses in training do not pay council tax. However, a nurse in training who earned some money at weekends or during the holidays and started to pay income tax would be caught by the local income tax, so a new set of people would have to pay local income tax.

The Liberal Democrat sums do not add up—we had that debate in February. They said that they would pay for all their proposals through an increase on the higher rate of council tax that will generate £4.7 billion. They would spend about £6.2 billion in local tax and £1.7 billion on raising the income tax threshold to £5,000 and they would spend on higher education and on care for the elderly. We have costed a list of Liberal Democrat promises and it comes to £6.2 billion, yet they will raise only £4.7 billion.

That seems to be a bit of a gap. It is only £1.5 billion, but that is the Liberal Democrats' finances. Perhaps they might like to spend time at a numeracy summer school to try to get it right in future.

The Liberal Democrats' other great slogan is, "Scrap the cap". That sounds a great idea; we will not put a cap on. What happened to the Liberals' concern for pensioners on low incomes? "Scrap the cap", but what do we see? They would allow local councils to put council taxes through the roof. That is why we have introduced capping to bring down council taxes this year. It is important to protect pensioners on low incomes.

We then come to the great cheque that bounced—the £100 that came and went. Now you see it; now you don't. It is another bit of Liberal Democrat magic for the House. They are not so much pulling a rabbit out of a hat as trying to stuff it rapidly back in as they realise that they cannot afford to pay for it. The Lib Dem agenda is higher income tax, more bureaucracy, sums that do not add up and a U-turn. That is just about right for the Liberal Democrats.

I would not want this Liberal Democrat-led debate to divert attention entirely from the Conservatives and their proposals for local government. It is interesting that their amendment to the Liberal Democrat motion says absolutely nothing about their proposals for the future of local government funding. So I thought that I would remind the House of one or two proposals that we know are now in the public domain.

The first thing is that the Conservatives will not repeat their poll tax disaster; for that, we can be thankful. However, they made a record 7 per cent. cut in local government funding in the last four years of the Tory Government. Have they learned that that was probably not a good idea? No, because they have a shadow Cabinet that represents a recession in waiting. For the first two years, if they got back into office, they would cut spending on local councils by no less than £2 billion. That is not just cuts, but hacking off whole services at a local level.

We have heard some excellent contributions in the debate. My hon. Friend Mr. Turner spoke, and the budget of his council in Wigan would be cut by no less than £13 million in the first two years of a Tory Government. The budget of the council in the constituency of my hon. Friend the Member for City of York would be cut by £5 million if the Tories got back in. Mr. Moss talked about the capping of Fenland. If his party got back in power, the first thing he would be doing is explaining to his councillors why it was going to cut £350,000 from Fenland's budget. That is the impact of Conservative policies.

There would not just be cuts for everyone and cuts across the board. The Conservatives would remove resource equalisation, which involves spending more for those who need it most. The sum total of Tory policy is not only cuts for everybody, but cuts for those councils in the areas with the most vulnerable people who need the resources and services the most.

I might add that the Tories have promised that they would scrap the comprehensive performance assessment and the best value measures. I was trying to work out why that should be. Is it because they want to deny a good management tool for local government? No. Is it because they want to stop local citizens having information to make judgments? No. I shall tell the House what it is about. When they put their cuts in place, they do not want us to know about it. They do not want the citizens to know about it. It is a cover-up for the cuts that the Tories would introduce. We can sum up the Tories' agenda—cuts and cover-up. That is the Conservative way.

Let me draw to a conclusion on where we are going next. We have seen that the Liberal Democrats' proposals involve higher taxes, more muddle, more bureaucracy and reneging on their promises. From the Conservatives, we have seen that, if they got back into power, there would be cut upon cut, with services and councils finding themselves unable to deal with that.

The hon. Member for North-East Cambridgeshire complained about capping, but his views were in direct contradiction to those expressed by those on the Opposition Front Bench, who have said that they would support capping and keep capping reserve powers if they needed them. He should ensure that his local councillors understand the difference between his position and that of those on the Opposition Front Bench.

Where are we now? We have a Labour Government who are investing in local services and investing 30 per cent. more in local government than the other parties. We are in a position of lower council tax increases—

Question put accordingly, That the original words stand part of the Question:—

The House divided: Ayes 48, Noes 437.

Division number 177 Local Government Finance

Aye: 48 MPs

No: 437 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Question, That the proposed words be there added, put forthwith, pursuant to Standing Order No. 31 (Questions on amendments):—

The House divided: Ayes 296, Noes 181.

Division number 178 Local Government Finance

Aye: 296 MPs

No: 181 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly agreed to.

Mr. Speaker forthwith declared the main Question, as amended, to be agreed to.

Resolved,

That this House welcomes the Government support for local government with its 30 per cent. real terms increase in grant since 1997; notes that the average increase in council tax in 2004–05 is the lowest for nine years; supports the Government's proposals to take action against a number of authorities which have set excessive budgets and council tax increases in 2004–05; and looks forward to the report of the Balance of Funding Review of how local government in England is funded which is due in summer 2004.