I beg to move,
That this House
notes with concern the increasing burden of local taxation;
awaits the outcome of the Lyons Inquiry but rejects the proposals for a local income tax;
asserts that a local income tax would entail higher taxation on hard-working families and crippling compliance costs on local businesses and would undermine the incentive to work;
believes that council tax must be reformed, with the introduction of an automatic discount for pensioners and other measures, but rejects proposals to move from a local services tax based on fixed property bands to a wealth tax;
calls on the Government to reject the Mayor of London's proposals for a regional income tax in London and to cancel its plans for a council tax revaluation and higher bands in England, which would be a further stealth tax, particularly on those living on fixed incomes.
We sought this debate on local government taxation because the subject of council tax and local government finance was notable by its absence from the post-general election Queen's Speech, although it is anticipated that the Government will take measures to reform local government finance in this Parliament. We seem to have been waiting interminably for the outcome of the Government's review of local government finance, and while the issue of council tax burns the Government continue to fiddle—in this case, the figures.
It is the moment when people write their cheques for the council tax that they associate most directly with the role of local government. However, that is an increasingly misguided association, because since 1997 the Government have riven apart the connection between council tax and the provision of local services. It is certainly not the case that the cost of local services is met by local taxpayers; now, local taxpayers merely top up the Chancellor's coffers. From the Chancellor's point of view it makes perfect sense: by turning local authorities into tax collectors, he hopes to escape the blame for a whopping 76 per cent. increase in council tax.
However, the electorate are increasingly sophisticated. According to MORI, 78 per cent. of the population blame national Government for council tax increases—and they are right. Furthermore, they know that the figures are being fiddled. The Government have systematically engineered the redirection of central funding from efficient Conservative-run councils to inefficient Labour-run councils.
At the same time, the Government have set about loading unfunded cost burdens on local authorities and transferring costs and duties from national Government to local government. I call that stealth taxation by statute. The net effect is that receipts to the Treasury from council tax have increased by more than £9 billion since 1997. Without doubt, council tax has been used as the ultimate stealth tax. While pensioners protest on the streets, the Chancellor is coining it.
I share that concern and feel it deeply. We all read the headlines about people being threatened with prison for not paying their council tax. We are all lobbied by organisations that call for the abolition of council tax and we all witness the growing disregard for local government among voters.
Instead of trying to arrest the drift, the Government are moving in the wrong direction and hastening it. The warning signs are so clear and the symptoms are so obvious that ratcheting up council tax must be part of a broader plan. How else can we explain the forthcoming revaluation, which is hanging like a sword of Damocles over people's heads? Despite claims that it will be revenue neutral, the revaluation shows every sign of punishing people simply because the value of their property has appreciated.
Is it Conservative party policy that there should be no revaluation? If so, how is leaving the level at that of 1991 compatible with a system that is based on property values?
I am sure that the right hon. Gentleman's colleagues are sorry to lose him, with his expertise and knowledge, from the Front Bench. However, he knows as well as I do that the point of revaluation should be to address growing disparities in property prices when they arise. Those disparities are narrowing.
Let us consider the Welsh revaluation experience. Four times as many homes moved up a band as went down. The revaluation, which the Government solemnly promised would be revenue neutral, was used to jack up council tax bills by 10 per cent. in the first year alone.
Does the hon. Lady accept that, when the Conservative Government introduced the council tax, revaluation in general was part of the principle? Why has she decided to depart from her Government's revaluation policy and invent a spurious new version of revaluation, which appears to have no possibility of working in the real world?
The hon. Gentleman may want to discuss extensively the history of my party's introduction of the council tax. However, if he gets the chance to make that speech, he should deal with the fact that the revaluation measure was not part of the council tax when the Conservatives introduced it. The Labour Government's legislation introduced the revaluation.
On the basis of the Welsh experience, council tax payers in England have every reason to fear revaluation. Even worse, it transpires that, unlike in Wales, the Government will not fund transitional relief when homes in England are revalued. I wonder who will end up footing the bill for transitional relief. I received a parliamentary answer last week, and yet again it transpires that council tax payers will foot the bill—the same council tax payers who will have an army of clipboard inspectors descending on their homes and listing any improvements so that they can be taxed on them. Perhaps there is scope for a new generation of home makeover shows, in which Carol Smillie and workmen dismantle home improvements to help people reduce their council tax. It could be the window tax of the 21st century. We could end up explaining to our grandchildren why extra bedrooms and bathrooms had to be mothballed to avoid tax.
As if revaluation were not bad enough, the Government are keen to introduce new, higher tax bands. The inevitable consequence is higher council tax bills.
It so happens that I was in Cheadle this morning. That is precisely the kind of prosperous area that will be hit be the revaluation. If the Welsh experience is repeated there, the average home will go up by two council tax bands, adding more than £500 to the average bill. There is also every sign that the imposition of cost burdens from the centre will continue to rain down on local authorities, forcing up costs and driving up council tax bills. There is no better example of that than the case of identity cards. On
My hon. Friend mentioned her visit to Cheadle this morning. Would it be in order for me to ask her whether she knows which way the Liberal Democrats voted on council tax rebanding and revaluation?
My hon. Friend will not be surprised to learn that I can provide the answer to that question in glorious detail. On
The hon. Lady will have her chance to speak. At the moment, I am addressing my remarks to the Government.
In tandem with what the Government are doing, they are also stripping away services that were previously centrally funded. Community and neighbourhood wardens are a case in point. In the light of that, I must return to one central question: why are the Government determined to drive up the council tax? Why are they manipulating the funding formulas and pushing ahead with the ugly twin sisters of revaluation and rebanding? Is it because the cost of providing local services has gone up disproportionately? Is it because people are using a lot more locally provided services? Is it because town halls across the country need to amass funds? No, it is because the Government are systematically turning council tax into a proxy for central taxation in order to fill the Chancellor's economic black hole.
Has my hon. Friend noticed that there is not one single Labour Member of Parliament in the Chamber today? Does she agree that that might be because they are thoroughly ashamed of the way in which the Labour Administration in the Welsh Assembly told people that there would be winners and losers under this system, when in fact one in three people have seen their council tax go up while money has been squandered by the Labour-run Welsh Assembly?
My hon. Friend David T.C. Davies has excellent eyesight, Mr. Speaker, and he has made the very astute observation that there are no Welsh Labour Members in the Chamber today. I wonder why that might be—[Interruption.] I see that Kevin Brennan has taken his place—just in time!
Some Labour Members might welcome council tax inflation as a means of wealth redistribution. The last time we debated this matter, I detected a real enthusiasm among them for new upper council tax bands. But council tax is not a wealth tax; it is a local services tax that is partly based on property to reflect the fact that larger properties typically make slightly greater use of public services. The swingeing increases that we are now seeing have hurt some of the poorest people, and that is what is so unjust. People on fixed incomes, notably pensioners, suffer more than others as a result of the Government's abuse of the council tax.
The hon. Lady is quite right: the system is tough on those on fixed incomes. But how would that be helped by the policy proposed by the Conservatives—at least at the last election—to freeze Government support to local government, which would push council taxes up even further?
The hon. Gentleman fundamentally misunderstood our policy at the last election, and I cannot believe that he is suffering either shortness of sight or deafness. We campaigned at the last election on giving a 50 per cent. discount on council tax to over-65s, which was fully funded and costed.
The Government will counter that with talk of council tax discounts, but the truth is that take-up of those discounts is abysmally low. There are several reasons for that: the length and complexity of the paperwork is daunting; the questions are demeaning, particularly for pensioners; and let us face it, the present scandal surrounding the tax credit system could hardly be a greater deterrent to would-be claimants. Soaring council tax bills not only present problems for people in terms of meeting the cost; a series of contingent problems arise from the way in which the system has been abused. It is a perverse system, which penalises efficient councils by giving them a relatively small central Government grant, forcing them to put up council tax. Council tax duly goes up, and the Government hit that authority with a capping order. That is a crazy way to proceed—it is the fiscal equivalent of splat the rat.
Is my hon. Friend aware that the rumour in local government circles, emanating from the Local Government Association, I think, is that this year an increase of 1.7 per cent. in the revenue support grant is being planned, with the exception of education, for which it is said that an increase of 4 per cent. is being planned? Does she consider that that will extend the concept of stealth tax?
My hon. Friend is right to point to a pattern that we have seen before. After the general election of 2001, the pattern was of council tax rising steeply as the Government recovered their financial position. Once again, after the 2005 election, we fear the worst. Not only is the process flawed and costly but it puts local authorities in the position of having to cut services on which local people often rely. Typically, those tend to be the sorts of services used by some of the most vulnerable in our society.
As the situation stands, everyone except the Chancellor loses out. I sincerely hope that he had a pang of guilt when he offered a one-off £200 payment to pensioners for this election year only. The Conservative party proposed a 50 per cent. discount for over-65s, year on year, properly costed and fully funded.
The hon. Lady has made several elusive suggestions that she might reform council tax, but has not provided any options for its reform. In fact, she seems very much in favour of keeping it exactly as it is, and probably making it a good deal worse. Would she like to explain?
I am about to come on to the Liberal Democrats. A great deal can be said on the subject, but I was hoping that the hon. Lady might use her intervention to tackle the question of her party's stance—voting three times with the Government for rebanding and revaluation, which we opposed.
No, the hon. Lady has an opportunity to reply, and I have a series of questions that I want to ask about Liberal Democrat policy. She might wish to cover those points when she makes her speech.
I would like to make a little progress.
The Liberal Democrats voted in favour of revaluation and rebanding, despite telling people on the doorsteps that they were opposed to both. There is nothing like saying that one is a principled party of opposition—because, let's us face it, such actions are nothing like those of a principled party of opposition. As for the local income tax plan, it was certainly interesting, not least because of the rancour that it has created within the Liberal Democrats. As the Liberal Democrats' president, Simon Hughes, said:
"I don't think in the end it worked well".
What local income tax has in its favour is that it is easy to market, but it is often the case that the devil is in the detail. The campaign pitch is simple enough—the amount of tax that one pays locally is determined by one's level of income. But I think the Liberal Democrats should be had up by the Advertising Standards Authority for their slogan, "Axe the Tax". The Liberal Democrat Treasury spokesman—Dr. Cable—himself admitted that two full-time earners in a house would pay more tax, and said that the tax would bite when a combined salary was between £30,000 and £40,000 a year. A pensioner with savings or investments would be taxed on them, so it is rather disingenuous to suggest, as the Liberal Democrats have, that local income tax is a panacea for pensioners. It certainly is not.
The biggest pressure on councils such as Shrewsbury is caused by the Labour Government's targets for affordable housing. The council must provide 500 affordable housing units in the foreseeable future. Yet in 2003, the Government took away Shrewsbury's local authority social housing grant. That has placed a tremendous financial burden on my council, which must provide for a target set by the Government.
That is a very good point, which illustrates what I was trying to say. The Government, in a sense, set up well-run councils to fail through their system of targets and fiddle-funding of the central grant.
The local income tax would also ratchet up bills for hard-working families, especially those with dual incomes. A typical working family in England would pay an extra £692 a year, an increase of two thirds. Not only would the tax apply to people who have hitherto been exempt from council tax; students with part-time jobs are a particularly striking example of people who could ill afford being heavily taxed under the Liberal Democrats.
So that the hon. Lady does not keep repeating things that are not true, I should tell her that every member of our party stood on the basis of abolishing the council tax and agreed with that, and every member of our party stood on the basis of replacing it with a local income tax, and agreed with that as well. Yes, there were criticisms of some of the presentation—I criticised it myself—but the substance is clear. The policy of the hon. Lady's party is "Council tax: we want to keep it". We had a clear alternative, although we can argue about whether it was right. The hon. Lady never had one.
I am not sure that the hon. Gentleman's intervention has really helped his party. He does not deny that his policy has not worked very well. The local income tax would not be a win-win; it would be a win-lose. Pensioners with savings would lose out, hard-working families would lose out and young people, typically sharing accommodation, would certainly lose out. As for the councils that would have to administer the tax, their ability to plan would be hampered in the medium term because revenue derived from income is by nature less predictable than revenue derived from house values.
Councils would also become slaves to Whitehall funding. The tax would necessitate more equalisation. A local income tax offers limited redistribution of the tax burden, but disregards the feelings of many pensioners who instinctively dislike the idea of their tax liability being transferred to their children and grandchildren. As I said earlier, pensioners are proud people and are prepared to pay their way. It stands to reason that they would be distinctly uneasy about their families picking up the bill for them. Let us take a practical example. A typical working family in Cheadle would see their average tax bill rocket by over £1,000 under the Liberal Democrats' income tax.
Perhaps the hon. Lady could explain how the Conservative proposals in the motion to give pensioners a permanent rebate on their council tax—which would presumably have to be replaced by central taxation to provide a Government grant—differs fundamentally from the Liberal Democrat proposals as she has described them.
The hon. Gentleman misses the point, in terms of what his Government have done to pensioners by abusing the council tax. One third of the increase in the basic state pension has been snatched back because they are having to pay council taxes that have been increased by more than the rate of inflation.
Before we leave the question of revaluation, which was supported so avidly by the Liberal Democrats, may I ask whether my hon. Friend agrees that it would be absolutely wrong if it led to areas with large increases in property values being at a disadvantage in comparison with areas with smaller increases? Services would cost approximately the same, but areas with higher property values would receive less money from the Government.
I thank my hon. Friend for that intervention. He accurately points out that such a measure is redistributive. It is very attractive to a party that calls itself new Labour, but which is at its heart still socialist. I understand where it is coming from.
Permit me to give an overview of the impact of local income tax on a typical community. A pensioner with savings and investments would be taxed. A young person who is sharing a flat or in part-time work as a student would be taxed. A young family with a dual income and a mortgage, trying to make their way, would be taxed to the hilt. On top of all that, a local income tax would co-exist with a whole raft of other taxes, including regional income taxes to fund the network of unelected and undemocratic regional assemblies that have leached power away from local communities.
Presumably, the Liberal Democrats support London Mayor Ken Livingstone in his quest to introduce a London-wide regional income tax. As the Association of London Government has recently observed, this could mean up to 6 per cent. on the basic rate of income tax for Londoners.
The hon. Lady says that she is opposed to rebanding, to revaluation, to local income tax and to the Lyons review. She says that she would give £500—or was it £50?—to all pensioners, be they Margaret Thatcher or my granny, who was pretty poor. What about the other groups about which she has been talking? What are the measures that she is going to promote?
Before making an intervention that is an attack on my party's policy, the hon. Lady should acquaint herself with its detail. In addressing her very real concerns, I remind her that the sum in question is not £50. We are talking about a 50 per cent. increase, which is a significant increase, as I am glad she acknowledges. I further remind her that the figure is capped at a maximum of £500 in order to address the very point she makes. So we did take into account those two important details.
Earlier, the hon. Lady kindly offered to give away some glasses. Perhaps she might repeat that offer, because if she looks at the small print of her party's proposal, for which one might well need glasses, she will see that—unlike the Chancellor's offer, which will help 19 out of 20 pensioners—it would help only one in four pensioners.
The underlying point is that our proposals would help more than 5 million pensioners. Moreover, it is a year-on-year payment, not this one-off payment of £200. Under such a proposal, what happens the following year? How does the hon. Lady think pensioners felt about that proposal during the election?
Perhaps the Liberal Democrats should listen to the words of Andy Mayer, director of their think-tank, Liberal Future. He said that
"we're not convinced that the association of income tax with fairness is correct".
My frustration with local income tax is that it purports to be the cure-all that it patently is not. Many Liberal Democrats know it and have admitted as much; as the proposal comes under greater scrutiny, the voters will also come to know it. It is a distraction from the important question of how we can make local taxation fairer to everyone. By persisting with local income tax—that said, I understand that its future as party policy is in some doubt—the Liberal Democrats are effectively ruling themselves out of this fundamental debate.
All this is taking place against a backdrop of uncertainty as we await the outcome of the Lyons review—a review commissioned to assess the previous review of local government finance. But the fact is that this Government have hidden behind reviews, sympathetic words and one-off pre-election handouts, instead of grasping the nettle and addressing the fairness issue that bedevils the current situation. I think that I am safe in presuming that we are some time away from another general election, so this is the time when—away from the heat of battle—we can really engage with the problems of local taxation and restore a genuine link between local taxation and local services.
That is critical. We need to abort the process of subordinating local government and reinvigorate local democracy instead because the alternative is to foster more resentment and more economic hardship: we will then have witnessed the still birth of a new localism.
I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:
"welcomes the Government's continuing support for local government with its 33 per cent. grant increase since 1997;
notes that the average increase in council tax in 2005–06, at 4.1 per cent., is the lowest increase in a decade, the second lowest ever, and lower than the last three council tax settlements for which the previous Government was responsible;
welcomes the Government's engagement with councils to facilitate the delivery of 2.5 per cent. annual efficiency gains in local government;
and looks forward to the conclusions of Sir Michael Lyons's inquiry as an important contribution to securing a fair and sustainable system of local government finance for the future."
I welcome the debate and hope that, at the end of it, the watching millions are as informed and passionate on the subject of local government finance as the small band of experts who follow these matters carefully. I hope that the House will agree that, among the small band of experts who follow local government, and particularly local government finance, one man stands out. I pay tribute to my right hon. Friend Mr. Raynsford, and remark that this particular debate on local government matters is unusual in that he is not speaking from the Front Bench. By the end, many may wish that he were, but I know that I speak for the whole House when I say that he was always the most courteous Minister. However naive or inane the question, he always tried to answer it fully. Anyone who believes in the health of—[Interruption.] Alistair Burt should listen to this; if he did, he might agree with it. Anyone who believes in the health of local government must believe that my right hon. Friend's contribution was immense.
When I took up the post, my right hon. Friend congratulated me and told me that it was the best job ever, yet I now read in this week's "Municipal Journal" that he believes local government finance is "a nightmare subject", so it turns out that he is a bit of a spin doctor himself in these matters.
I also want to welcome Sarah Teather, who was cruelly denied the opportunity to speak to us during the Queen's Speech debate, but will now be able to do so. She may not realise that Opposition motions are usually a chance for the Opposition to attack the Government. It must be strange for her to feel that this time she is the Government, given that she was so often the subject of the speech of Mrs. Spelman. Listening to that speech, I began to feel that the two Opposition parties were becoming concerned about the fight for second rather than first place—[Interruption.] I hope that the hon. Member for Brent, East will take it as a compliment to be so roundly attacked by the hon. Member for Meriden, but she must look out for Martin Miller on the side track in Cheadle, as he is mounting a strong campaign for the governing party. She had better not take her eye off him.
I want to make three main points in the debate. First, it is possible to talk about local government taxation and, therefore, income for local government, only if one is willing to talk about expenditure as well. Secondly, there is a balance of income sources for local government and they need to be understood together. Thirdly, the Lyons inquiry, following the balance of funding review, offers a special chance for the country to find a sustainable way forward for this important issue for our quality of life and the quality of our democracy.
In that context, I have to tell the hon. Member for Meriden that it was disappointing that, after 27 minutes of her speech, she should turn to our proposals and then finish before the 28th minute had passed. I am sure that we shall get to hear the details of the Conservative party proposals—[Interruption.] Yes, it must have been an oversight on her part. I am sure that among the many sheaves of paper that she has with her are her detailed proposals. We look forward to hearing all about them in due course.
Let me talk first about local government expenditure, because it is expenditure that drives taxation—national and local. Local government is at the heart of national life and it has a unique role in championing the communities that we live in and helping them to prosper. The four pillars of local area agreements for local authorities over the next two years cover enterprise and economic development, safer and stronger communities, healthier communities and older people and children and young people. They provide a clear and sensible way of thinking about the arithmetic of local government.
In 2004–05, local government in England spent £127 billion—a quarter of all public expenditure. The largest share, at 37 per cent., goes on education. Social services spending represents a further 18 per cent. and the police another 11 per cent. Those three services make up 65 per cent. of the total net current local government expenditure. Of that share, 65 per cent. goes on the pay of teachers, police, fire fighters and other local government workers. The share of spending on staffing costs varies, from transport, where it is relatively low, to education, where it is quite high.
In preparing for the debate, I was interested to see that, over the last 30 years, local government spending has risen at more or less the same rate as national spending. The pressures do not follow the business cycle as central Government spending did in the 1980s, but instead reflect real need in areas such as social services, where an ageing population, higher dependency costs and increases in areas such as care home fees are placing pressures on local authority budgets. The same goes for community safety—the hon. Lady mentioned neighbourhood wardens and I hope that we can take it from her remarks that she will support the drive to extend that scheme all over the country. It also applies to waste services, where we must manage ever-increasing quantities of municipal waste in ways that minimise its impact on health and the environment.
Local government is responsible for spending decisions in all those areas, but the imperative to control cost is clear and present.
Will the Minister confirm that the passporting of school budgets and ring-fencing of other budgets has made it more difficult for local authorities to manage their budgets prudently?
That is often said, but the hon. Gentleman will know as well as I do that many local authorities spend above the ring-fenced or passported level on education, to some 108 per cent. to 110 per cent. nationally. My impression is that the commitment of the Government to make education the No. 1 priority is widely shared across the country.
If education and the like are ring fenced, the growth in other services that do not have that benefit that the Minister mentioned is distorted. After all, 12 local authorities received no additional grant once the money had been expended on education. Does he accept that the more areas the Government control, the more they distort the market?
The Government make no apology for saying that the money we raise for education—our top priority—needs to go on education, and I am pleased that local authorities have supported that. On the hon. Gentleman's wider point, if money is specified for one function, it cannot of course be spent on another. However, I am sure that he is pleased, as I am, at the development of the local area agreements that allow local authorities to move money across the piece, because such agreements contribute to the vibrancy of local government, in which I know he believes.
The evidence of the Government's determination to control costs as well as to support local government can be seen in the average increase of 4.1 per cent. in council tax this year, but it is also evident in our drive for efficiency. The Government can play a lead role in that area. That is what we have done through the Gershon review, which has set challenging efficiency targets for local authorities of up to £6.5 billion by 2007–08. For our part, we will continue to work with local government to ensure that those targets are met and the money is then properly spent.
The Minister will know better than most that, although he says that local authorities have control over various spending decisions, they in fact do not, because various matters are controlled by the Government—in particular, the increases in taxes that they have put on local authorities, in the form of pensions tax and national insurance. The Government also keep putting unfunded duties on local authorities—for example, local authorities have to comply with the waste directive and face increases in the landfill levy. The Government have also reduced local authority housing grant, as my hon. Friend Daniel Kawczynski mentioned earlier. More than the entire increase that the Government have given local government in the past seven years has been taken up by increased taxes and duties.
We can have a debate about national insurance every day of the week as far as I am concerned, but the Conservative party made no proposal to reverse the 1p increase in national insurance that the Government introduced and it is money that has been well spent by the national health service. It is also churlish of the hon. Gentleman not to thank the Government for the £120 million increase in grant for his local authority in the past eight years—in stark contrast to the performance of his party in power.
Can the Minister confirm, off the top of his head, that, over the past 20 years, the amount of spending raised by local councils has been some 25 per cent. and the amount provided by the Government has been 75 per cent., irrespective of the ever-growing burden that this Government are alleged to have put on local councils?
My hon. Friend makes a good point. The amount is certainly about 25 per cent. at present. Of course, there was a certain rupture in the way that local government was organised under the poll tax and, although I am sure he and I could talk for a long time about the vagaries of the poll tax, we are trying to look forward today.
There is an irrefutable link between the amount of money that local authorities raise from a range of sources and the amount that they have to raise in council tax, because they have to bridge the gap, but, as the hon. Gentleman will know and as I shall explain in a moment, local government income is from a range of sources, which I shall set out, as it may be helpful.
Council tax raises about £21 billion, which is equivalent to 25 per cent. of local revenue expenditure. Government grant accounts for about £48 billion and 53 per cent. of revenue expenditure. I urge those who decry that level of Government grant to remember that a smaller contribution from central Government means more from someone else. At the last election, the hon. Gentleman's party proposed to freeze grants to local government for two years—[Interruption.] Mrs. Spelman says, "We didn't," but let me quote her the words of the then shadow Chancellor, because the policy was clear:
"I have agreed with my Shadow Cabinet colleagues that the baseline for spending across all these departmental budgets, including local government, will be 0 per cent."
Nothing could be clearer than that—[Interruption.] The hon. Lady says that that was before the James review, but we know that the review proposed cuts of £1 billion in local government expenditure for which it had no way of accounting. It is important that the House knows that the Conservatives were claiming £900 million of savings from reduced costs as a result of inspection and the like but, when pressed, they were forced to rely on a study that concluded that low morale cost £400 million. Their sums simply do not add up.
I very much look forward to taking that matter forward. We have quotes from Mr. Letwin and, although I know that he is something of a man of the past in the Conservative party because he is not running for the leadership, we shall certainly pursue the matter.
Council tax raises about 25 per cent. of income, central grant raises 53 per cent. and the national non-domestic rate about £18 billion, linked to the retail prices index. Thanks to the new prudential capital finance regime that took effect on
That is all good knockabout political stuff, but where Mrs. Spelman was right was in saying that we should all be thinking about the future of local government finance. Does my right hon. Friend accept that in no other western democracy is local government in thrall to central Government as it is in the UK? Will he look into the constitutional settlement between local and national government, because that is the only long-term way in which local people can take control of their own affairs and have a say in raising money locally in the way they feel is appropriate?
My hon. Friend makes an important point and, as he will know, the balance of funding review addressed that matter directly, as shall I. It was generous of him to focus on the 28th minute of the contribution of the hon. Member for Meriden and I shall try to do so, too.
Will the Minister return to a point on which there is more consensus: the Gershon savings of £5.6 billion a year? How will we know when they have happened and, as a taster, can he tell us how much was saved in the first year of the programme?
I am pleased to say that I can. Our analysis of plans submitted by authorities suggests that councils are not just making real efforts but achieving real success. The efficiency gains achieved already and those expected by the end of the year add up to £1.9 billion. That is good news, and I think we can all agree on the importance of that.
The property base of local taxation, through the council tax, provides an efficient and workable foundation for taxation.
In response to the intervention about local government not being in thrall anywhere else in western Europe, may I cite the fact that local authorities in Germany and Austria get respectively 15 and 18 per cent. of the total national tax take, and they get it from central Government? They are almost entirely funded from the central Government, not from local people.
The hon. Gentleman makes a good point. Of course, there is a big difference between local taxes and assigned national taxes, and the degree of thrall differs according to those two measures. Before hon. Members become too focused on the idea that those in local government are lying inert on the floor underneath the weight of central Government, they should go to any town or city in the country, where they will see a lot of dynamism, with those in local government exploiting quite a lot of freedom in performing their roles. I am sure that every hon. Member can point not just to isolated examples, but to a real drive by those in local government to lead their communities, economically and socially—and in my part of the world, culturally as well.
The balance of funding review concluded that there was a strong case for more money to be raised locally. In respect of devolution, I believe that it is a good principle that power should be exercised as close to the people as possible, and I tell the hon. Gentleman in all seriousness that that is not just about power for the town hall; it must be about moving power from the town hall to the citizens as well. In that sense, this is not just a devolution deal between local and central Government—it must engage people beyond the town hall. That is important.
The property base of local taxation provides an efficient and workable foundation for taxation. For groups on low income, the council tax is, of course, reduced—for single people, by 25 per cent; for poor families, by council tax benefit, which is received by 4.9 million family units a year and is worth £13 a week on average, although we would all like take-up to be higher. Of course, there is a welcome boost for pensioners, pioneered by my right hon. Friend the Chancellor of the Exchequer.
Will the hon. Gentleman just let me make this point?
The Government's help in the form of a £200 contribution to the cost of council tax goes to 6.2 million pensioner households, nearly twice as many as would be covered by the Opposition's proposal, which excludes many pensioners because they do not live with other over-65s. Less than one quarter of pensioners would get the £500 of which the Opposition boast. In fact, the majority would get less than the £200 that is delivered under our proposals.
I should like to bring the Minister back to the take-up of council tax benefits, which he skirted over. The unsettling fact is that about a third of pensioners who are eligible for council tax benefit do not take it up, apparently owing to the complexity of the process. What will the Government do about that, apart from just stating an aspiration that take-up will increase?
I agree that take-up is an issue. I will write to the hon. Gentleman, though, because he is somewhat mistaken about the number. My understanding is that the figure is actually 53 per cent., but I will check that for him. However, neither 53 per cent. nor 33 per cent. is anything to be proud of. Take-up is certainly an issue to be considered, but it is not just a matter of publicity, however important that is, and a range of other issues is associated with it. It is certainly something that my right hon. Friend the Secretary of State for Work and Pensions is considering, because it is a long-term issue.
I am sorry, but any of us can promise any amount of money if we do not have to say where it will be paid from. I can magic commitments out of the air, but, frankly, in the scheme of things, when the Conservative party proposes a £35 billion reduction in Government spending by 2011, for the hon. Lady to suggest that there is a sudden outburst of generosity in respect of pensioners strikes me as fanciful to say the least.
I am sorry, but this £1 billion cost for inspection is completely erroneous. As I said to the hon. Lady, the figure is based on a local government information unit study that ascribed £400 million of savings to increased morale. I am happy to pursue the point, but I think that I should bring my remarks to a close. [Hon. Members: "Yes."] I am sorry that Conservative Members have not been able to enjoy the past 20 minutes, but there is more to come.
The Government are determined to balance the commitments to spending on front-line services, a strong efficiency drive and a prudent council tax policy as part of a balanced package to support local government. The balance of funding review, which reported last July and included senior figures from central and local government, the academic world, business and professional bodies, found a strong case for shifting the balance towards more local funding. But that case depended on the feasibility and desirability of any measures to achieve it. It concluded that a variable local income tax might increase local accountability, but that a more complex funding system might be harder for taxpayers to understand, and there were potentially serious risks and disadvantages that would need to be considered in great detail, including the additional costs and burdens that the system would impose and the complexities of administration. That is notwithstanding the further point that, for dual-earner households, a local income tax presents, by any stretch of the imagination, a significant tax rise. Opposition Members must explain that.
I will not have a big go at the hon. Gentleman but let him speak for himself. Sarah Teather will no doubt cover this point in a moment.
The balance of funding review reached consensus on a broad range of issues. It concluded that council tax had important advantages as a local tax and should be retained but reformed to help people on low incomes and to reduce the impact of revaluation. In the context of that, the House will be interested to compare the remarks of the hon. Member for Meriden today with her comment, as recently as
"a property-based tax must take account of changes in the value of the property".
[Interruption.] The hon. Lady says that it is not true, but it is written here in Hansard
I am sorry but I have the full quote here. If the hon. Gentleman will contain himself, he will hear that the hon. Lady said:
"The answer to the question about revaluation is that, of course, a property-based tax must take account of changes in the value of the property."—[Hansard, 2 March 2005; Vol. 431, c. 983.]
She said that. I hope that the hon. Gentleman will accept that the quotation is accurate.
All I said from a sedentary position was that I had already covered that point in response to the intervention of Mr. Raynsford. The point was that the revaluation exercise is to tackle the disparities in property prices, but the fact is that the gap is narrowing. That takes away the need to act now and in the way that the Government intend.
The watching millions can draw their own conclusions from that.
To follow up the work of the balance of funding review, we invited Sir Michael Lyons to undertake his inquiry into local government funding. We asked him to consider the detailed case for changes to the system of funding and make recommendations on any changes that are necessary and how to implement them.
I have been extremely generous in giving way, and I hope the hon. Gentleman will now allow me to finish my speech.
In particular, we asked Sir Michael how best to reform and revalue council tax and to look at the case for supplementary revenue raising by local authorities and options for reforming business rates and other local taxes and charges. Since starting work, he has visited each of the English regions and Wales to take evidence from stakeholders. He has met groups and individuals with a wide range of interests, and key stakeholders have been encouraged to submit written evidence. I look forward to his report.
I have a sneaking feeling that the minds of the drafters of both Opposition motions may be less on the finer points of the Lyons inquiry and more on their intense political rivalry for the vacant Cheadle seat. When the hon. Member for Meriden started talking about "Bash the rat"—[Interruption.] I am sorry but "splat the rat" is known as "Bash the rat" in the more refined parts of the north-east. However, when she started talking about "splat the rat", I thought she was talking about us. It turns out that we on this side are the drainpipe in this competition and the rat is sitting on the Liberal Democrat Bench. Be that as it may, the Government are fully focused on promoting serious engagement with the difficult choices raised by the pressure for more local spending in an acceptable way. It is to that end that I welcome this debate and look forward to its conclusions.
As the Minister of Communities and Local Government suggested, it is a great pleasure, in my debut on the Front Bench, to be defending our party's most popular policy from Conservative attack—[Laughter.] The Conservatives laugh; let them laugh.
We have had an interesting debate so far, although it has turned up some of the worst and most anodyne of soundbites—goodness knows what "splat the rat" relates to. However, it has also shown clear philosophical differences between the parties, as well as a gaping hole in Conservative party policy. The Conservatives have nothing to say about the balance of funding crisis or the need to reform council tax, but of course the truth is that they do not want to do that. They have flip-flopped all over the place on revaluation. Their claim appears to be that house prices are converging across the country. What land are they living in? I assure them that house prices in my constituency have gone up a good deal faster than they have in neighbouring areas.
The hon. Lady is wrong on two material facts. First, there is not a question of convergence. However, the relationship between north and south is roughly what it was.
Yes, it is; the relationship is exactly what it was when the council tax was introduced 10 years ago. Secondly, we have voted against revaluation on every single occasion, but on every single occasion, the Liberal Democrats voted for it.
I understood that the Conservative party was advocating five-yearly rather than 10-yearly revaluations, so the hon. Gentleman is perhaps misleading us.
I think that the hon. Lady meant to say "inadvertently misleading".
I absolutely meant that the hon. Gentleman was inadvertently misleading us Mr. Speaker.
Now that the Conservatives oppose revaluation, it is clear that they are not attached to the council tax because they believe in the philosophy of a property tax. They have said that they oppose a wealth tax and want a local service tax. Mrs. Spelman said that it costs the same amount to every person to empty the bins in every area. That shows her view of the role of local government. The nonsense that the Conservatives talk about wanting localism is underlined by that statement. It is the kind of thinking that spawned the poll tax, so the party has not moved on intellectually.
There is real tension in the Conservative party because although some say that they want localism—some of the brighter Back Benchers advocate the return to localism and getting rid of the centralist state—the hon. Lady continues to argue for a local services tax and against giving any powers back to councils. She argues for a regressive tax system.
I am grateful for the opportunity to reply to the hon. Lady's point, which is definitely misleading, and not inadvertently. I make it perfectly clear to her that in the balance of funding review—
Order. We had best stop here. No hon. Member would be misleading in the House and certainly not Mrs. Spelman will withdraw that remark.
Of course I withdraw any remarks that might cause offence. A proper reading of Hansard tomorrow will reveal the words that I actually said in my speech, not the words that are being put in my mouth.
I am no clearer, I am afraid.
At least the Tories are honest enough to acknowledge that the council tax is a poor proxy for a wealth tax, whereas the Government claim to be interested in progressive taxation, but fail to tackle the main problem with council tax by grasping the nettle that it is fundamentally unfair. I will be interested to find out whether they finally grasp that nettle when the Lyons review reports, or whether they will institute yet another review.
We have been arguing for the abolition of the council tax and its replacement with a local income tax since the Conservatives introduced it.
In light of the Liberal Democrats' opposition to the council tax, will the hon. Lady explain why members of her party voted again and again for a revaluation that will hit people hard and make them pay more. Why did they support the Government in doing that?
Surely the hon. Lady is aware that the Liberal Democrats in Wales most certainly voted not only for revaluation, but for the change in formula that took money from rural areas and put it into the south Wales valleys, where Labour authorities had been unable to keep their books in order for many years.
A revaluation is irrelevant if we have a local income tax. If we scrap the council tax, there is no need for any revaluation. It is nonsense to suggest that we are in favour of revaluation. We are in favour of getting rid of the council tax.
In a minute.
We have argued for a local income tax because it is fair and simple and has been proven to work in many other countries and here. Fundamentally, it will allow us to shift the balance of tax raising from national income back to local income. That is what localism is about. If we are serious about localism, we must give councils the power and freedom to raise money and spend money.
I am listening to what the hon. Lady says about local income tax. Does she stand by what she said in the Evening Standard on
"A fair local income tax would be simple and cheap to collect and wouldn't leave people impoverished."
How could it not leave three nurses who live together in a house in the city of Durham impoverished if they have to pay more council tax?
One fundamental problem with any system of local government that is dependent on a central Government formula is that it will relate to the local tax base. A council tax system will always be unfair to an area of above average house prices and below average incomes. Our policy tries to address that.
I give the hon. Lady the opportunity to withdraw her remarks. Is Hansard in 2003 at columns 126, 976 and 339 wrong when it shows Liberal Democrat MPs voting for revaluation?
That relates to a vote on Third Reading. We did not vote for revaluation. [Interruption.] Those are endless numbers and I cannot answer the detail.
The point of introducing a local income tax is that it allows us to shift the burden so that we move from raising all the money through national income tax to raising it through local income tax. We cannot do that with a property tax alone. We certainly cannot do it with an unfair council tax.
I shall give way to the right hon. Gentleman shortly.
Council tax is fundamentally unfair because the poorest 20 per cent. pay far more of their income to it than the richest 20 per cent. That is much more the case for pensioners, who pay six times as much of their income as the richest 20 per cent. That explains the revolt against council tax.
As other hon. Members said, benefit take-up is poor. It is an intimidating process. Two thirds of pensioners fail to claim the benefit that they are owed. We need to end the nonsense which suggests that council tax is easy to collect because property does not move. Some £600 million-worth of council tax went unpaid last year. We now have the spectre of an 85-year-old lady being imprisoned for not paying her council tax, which she says she is unable to pay.
Will the hon. Lady tell the House whether her party's policy for a local income tax remains based on the premise that it would be collected only through the pay-as-you-earn system? If that is the case, how is it fair that those people who are outside the PAYE system, including those people living on investment income and dividends, who are among the wealthiest in the country, would be exempt from making any specific contribution towards local taxes?
The money would be collected using the same process that we use to collect income tax at the moment. It would not be any different.
I shall deal with some of the misinformation circulated by the Conservatives, who do not understand the impact of council tax on ordinary families, because they do not understand how much an ordinary family earns. The leaflets circulated in Cheadle claim that in some areas of Bramhall people would pay much more in local income tax, but, in fact, that would only be possible if they earned well over £80,000 a year. I would be interested to know the workings behind that calculation. I am sure that people on the North Park Road estate would be interested to know that the hon. Member for Meriden believes that the average household income in that area is over £80,000.
The figures in the Conservative leaflets in Cheadle claim that people would supposedly pay much more in local income tax, but I must point out that that is only possible on an income of more than £80,000. So that is a ridiculous claim.
The average household income is only about £23,000 a year, so figures given by the Conservative spokesmen completely misunderstand the earnings of ordinary families. Under a local income tax, about half the population would be better off, a quarter would be about the same, and a quarter would pay more. We have been upfront about that, and the hon. Member for Meriden, the Minister and I would all pay more. That is perfectly fair. Pensioners in Cheadle, however, would do extremely well. Only 4 per cent. of pensioners nationally would pay more. Many pensioners would do considerably better than they do at the moment, and about 6 million of them would not pay anything at all.
It is fascinating to watch the spat between the Liberal Democrat and Conservative Front Benchers. The hon. Lady made a strong point about wanting to return to localism in local government finance. However, is there not a difficulty, given that for many decades a fundamental principle of local government finance has been redistribution from the richer parts of the country to poorer areas? Is that not equally important, and is there not a danger that in her ideological obsession with localism she may lose support for poorer areas of the country?
We need to raise a much greater proportion locally. About 30 per cent. of local authority income is raised locally, and about 70 per cent. comes from a Government grant. We should reverse that 70:30 split. There would still be an equalisation grant, but far money would be raised locally through a local income tax.
A local income tax would be much cheaper to collect—around £340 million a year. It would end the bureaucracy of 352 separate billing authorities, and everything would be done through the Inland Revenue. I shall deal with some of the other nonsense in the Tory motion. The Chartered Institute of Public Finance and Accountancy looked at compliance costs on businesses after it gave evidence to the Government's balance of funding review, and said that it was quite possible to use the coding system, so no extra administrative burden would be imposed on employers. As for local income tax undermining the incentive to work, I suggest that the Conservatives tell that to people who are paying a 20 per cent. marginal tax rate as they struggle to return to work, who find that their council tax benefit is removed.
The Conservatives do not have an answer to the council tax or to the balance of funding crisis. They have opposed every reform that has been proposed, and do not have a clue about returning tax-raising powers to local authorities. That is hardly a surprise, because under Thatcher we experienced capping, the abolition of the Greater London Council and centralised business rates. The Government are in no better position. They have already briefed their favourite journalists at The Times to the effect that they may not do anything at all about local government finance. They have an historic opportunity to do away with an unfair and unpopular tax that has been hanging around their neck since they replaced the Conservative Government. They have an opportunity to shake up local government finance radically, to localise business rates and give them back to local authorities, to get rid of ring fencing and passporting, and to introduce a tax system that would allow us to raise far more of the money locally. Will they do it? I doubt it, because new localism is meaningless. I await a further review.
Order. I should remind the House that a 10-minute limit has been placed by Mr. Speaker on Back-Bench speeches, which operates from now on.
Words to describe the contribution from the Conservative Front-Bench almost fail me. I had hoped that after the exigencies of the election, we might have a rather more reasoned and thoughtful debate, as my right hon. Friend the Minister said, about the future of local government taxation and where it goes. Mrs. Spelman claimed that we did not need the revaluation, which the Conservatives themselves built into the council tax when they introduced it. Revaluation was seen as a logical part of the process because in one year, apparently, house prices were converging, whereas the idea of building a revaluation into the council tax takes account of the difference in prices over the period between one revaluation and another, so the revaluation relates council tax to the real price of houses, rather than to the fictitious base that successive failures to revalue would eventually create.
The hon. Lady contributed a series of non-suggestions for change—for example, by talking about how pensioners would get a rebate on council tax, without stating how that rebate would be funded. As she said, it would have to come from central Government funds, so the proportion of money coming from the centre would be greater, while the proportion from local funds would be smaller.
The third point in the Conservatives' case was that council tax-raising by the Government is a form of stealth tax that takes ever-increasing amounts of money away from local people.
No, certainly not. If the hon. Lady would care to listen, my point is that you cannot claim that you are trying to cut expenditure centrally and at the same time fund the rebates that you propose as part of your policy by putting in more money from central Government. The two do not—
I apologise, Mr. Deputy Speaker. I shall attempt to be more accurate in my remarks.
On the extent to which the council tax is supposedly a stealth tax, the hon. Member for Meriden should refer to the proportion of funding raised by local government as a proportion of total revenue spending in local government year on year over the past seven or eight years, and see what percentage comes from central Government, what percentage comes local government and what percentage comes from business rates. Had her claim been correct, one would expect the proportion raised from local taxes—the money that the Chancellor is allegedly trying to get local people to raise as a form of stealth tax—to rise and the amount coming from central Government to fall. The hon. Lady would find that the opposite is the truth. What is true—perhaps this is a reflection on the future of council tax—is that the proportion of the tax provided by the business rate has fallen substantially in terms of total local government revenue.
I hope that my hon. Friend will be wary of falling into the trap of not recognising that local tax-raising and national tax-raising is taxation raised locally. The moneys come from individuals, local people. The question is how much is retained by the centre and what is done with the revenue. Does my hon. Friend accept that we can never separate local government finance from local government powers? Perhaps Liberal Members have lost that part of the theory. They have come up with a view about local income tax, which has some intellectual coherence, but that seems not to walk alongside the differentiation of local power and national power. There must be a constitutional and democratic settlement to make things work.
My hon. Friend makes a valid point. If it is accepted that more power should be returned to local level, that goes along with the idea that funding for local decisions should be made locally to a greater extent. Decisions on that funding, and the extent of that funding, must be made locally. There are no proposals from Conservatives to raise the amount of money that is raised locally through council tax. Indeed, the opposite is the case, given what they say about how their various giveaways should be funded. They wish to see the proportion of money that comes from the centre increased. At the same time, they say, having examined the charts erroneously, that the sums that the Government are making local people pay through local tax are increasing.
The amount raised by the business rate has fallen. If there is a review and an outcome, the buoyancy of the tax take across the board must be considered as a whole. The hon. Member for Meriden failed to set out the proposal at the centre of her party's proposals when going into the general election. It was proposed to freeze the amount of money going into local government. The hon. Lady shook her head in response to the quote from the shadow Chancellor on
If the hon. Gentleman reads Hansard tomorrow he will see that I stated clearly for the record that our former shadow Chancellor had clarified before the election that local government funding would be increased. The proportionate share between central Government and local government varies by local authority. The global picture disguises the way in which Conservative authorities have been discriminated against.
The hon. Lady is right that the shadow Chancellor clarified the position shortly before the election. Indeed, he did so in February 2005. In a statement posted on the Conservative website entitled "Better Public Services, Better Value", he said:
"Last February, we set out our medium term expenditure strategy. The heart of that strategy is a path for public spending that is affordable . . . in this document we set out how we will achieve that affordable spending."
On page 2, there is a table setting out spending in 2005–08, which was allocated to priority and non-priority areas. Right hon. and hon. Members will be shocked to know that local government expenditure was considered as a non-priority area. They will also be shocked to know that other grants to local government in a devolved Administration in that non-priority group were listed to increase over a three-year period by only 1 per cent. That is equivalent to a freeze in the first two years and an increase of 2 per cent. in the third year. The policy that the hon. Lady has said is not policy, and which was amended between 2004–05, was endorsed by the shadow Chancellor in the document of 2005. That illustrates the bankruptcy of the Conservative proposals on local government.
We need to consider some aspects of council tax, including, as the Liberal Democrat amendment suggests, the way in which local government taxation is geared. The gearing effect shows that decisions on local government taxation automatically inflate in terms of the council tax-raising decision and the budget-making decision that precedes it. However, the Liberal Democrats have failed to see the central point. Indeed, the hon. Lady's predecessor, who was in the Siberian power station position of defending Liberal Democrat local income tax proposals, said that under his policy he would have to put £1.7 billion into the pot to keep local income tax rises at 3.5 per cent. for the first year. He was, I accept, very honest when he said that that amount had gone up from £1.7 billion to £2.4 billion—again, money from central Government resources. Local income tax completely fails to deal with the gearing problem in local government taxation.
It is a two-stage solution, as it is not possible to do everything in one go. We need to get the system in place and let it bed down, and then shift from national to local taxation. Without a coherent system, it is not possible to do that.
I think the hon. Lady is saying that over a period of time the local government settlement becomes even more highly geared—that is, more money comes from the centre and less from local government, and eventually the position switches to a greater amount of money coming from local government than from the centre, in which case local income tax rises very substantially. The whole basis of the local income tax proposals—as currently presented, for all I know, in the Cheadle by-election—is that rises are kept down to about 3.5 per cent. a year, which can only be done by smoke and mirrors.
I only had 10 minutes, and I am afraid that I cannot give way any more.
In other words, a lot more money will have to be put in from the centre to keep the whole rickety show on the road. The truth is that, as the balance of funding review said, a local tax derived from property that is difficult to evade, relatively straightforward and cheap and simple to collect is probably the best way forward for local taxation. However, it requires several changes that reflect how taxation can be affordable, how the gearing process works, how the business community relates to local government in terms of paying for it, and how the palette of taxes might be broadened in order to make that whole burden bearable. The balance of funding—
Since I have been in this House, we have moved from the rating system, through the poll tax, and on to the council tax. People are now saying that none of those worked and we need another kind of tax. The real problem with the council tax, which was welcomed when it was first introduced, is the increased burdens that the Government have placed on local authorities without providing the funding to ensure that there is not a hugely increased charge to council tax payers.
The hon. Lady must let me say a couple of sentences before she tries to intervene, but I will give way in a moment.
The council tax has become unpopular simply because of the large increase in costs. It is therefore not unreasonable for thoughtful people such as the Liberal Democrats to say, "Ah, but wouldn't it be more reasonable if we had a local income tax, because that would be fairer and more attuned to people's ability to pay?" I believe that they are well intentioned, but misguided.
First, who would pay it? According to the Library, where I got some statistics today, there are approximately 38.3 million people of working age in this country, of whom 12.2 million do not pay income tax. On the other hand, 5 million pensioners pay income tax. Students, who do not currently pay council tax, would pay local income tax if they earned money to sustain themselves in their time at university. However, if we had local income tax in my constituency, the hundreds of foreigners who own holiday homes there would not contribute because they do not pay tax in this country. Probably 1 million foreigners, who would not pay local income tax, own property in London. Yet they use services, often placing a huge burden on the services that local authorities provide.
Well, at least we have one little extra gem to add to our understanding of Liberal Democrat proposals.
Local income tax would have a narrow tax base. Some boroughs would have few income tax payers. Either they would become increasingly dependent on central Government funding or the few income tax payers left in some poor boroughs would pay massive amounts of local income tax. They would bear a swingeing burden. It has already been said that hard- working husbands and wives, with heavy responsibilities, would be worse off. I do not know whether the Liberal Democrats propose to do something to help them.
The real problem with local income tax is that the administration is so difficult. First, unlike in some other countries, people in this country do not pay income tax where they live but where their employers are based. Local authorities that wanted to collect local income tax would have to find out where residents' employers were based. They would have to apply through the employers to the tax office to find out those residents' incomes. It is no good the Liberal Democrats claiming that it can be done through the tax code; it cannot. The tax code gives information only about a person's allowances, not a person's income. Unless the local authority knew the income of each tax-paying individual in the local district, it could not calculate the product of a local income tax. It would be flying in the dark. Officials at the town hall would need to know the income of every resident in the area.
The fallacy in the hon. Gentleman's point is the assumption that the local authority would need to know anything about taxpayers' affairs. As in other countries, the system would be prepared through the national tax authorities. All they have to know is where people live. They already know that; otherwise, how would we receive our tax notices?
There we are. We revert to the point that the tax would be nationally based and subsequently redistributed. It would be a central tax. The hon. Gentleman is right that that is exactly what happens in Germany, where a national tax is distributed to local authorities. That gets rid of the independence of the local authority. Local authorities would need to know the income of people who lived locally; otherwise they could not set a rate. A huge administrative burden would be placed on local tax offices.
The biggest problem with local income tax, however, is that it creates ghettoes of the rich and poor. I shall explain how that works. If we take the two London boroughs of Lambeth and Wandsworth, we can already see the effect that has been created just through the council tax. Relatively poor Lambeth has relatively high rates of local taxation and substantial Government subvention, whereas relatively prosperous Wandsworth has become more prosperous because it has a very low rate of council tax.
If that is true in the case of council tax, how much more true would it be if a local income tax were introduced, and people were to have their money directly plundered by the Liberal Democrats? The rich would vote with their feet. They would move from areas of high local income tax into areas of low local income tax. They would be able to afford to do so, but the poor would be trapped in areas of high local income tax as they would not be able to afford to move.
The only way in which that problem could be overcome—I am anticipating what Mr. Davey is going to say about this—would be to have even larger Government grants to the areas with high rates of local income tax. That would create even more dependency, as well as taking away from the poor areas the very autonomy that the Liberal Democrats profess to want for them. This is a lunatic system that could only have been developed by the Liberal Democrats. Only they could be so silly as to propose something like this. In the ghettoes that they would create, there would be huge numbers of people who would vote for better and better local services in the certain knowledge that they would not have to pay for them, and that somebody else would.
I am sure the hon. Gentleman has studied the way in which local income tax works in Sweden, Finland, Norway, Denmark, Switzerland, Japan and many states in the US, where there is more decentralisation and more money raised locally. None of those systems has any of the features that he has just mentioned. Would he like to study the systems in those countries, because that is where they are working in practice?
I am grateful to the hon. Gentleman for raising that point; I was just coming to it myself. I have read the study produced by Cardiff university on the very paragons that he has just mentioned. It criticises local income tax in Scandinavia for having the following disadvantages: its base is limited by options decided at a higher level; it is not very transparent, in that local tax policy and national tax policy are difficult to separate, as I am sure the hon. Gentleman would happily confirm; and the joint nature of the tax means that central Government are involved in setting the base and the rate of tax,
"thus lessening the autonomy of the local authority".
And, as I pointed out earlier, the system in Germany involves a percentage of central income tax being handed out. The same applies in Austria. Moreover, Scandinavia, about which the hon. Gentleman is so enthusiastic, does not have a graduated system; it has a proportional system that is extremely regressive. Is that really what he wants to introduce in the United Kingdom? Perhaps it is. If so, we are glad that we are being told that that is what the Liberal Democrats want.
We could, however, refine the existing system in the ways that my hon. Friend Mrs. Spelman has outlined. I would go a little further. One of the inequities of the present council tax system is that it does not take sufficient account of the composition of a household. It makes some recognition of it, but there are many households, in my constituency and everywhere else, with a large number of people of working age who do not effectively make an adequate contribution to local taxation. Yet there are others with a single person or a pensioner couple that are effectively paying more than their fair share for the services that are provided. If we are to reform the council tax system, I suggest that we adjust the council tax more adequately to reflect the composition of households. That would not be difficult; the necessary information is available from the census data or through voter registration details. It could therefore easily be done, and it would create a much fairer system than the complete dog's breakfast proposed by the Liberal Democrats.
I followed with interest the speech of Sir John Butterfill, which started very well. It was particularly good when he was demolishing the Liberal Democrat case for a local income tax, which he did with considerable skill and accuracy. Unfortunately, he spoiled the good effect by veering in the last minute of his speech into a return to the poll tax. It is one of the extraordinary features of today's Conservative party that it remains absolutely wedded to the belief that if it could get itself back to where it was in the 1980s, all would be well. Political parties that are obsessed with the past rarely command the confidence of the public. Thinking that it can find a solution to local government finance by going back to the kind of principles that generated the poll tax seems to be a delusion that is sadly typical of today's Conservative party.
I fear that the right hon. Gentleman does me an injustice. I was opposed to the poll tax when it was introduced, and I proposed an adjusted rating assessment, because the big attraction of the rating assessment, and the council tax, is that it is collected simply from the head of household. All that I was suggesting is that council tax ought to take household occupation into account more than at present.
I hear what the hon. Gentleman says, and I will not pursue that, as there are points of principle that I do wish to pursue. Any attempt to move back towards a flat rate tax related to the numbers of people living in a household would be a profound mistake, as the country rightly and overwhelmingly rejected the whole ethos of the poll tax that characterised the Conservative party in the 1980s and early 1990s.
One of the curious features of today's debate is the extent to which the two Opposition parties have been vying with each other—something on which other contributors have commented. It is strange that they should attach more importance to the short-term interests of the Cheadle by-election than to the long-term interests of developing a credible system of local government finance for this country, which is what we need. Let me consider some of the serious weaknesses in both their positions before concluding with a few thoughts about what should guide the way forward.
The Conservatives have been advancing the extraordinary proposition that one can have a system of taxation based on property values without the need for revaluation. Mrs. Spelman recognised, I think, that that is completely untenable. She then proceeded to say that they were not totally opposed to revaluation, although the motion in her name and that of the Leader of the Opposition talks about cancelling plans for a council tax revaluation, which indicates pretty clearly that they are opposed to revaluation. She acknowledged that there was a need to take some account of values, but advanced the preposterous suggestion that because of some degree of convergence between property values in different parts of the country, there would currently be no need for a revaluation.
I explained that, according to the Halifax building society, there is a clear convergence. Given the argument that the right hon. Gentleman is promoting, however, how does he explain the situation that pertains in Northern Ireland, which still has the rates system but has values based on 1975? That does not seem to present a problem in Northern Ireland.
It is completely untenable, for reasons that I shall outline, to have a values system based on historic values without any revaluation. Let me tell the hon. Lady why.
First, there is the nonsense of new properties being built where a notional value must be imputed as to what that property might have been worth 15 years ago. That is difficult enough if one is building a property in a developed area, but in an area which was previously entirely undeveloped, it is a completely ludicrous process. Secondly, when properties change hands and new values are applied, unfairness will inevitably be created. Two identical properties next to each other will have different valuations, purely as a result of a change of ownership in the intervening period, which is absolutely intellectually incoherent. Thirdly, the whole system is increasingly out of date, because it is based on values created 15 years ago. For all those reasons, it is intellectually and economically illiterate to suggest that one can have a system of council tax without the need for periodic revaluation. That is why we introduced arrangements for a regular 10-yearly revaluation. The Conservatives made fun of the Liberal Democrats for voting in favour of revaluation during the Committee stage of the Bill that became the Local Government Act 2003. The Liberal Democrats said that they did not vote for it on Third Reading. They do not seem to know where they stand.
It is nice to see the right hon. Gentleman on the Back Benches, although we enjoyed his performances on the Front Bench.
There was not a single vote on revaluation in Committee. The only amendment was tabled by the Conservative spokesman, Mr. Clifton-Brown, who proposed five-yearly revaluations. There was no vote on revaluation on the Floor of the House. The only votes in the House took place on Second and Third Reading.
As the right hon. Gentleman knows, there was much in the Bill for which we had campaigned for many years. We did not support revaluation, but we supported many good things such as prudential capital borrowing.
The truth of the matter is that both Opposition parties are up a gum tree. One argues against revaluation now, but in Committee argued for five-yearly revaluations; the other adopted the view in Committee that revaluation was sensible, but now, because it is embarrassed about that, says that on Third Reading it did not vote for it.
This is nonsense, and the motive behind it is the revealing factor. Both parties are positioning themselves in the short term so that they can attack and criticise the revaluation when it happens without being in any way to blame. That is the position of the politically—let me choose my words carefully—the politically unprincipled, who simply wish to attack and criticise without having a credible alternative to offer.
Speaking of the politically unprincipled, one of the things that have consoled us since the right hon. Gentleman's removal to the Back Benches is the number of articles that he has been writing on local government finance. Next to those articles have appeared news items from the Government suggesting that they are going wobbly on revaluation, rebanding and the whole process of local government finance. Are they being opportunist?
I am delighted that the hon. Gentleman is reading my articles in the "Municipal Journal" and other organs. I am sure that he agrees with much of what he reads, because he has some experience of local government. Despite his present difficulty, caused by the position that his party is temporarily adopting for expedient short-term reasons, I think he will understand that Labour is the party that is currently pursuing a credible policy to try and create a long-term, viable system of local government finance.
Let us now consider the Liberal Democrats' local income tax. Carried away by its vacuous slogan "Axe the tax", the party came to believe that this was the panacea and the miracle for them, but I am afraid that the rhetoric concealed all the defects of the local income tax. It is administratively complex, as the hon. Member for Bournemouth, West pointed out.
No. My time is limited, and I have already given way to a member of the hon. Gentleman's party.
The local income tax system would be inherently complex, with 400 authorities setting different rates. It becomes even more complex when we take account of the fact that unlike properties people move, because that means that there must be an arrangement for apportionment between areas. There would be huge additional pressures on employers, who would have to cope with the new coding arrangements. All that leaves considerable scope for evasion. The council tax is relatively easy to collect, and is difficult to avoid.
The second problem with the local income tax is its unpredictability. That does not apply to the council tax. Local authorities could find that following the closure of an important factory, there was a dramatic fall in their revenue in the short term and no means of covering it. That is clearly a serious weakness.
Thirdly, the local income tax is inherently unfair. If the Liberal Democrat proposals exempt those who do not contribute through the PAYE system, they are essentially exempting several hundred thousand of the richest people in the country, who are living on investment income and dividends, from making any contribution to local taxation. That is a scandal. Coming from a party that talks of fairness, it is one of the most ridiculous and absurd propositions that could be advanced.
So the positions adopted by the Liberal Democrats and by the Conservatives are untenable. By way of contrast, the Government have rightly set up the Lyons inquiry, entrusting this work to Sir Michael Lyons, who is one of the foremost experts in the country. He is widely respected and is giving careful and thorough attention to the various issues. I am confident that he will produce a credible package of proposals, in line with the brief that he was given, as outlined by my right hon. Friend the Minister of Communities and Local Government. It is important that we await Sir Michael's findings before jumping to conclusions or advocating a particular course of action. [Interruption.] The hon. Member for Meriden is nodding; I counsel her to await Sir Michael's report and recommendations before jumping to any conclusions about revaluation. She will recognise that in a taxation system based on values, there will be a need for regular revaluations. I am afraid that the motion tabled in her name would have to be withdrawn or amended in the light of those recommendations.
Sir Michael's work and the preceding work of the balance of funding review, which I am proud to be associated with, give us an historic opportunity to establish a long-term framework for local government finance that provides greater certainty and greater devolution to local authorities—so that they can take decisions and raise money themselves—but which also recognises the importance of an equalisation framework in ensuring no undue disparities between areas, and gives incentives for high performance and the delivery of high-quality services. That should be our aim and objective—local government empowered to serve communities in the most effective way, with a sustainable long-term finance system that is not the subject of short-term political squabbling among parties. I hope that Sir Michael will be allowed the freedom to produce his proposals, and that the Government will then introduce sensible proposals for reform, based on his propositions.
It is a pleasure to follow Mr. Raynsford, to whom I shall refer later on, if I may. I do not usually begin a speech by disagreeing with my own Front Benchers, and I do not intend to do so today. However, I should point out to my hon. Friend Mrs. Spelman—she is no longer in her place—who said that 76 per cent. of people blame the national Government for the level of local taxation, that although that is doubtless true nationally, on the Isle of Wight it is not. There, it is the Liberal Democrats who are blamed for the level of local taxation. The people of the Isle of Wight understand that if one spends more, one has to tax more. The Liberal Democrats do not seem to have understood that point in proposing their panacea of local income tax as an alternative to council tax.
The Liberal Democrats do not seem to understand that shifting the taxation burden from a ratio of 30:70 to 70:30, as Sarah Teather suggested—she is also no longer in her place—would place an additional burden on the taxpayer. Such a proposal would be particularly burdensome in areas of low income such as my constituency, which has one of the lowest average income levels in the country and a very small number of higher-rate taxpayers. In other words, it has very few people who could afford to pay the level of tax that translating from the Isle of Wight's council tax to a local income tax would involve. As a result, the rate of tax would have to be pushed up. Nothing that I have heard so far from the Liberal Democrats during this debate has explained how they intend to help people in areas of relatively low income.
Does the hon. Gentleman agree that those of his constituents and mine who are on average earnings would pay more under a local income tax scheme? During the general election, the Liberal Democrats' website verified that two average earners in my constituency—a policeman and a nurse, let us say—would pay more. Alas, that evidence has been removed from the website, as it became an embarrassment to the party.
The hon. Gentleman is, of course, absolutely right that they would have to pay more: the lower the average income in the constituency, the higher the rate at which local income tax would have to be levied. I have to say that I did not spend much time during the general election looking at the Liberal Democrat website. I had much better things to do, but perhaps we are about to hear an explanation now.
It is no part of the Liberal Democrat proposals that we remove all equalisation between local authorities. We believe that the amount of equalisation is currently greater than is necessary to overcome the disparities between different councils. Unlike Mr. Pickles, I refer to different councils rather than overall regions.
I am grateful to the hon. Gentleman for making that clear. We are drawing out some interesting information from the Liberal Democrats. First, we had business rates for second home owners; now we have the idea that some local authorities do not need equalisation. Perhaps the Liberals would place on their website a list of the local authorities that do not need any equalisation. It would be interesting to voters in those councils to know that they are being targeted by the Liberal Democrats to make a bigger contribution to local tax than before.
The problem with local tax is that the more money is spent, the more has to be raised. That is a fundamental fact that the Liberal Democrats will not accept. They will not accept that if a council spends more or wastes money, more has to be taken from the taxpayer. That is at the root of their troubles. That is why my local authority had to raise local taxation over the last four years by almost 50 per cent. I repeat that the Liberal Democrats raised taxes in the Isle of Wight by nearly 50 per cent.—something that even the Chancellor of the Exchequer has not achieved. He managed to achieve a 60 per cent. increase over eight years, but the Liberal Democrats achieved a 50 per cent. increase over four years.
You will not be surprised, Mr. Deputy Speaker, to know that the Liberal Democrats were roundly rejected in the county council elections, which coincided this year with the general election. Where they, along with their independent allies, had formerly had a majority of seats, they were reduced to five seats out of 48. That is because the people of the Isle of Wight understand that if more is spent and more is wasted, taxation will be greater and it will be local people who have to pay the tax.
By gosh, the Liberal Democrats did waste more. Let us look at how they administered the fire service on the Isle of Wight. It was described as "wholly ineffective" by the Audit Commission, which also pointed out that ideas for change were simply "not taken seriously". Because of the incompetence with which the Liberal Democrats administered the service, we were in danger of losing not only our fire control room, but entire control over the fire service from the island to the mainland.
On highways, the Liberal Democrats were criticised by an Audit Commission report three years ago not only for having some of the worst roads in the country, but for not spending the amount of money set aside to improve the roads.
On schools, we found, in the words of the Liberal Democrat portfolio holder for education, that standards were "too low" and "County Hall leadership wanting". Those were her words, so what was the Liberal Democrat solution? It was to spend £500,000 on a report about how to improve standards in schools. However, that report came up with nothing about improving standards, only with a reorganisation. It produced nothing about standards; it was all about structures—precisely the sort of thing that the Government criticise. It came up with a £70 million reorganisation with no idea of where that money would come from. It is not surprising that the Liberal Democrats went into the election somewhat lacking in the confidence of my constituents on the Isle of Wight.
The crowning glory of the Liberal Democrat election campaign was their proposal for a tourist tax. You will be aware, Mr. Deputy Speaker, as are many hon. Members who visit my constituency, that the Isle of Wight is a glittering jewel in the tourist industry, which serves many people from all over the country very well. It is a very popular place to visit, but three months before the local election, the Liberal Democrats dreamt up the idea of a tourist tax. They disguised it, of course, as Liberal Democrats often do, and called it a visiting vehicle tax. Whether people arrive by ferry or by air, most use a motor car to get around the island—
Have we not had an announcement today of a new tourist tax that would affect the Isle of Wight and many of the hon. Gentleman's constituents, because the Liberal Democrats have announced that they would impose business rates on holiday homes?
Indeed, but I am not sure of the consequences. It would take more research than I could expect the Library to do in a few minutes.
The proposal was one of the most un-thought-through of even a Liberal Democrat manifesto, because the consequence of a tourist tax is to drive tourists away.
Is my hon. Friend aware that that is not the only tourist tax that the Liberal Democrats suggest? They are also suggesting a tax on hotel accommodation.
I assume that the Liberal Democrats want everyone who comes to the Isle of Wight to walk there on water and then live in a tent. When they calculated the effect of their tourist tax, they did not allow anything for collection. Eventually, they were forced to claim that the tax would be only about £1 a tourist. How much would it cost to collect £1 from every tourist, but not from those who live on the Isle of Wight? I would imagine that it would cost more than £1 to collect that, so the poor benighted taxpayers of the Isle of Wight, had they been foolish enough—thankfully, they were not—to re-elect the Liberal Democrats to county hall, would have paid more to collect that tax than it would have raised.
The record of the Liberal Democrats on the Isle of Wight speaks for itself and it is reflected in Liberal Democrat councils up and down the country. They sold a property for £100,000 that was subsequently sold for £1 million, a loss of £900,000 to the taxpayers of the Isle of Wight. It was the Prince Consort in Ryde, in case anyone wishes to queue up for another property at such a price. They should bear in mind, however, that the new administration will take more care to sell things at their proper value. The Liberal Democrats also rented some office accommodation, called Enterprise House, for £300,000 a year and then left it empty. They built a lay-by for £250,000 and employed four chief executives in four years. They held a very successful pop festival, now in its third year, but they budgeted £30,000 for it in the first year and spent £380,000. They also tried to sell a property known as Northwood House, but they had to pay compensation to the prospective purchaser, because they discovered that they did not own the property after he had incurred considerable expenditure. That is the record of the Liberal Democrats in my constituency.
When the right hon. Member for Greenwich and Woolwich, the former Minister, undertook his balance of funding review three years ago, the county treasurer predicted that the Liberal Democrats would have to put up local taxes by 11 per cent. to account for the loss of money that the Government would take away. In the event, the Government gave the council more money—unlike most Conservative councils—so I led an all-party delegation to meet the right hon. Gentleman. Out of his munificence, he took £1 million from Hampshire and gave it to the Isle of Wight. The total benefit has been £13 million over the past three years, but the reaction of the Liberal Democrats was not to increase council tax by 11 per cent., but to increase it by 14 per cent.
That is the record of the Liberal Democrats. If one spends more, one has to tax more. That is what drove the Liberal Democrats out of control after 20 years in county hall on the Isle of Wight and will doubtless do so elsewhere. It is said, "If it ain't broke, don't fix it." Well, I recognise that the local government funding system is to some extent broke, and needs to be fixed. If it is to be fixed properly, we need to identify the causes of the breakdown before we try to fix it. The cause of the breakdown, whether it is the Liberal Democrats locally or the Labour Government nationally, is trying to screw too much out of the taxpayer. We should all remember the message that if one spends more, one has to tax more.
I have listened to the debate with great interest but with sadness, because it is depressing that after eight years in opposition the Conservatives have failed to come up with any detailed proposals for a replacement for the tax they introduced in such haste to replace the deeply unpopular poll tax. This Government understand the need for a detailed and thoughtful approach to this complex subject.
For the Opposition to give an open-ended commitment, which would have to be met by the general taxpayer and central taxation, to support pensioners, whether well-off or not, is rash. Their sweeping commitment takes no account of the annually changing local government tax-raising level. The Chancellor of the Exchequer of course fully understands that position, which is why he has ensured that this year pensioners were protected from the excessive pressures put on them by council tax increases.
The Conservative proposals—I say that generously, as we have heard only one idea—do nothing to assist hard-working families or students. If additional payments to pensioners are to be made, the funding would have to be found from other taxpayers. Surely, it is better to work towards a fairer system of local taxation, so it is right that Sir Michael Lyons be given time before reporting to consider fully the implications of all the issues, such as rebanding, revaluation, council tax benefit, and how any changes will affect all groups in our society. He, too, understands that we cannot have a property-based tax without a revaluation process. Just about everyone understands that, apart from Her Majesty's Opposition.
The Opposition fail to understand the complexity of the local taxation system, but the Liberal Democrat proposals are seriously problematic, too. Sir John Butterfill, who is not in the Chamber at present, made an effective demolition of the Liberal Democrat local income tax proposals. Have the Liberal Democrats considered the impact of those proposals, especially on the accounts departments of small and medium-sized businesses? Those businesses would have to cope with individual workers living in different local authority areas, all with different levels of tax, and who might, when they moved house, be required to have a complete reassessment of their tax position. That is a recipe for complexity, delay and error.
Has the hon. Lady read the Chartered Institute of Public Finance and Accountancy report, in 2004, on local income tax? It shows that pay-as-you-earn coding could be altered so that the employer had all the details of each employee, so no change would be needed and the system could operate exactly as it does now at no extra cost.
Is not one of the complexities of this crazy local income tax scheme that the tax could vary in different parts of the country? The situation could be complex for the accounts department of a local employer with employees who lived in a variety of places.
Thank you, Mr. Deputy Speaker. I had not appreciated that the hon. Lady would conclude her remarks so rapidly.
I am interested in the debate because council tax was the issue above all others that was raised with me on the doorstep during the election. That may have been due to the accident of council tax bills arriving shortly before the election was called, but the issue is alive and well.
It is important for Labour Members to hear the experience of those of us who represent rural seats, because in the Ludlow constituency, which I am honoured to represent, there are no longer any Labour elected representatives, except for one on Bridgnorth district council who gamely bears the flag. However, there are no Labour candidates standing in South Shropshire district council. Consequently, it is very hard for those who are interested in supporting the Government to do so in my constituency, I am pleased to say.
We in the Ludlow constituency have a regrettably low average income. I will return to that in a moment, but it colours my remarks. Council tax is a severe burden on many people in my constituency—especially for those on fixed incomes, and pensioners, as other hon. Members have remarked—but we are fortunate in that we can compare and contrast the approach that at least two Opposition parties adopt to the levying of local authority bills. We have two district councils in the Ludlow constituency—South Shropshire, which is dominated by the Liberal Democrats, and Bridgnorth, which is led by a Conservative and independent administration—and I should like to share with hon. Members the contrasting approach to council tax of those two authorities.
Eighteen months ago, the Liberal Democrats proposed a medium-term financial strategy, with a staggering 9.5 per cent. a year increase in council tax proposed for each of the following three years. They were only prevented from introducing such a high increase thanks to the Deputy Prime Minister choosing to reintroduce the capping of local authorities and their fear that that might happen both last year and this year ahead of the general election.
By contrast, I, who happened to be leader of the Conservative group on South Shropshire district council, proposed a zero per cent. increase in council tax, without any cuts in services. Another contrast is provided in our neighbouring authority—Bridgnorth—where the district council rate for a band D property is almost exactly half of that levied by the Liberal Democrat administration in South Shrophshire.
I am pleased to see David Wright, who is a neighbouring Shropshire MP, joining us in the Chamber. I have been explaining how difficult it is for members of the Labour party to get representation, but they obviously have a representative in the House.
It may be of interest to hon. Members—certainly to Ministers—to know that, since the Liberal Democrats took control of the local authority in Stockport in 1999, band D council tax has increased by £335, to £1,252, which is significantly above the national average and an increase of nearly 37 per cent. over five years. Stockport has some relevance to the electors of Cheadle at the moment. My prediction is that if we were to go down a local income tax route, those of us who are unfortunate enough to be represented by Liberal Democrat authorities would face considerably larger increases each year than those of us who live in Conservative authorities.
One of the specific problems that I should like to highlight—my hon. Friend Mr. Turner has referred to this—relates to the balance of funding and equalisation issue and the redistribution of funds raised locally from those areas, such as my constituency, with lower than average incomes. Where incomes are lower than the national average, there are clearly two ways that the amount of revenue could be found: either by substantially increasing the average local income tax levied by that authority, or by increasing further the amount of equalisation funding that would come from central Government.
It is hard to understand how either way would benefit the authority's residents, such as those in my constituency, who would either have to rely on central Government handouts even more than they do at present or suffer a substantial increase in local income tax. The Liberals have estimated a 3.75 per cent. average local income tax if their proposals were introduced throughout the country. We estimate that they would need to raise between 6 and 7 per cent. in our area—roughly double their estimate—to secure the same local authority revenue, because incomes are substantially lower than the national average.
The next point that I wish to touch on briefly is the question of administrative complexity. The Liberals have placed great faith in the Inland Revenue's ability to see through the coding structure and the huge potential complexity of individuals being charged different precepts in different areas. Many of my constituents, particularly in the east of the constituency around Bridgnorth, work outside the local authority area in which they live. The Inland Revenue would have to find out in which county, district, region—God forbid that the regional income tax that the Liberals want is introduced—town and parish those people live, because each authority would have the potential to levy a variable rate. Each individual may move in the course of a year. I accept that, at present, the Inland Revenue has an address, but it would have to be notified each time someone moved.
The hon. Gentleman says that the Inland Revenue could be notified once a year, but it would surely have to change the tax coding during the year if a person moved more than once. That point is not taken into account.
The Liberals claim that the Chartered Institute of Public Finance and Accountancy has come to their aid on the point about administration, but it said on
"assuming a variable LIT rate, we have estimated the additional compliance burden"— on business—
"to be £100 million, based on additional time devoted to administering a large number of annual coding variations".
CIPFA also noted that it would take as long as five years for employers to introduce the necessary changes to their own coding structures and to be ready for the introduction of such a tax. I do not think that CIPFA has helped the Liberal Democrats' case unless they want to impose further administrative costs on business. That may well be the case.
CIPFA has also considered the issue of equalisation and the same report says:
"LIT would . . . place greater demands on the need for resources equalisation between areas . . . As a consequence, there is a possibility that although the perverse effect of high gearing on the overall average tax rises would be reduced, the ratios for a number of individual authorities could grow wider."
In effect, there would be increasing demands in different authorities for more central Government intervention. That is precisely what many of us are trying to avoid in the existing council tax scheme.
For those reasons, a local income tax would be exceptionally difficult and would not achieve the laudable aims that the Liberal Democrats might originally have set for it.
I welcome this debate on a subject that is of great concern to many of my constituents in East Dunbartonshire. The Conservative Members who have spoken are certainly right in one respect—the current system of council tax places an unfair burden on many people, particularly those on low incomes such as pensioners. Across the country, council tax bills have risen faster than inflation as local authorities have struggled to cope with additional responsibilities handed down by central Government, but often without the additional resources to deliver. Thus the council tax has essentially been used as a stealth tax, often penalising those who can afford it least.
It is a shocking state of affairs that the poorest people pay 6 per cent. of their income in council tax but the richest pay just 1.5 per cent. That surely cannot be right and it shows just how regressive and unjust this tax is. It is only due to get worse with the proposed rebanding exercise. We have already seen what has happened in Wales, where many people are now paying much more. For example, in Cardiff, two thirds of houses went up at least a band. Scotland, thanks to the Liberal Democrats, has a reprieve from the council tax revaluation while the independent review looks into the issue of local government finance.
When I was a Member of the Scottish Parliament, I distinctly remember that the Lib Dems supported a rise in business rates with the Labour Administration. At no time under both coalition agreements—first in 1999 and then again in 2003—was local income tax, or indeed the regressive rate of council tax, raised by the Liberal Democrats at all. Is that not completely contrary to your position here today?
I welcome the hon. Gentleman to the House. He will recall that the Liberal Democrats in Scotland consistently argued that the council tax was unfair. Through the many negotiations in which the Liberal Democrats have taken part, we have secured many policy commitments that the people of England and Wales do not enjoy, such as free personal care for the elderly and the abolition of tuition fees. We are campaigning on council tax and I have put forward a submission to the independent review that argues strongly for getting rid of the council tax and introducing a local income tax.
The main problem with the current system is that it bears no relation whatsoever to people's ability to pay. Many of the people who have complained to me about the unfairness of council tax are elderly, which is not surprising because it is an especially unfair tax for pensioners. They might be living in a fairly sizeable family home, but they have a much smaller income than they did in the days when they were out working and paying the mortgage. We have now reached the point at which no amount of tinkering around the edges will solve the problem. The pre-election bribe to pensioners of a one-off payment to help with their council tax did not fool anyone. The problem is the unfairness of the system, which will not be solved by further complicating the council tax through handouts and making special cases. Instead, the best solution is a local income tax.
During the recent election campaign, I found strong support in East Dunbartonshire for the policy of replacing council tax with a local income tax. In fact, I was moved to speak in the debate following an experience that I had last Friday night. I was knocking on doors in Bishopbriggs—what better activity could there be for a Friday evening—and met a gentleman and his wife to whom I spoke about a range of issues. He said that council tax was the most important issue to him and made a plea to me to keep pushing for a local income tax because the council tax was so unfair. He explained the problems that it was causing him and his wife as a pensioner couple who had bought their semi-detached home many years ago. They did not want to feel forced to move out of their home as a result of council tax bills. I promised him that I certainly would continue to argue for an end to the unfair council tax and its replacement with a fair alternative, so that is what I am doing.
In debates such as this, I often find, as I have today, that incorrect assumptions are made. I represent what has been described as the most middle-class constituency in Scotland, so some might assume that advocating a local income tax would be a vote loser in the affluent area of Bearsden and Milngavie—quite the contrary. Amidst the leafy suburbs, there is hidden poverty, often pensioner poverty. While we in the House might be privileged to earn salaries that are far above the norm, let us not forget the reality in our constituencies. Even in my middle-class constituency, the average household income is less than £25,000. Quite frankly, bandying about figures suggesting that an average household in Britain has two full-time wage earners bringing in more than £50,000 a year just helps to reaffirm in people's minds the feeling that politicians are out of touch. Let us not fall into that trap, because I am sure that no hon. Member here wants to be seen as out of touch.
I intend to go directly to the Commons Library to check the hon. Lady's two assertions that she represents the most middle-class constituency in Scotland and yet its average household income is less than £25,000 a year. Those two facts seem to be utterly irreconcilable.
That demonstrates my point. If you check the figures, you will find that in Richmond, which many people see as affluent—
I apologise, Mr. Deputy Speaker.
If the hon. Gentleman checks the Library figures for Richmond, which many people would agree is an affluent area, he will see that it has an average household income of £27,000 a year. People tend to forget that most households do not have two full-time wage earners. Many households are made up of pensioners, one person earning a wage or people working part-time. That adequately demonstrates my point that politicians are often out of touch with what is happening on the ground.
Finally, I cannot resist noting the irony of the Conservatives calling for this debate. Perhaps that is because I am from Scotland, where the lasting image of the Conservatives is one of Thatcher imposing the poll tax. She used Scotland as the guinea pig, and of course the protests went unheeded until England complained. During the recent election campaign, the Conservative leader said:
"Council tax is the best form of local taxation there is".
Such disregard for people's huge concerns about the council tax system, coupled with the memory of the imposition of the poll tax and the blatant lack of substance of policy, means that the Tories have no credibility on this matter.
It has been said that council tax became unpopular only when it started to increase. That is probably true. There is no doubt that it is a fact in my constituency. It is not only the increase that is the problem, but the increasing knowledge among local people of what is happening to that money. Council tax in Guildford has risen by 92 per cent. since 1997–98. That is, without a doubt, mirrored to some extent in Waverley. We heard that the average council tax on a band D home has gone up 76 per cent. in the same period. Now we all face the revaluation. I cannot tell hon. Members how worried residents in Guildford are about that, and the experience in Wales does nothing to reassure them.
We heard a long speech about local income tax from the Liberal Benches, but I must be allowed my two-pennyworth. What about hard-working families? What about the teacher and nurse who live together? What about the pensioners and their savings, from which they derive a much-needed income? It irritates me enormously when the Liberals refer to pensioners. Some pensioners are slightly wealthier than others. Not all are poor. Some have worked hard all their lives and saved hard, but they are going to be taxed on that income. Also, what about students? What about people in residential care homes and nursing homes? All those people would be hit by a local income tax.
I have a list of all the taxes favoured by Liberal Democrats, who love taxes because they think they keep people in their place. They are: VAT on new homes, stealth inheritance tax, speed camera tax, rubbish tax, plastic bag tax, parking taxes to shop, parking taxes on business, land tax, income tax at a new regional rate and a new local rate, hotel taxes, 4x4 taxes. I could go on—
I could, but the fact remains that the local income tax would still be collected by central Government. Nothing local is going to happen on local income taxes.
Hon. Members talked about the various ways of raising money for local services. What is talked about less is what happens to the money when we have got it. That is my problem with the Government. The burden of red tape, regulation, the extra services and the hoops that local councils have to jump through increases yearly.
I defy anyone to find me a local government officer who would not say the same thing. Councils have to provide more and more, and jump through all the hoops, but they are not receiving the funding that should come with it. Local government is without doubt enormously complex, but the increased burden of regulation, red tape and all the things that councils have to do means that it is getting unbearable. Most local government officers feel that there is a tight rope around their waists.
I have campaigned yearly on the council tax increases in Guildford. I even took to the streets and marched from one end of my constituency to the other. It is a shame that people do not take to the streets more often. I did that because of the 92 per cent. increase in council tax for the people of Guildford. It is unbearable. It cannot go on, and they cannot go on paying for central Government regulations that are passed down, with the burden shouldered by local people.
I am pleased to participate in this important debate on local taxation, which is probably one of the most pressing subjects that we will consider in the months and years ahead, but is one which, as the Minister said, few people understand fully. I hastily stress that I am with the majority on that. I am certainly not one of those who claim expert knowledge of the intricacies of local government finance.
What I am, I hope, in a position to do is to say a few words about the recent experience of council tax revaluation in Wales, and in particular to draw attention to the resentment and anger felt by many council tax payers in the Principality as a result of what many see as one of the most blatant examples of a stealth tax that we have seen in recent years.
The rebanding in Wales has left a bitter taste in the mouths of many council tax payers who saw their real incomes eroded as they were hit this year by a double whammy of the usual council tax increase and the uplift as a result of rebanding. The rebanding exercise came against a backdrop of a step-change in the burden council tax payers in Wales were being asked to shoulder under the Government.
Between 1998 and 2004, revenue expenditure in Wales increased by 44 per cent. to around £5 billion. That expenditure was funded principally from central Government grants, which increased by 40 per cent. over the period; council tax, which increased by a whopping 78 per cent. over the same period; and the share of non-domestic rates, which increased by only 13 per cent. Council tax payers in Wales are now paying for around 20 per cent. of revenue expenditure compared with 15 per cent. eight years ago. Council tax payers are becoming more important as a source of local government finance and they have been asked to pay more and more. As a consequence, they have every right to ask what they are getting in return for their money.
During the recent election campaign, I lost count of the number of people on the doorstep who made the comment that £1,000 a year is a lot to pay for their rubbish to be collected, that being the only service from which they feel they benefit. Many people in Pembrokeshire do not think that the 70 per cent. increase in council tax over the past eight years has bought them significantly improved local public services.
That is the context under which revaluation took place in Wales. When the Welsh Assembly first announced its plans for revaluation, it was claimed that it would not lead to a significant increase in the taxes paid by Welsh households. It would be revenue neutral, to use that horrible piece of Whitehall jargon. The Labour Assembly Minister in September 2003 stated:
"revaluation is not a means of increasing the total amount of council tax raised, and it doesn't follow that all council tax bills will rise. There will be movements within the banding system and changes in bills, but we estimate that half of Welsh homes will remain in the same band, around a quarter will move down the banding system and a similar number will move up."
The Assembly also pointed out that, as the underlying assumption is that the income from council tax will not change as a result of revaluation, it does not necessarily mean that all those moving up bands will pay increased council tax.
It is true in Wales as well as in England that local government is responsible for education, social services and much wider things than just waste collection. Does the hon. Gentleman not think it fair that those core public services should be paid for by an income tax system rather than a property tax?
No, I do not necessarily accept that. Taxation must be transparent and fair. There must certainly be an element that is geared towards ability to pay. My point is about the way revaluation was undertaken in Wales.
So much for the spin from the Welsh Assembly about revaluation. In the event, only 8 per cent. of homes moved down a band, but more than a third moved up. A total of 28 per cent. of homes moved up by one band, 5 per cent. by two bands and almost 1 per cent. by three bands. Nothing breeds resentment and cynicism more than broken promises and misinformation. People in Wales think that council tax revaluation was another stealth tax or a backdoor tax hike. The revaluation process, as proposed by the Welsh Assembly Government, meant that, although there was no change in the headline rate of council tax, local residents faced higher bills. In Cardiff, 64 per cent. of homes went up by at least one band, and Wrexham, Vale of Glamorgan and Powys were particularly hard hit. In my county of Pembrokeshire, 35 per cent. of dwellings moved up at least one band.
Will revaluation not be used by the Government to say that council tax as a percentage has not gone up? Following what happened in Wales, as my hon. Friend rightly demonstrated, many more people will pay far more, but the Government will still argue that the percentage raised by council tax has not gone up very much. In England, the amount of money that councils spend will rise, as will the amount of money that they take from people, but the Government will manage to argue that the percentages have not gone up very much.
My right hon. Friend is right. Welsh Assembly Ministers tried their best to say that the average council tax had increased by only 4 per cent. this year, but were forced to admit that, overall, it had risen by almost 10 per cent. Labour Ministers claimed that there would be as many winners as losers, as if council tax were a dodgy fairground lottery, but in the end they had to admit that it had risen by more than 9 per cent. this year.
Will my hon. Friend confirm that, besides the increase for individual households, the amount collected for council tax has gone up by 10 per cent. in Wales?
My hon. Friend has made an excellent point. It is worth bearing it in mind that, behind the numbers, real people are suffering, including pensioners whose only mistake was to work hard and buy their own home. In March, I met a D-day veteran who, within the space of a few short days, received two letters—one from the Pension Service, the other from the county council. One letter informed him of his weekly pension increase this year, the other of his council tax bill for the coming year. Calculated on a weekly basis, his council tax increase more than wiped out any increase in his pension. What was given with one hand was taken away with the other.
That pensioner is not an isolated example. This spring, across Wales, people experienced a serious cut in their income and quality of life as a result of council tax. People in Wales are therefore angry about the council tax revaluation. They are also bewildered and confused about what rebanding means and how it works in practice. Earlier this year, Pembrokeshire householders woke up to a local front-page headline, "5 per cent. council tax rise likely". The report said:
"Pembrokeshire County Council is likely to increase its demand on the council tax payer by five per cent next year."
In fact, the council's demand on the council tax payer for the coming year was almost £28 million compared with £24.5 million last year—an increase of 13 per cent. Many people would like to know how the council can raise 13 per cent. more money from a mere 5 per cent. increase in band D tax. The answer, of course, is to be found in the revaluation exercise, as the tax base of band D properties has swollen from 45,000 to almost 49,000—an 8 per cent. increase. Making comparisons between this year's band D rate and the rate for last year is like comparing apples and pears. The headline figure of 5 per cent. was a gross underestimation of the actual increase.
The Royal Institution of Chartered Surveyors recently undertook research into the revaluation in Wales and stated:
"Council tax revaluation in England will lead to unduly large increases in council tax bills unless the tax bands are readjusted in line with house price inflation."
Looking at the way in which revaluation was conducted in Wales, it said that rebanding was not carried out in line with Welsh house price inflation. It warned that, if the Welsh model were adopted in England, a disproportionate number of houses would move up into higher bands in southern regions, where house prices have risen above the national average since 1991.
In conclusion, taxation must be simple, understandable and transparent, and it must not place disproportionate burdens on the people who pay it. In contrast, the council tax revaluation in Wales was complex, opaque and placed burdens on people. Under the Labour Government, householders in England have every reason to fear revaluation. This tax-hungry Government are running out of options for raising new money, so council tax payers in England should beware.
As the second Welsh Conservative Member to contribute to our debate, may I say that it is a great shame that there are not any Labour or Liberal Democrat Back Benchers in the Chamber? This is an important debate, and the House has much to learn from the experience in Wales. Wales has shown us the future, and it does not work.
Wales has suffered far more pain as a result of council tax in the past few years than virtually any other part of the country. In Denbighshire and Conwy, whose councils cover my constituency, the average band D tax has almost doubled over the past eight years. The position has been made infinitely worse by the revaluation exercise that has just been implemented in Wales. We were told that the exercise would be fiscally neutral, but, in Denbighshire, 29 per cent. of households have been rebanded upwards, while only 8.5 per cent. have been rebanded downwards. In Conwy, 32 per cent. went up, while only 6.5 per cent. went down. In the ward of Llandrillo-yn-Rhos in my constituency, more than 40 per cent. of homes have been rebanded upwards.
The rebanding exercise is wholly unfair and amounts to a tax on house price inflation. Across Wales, there have been dramatic council tax increases. Some householders in my constituency have experienced increases this year of over 22 per cent, but the rises caused by rebanding are not simply reflected in comparisons between past and present band D figures. In Conwy, the average council tax has increased by 121 per cent. since 1997, while in Denbighshire the average increase is 105 per cent.
Those increases have not been accompanied by an improvement in services—quite the reverse. Rebanding generates additional local revenue, but a sum in excess of that revenue is withheld by the Welsh Assembly from the local authority, whose general budget is therefore affected. Consequently, many thousands of Welsh council tax payers are paying substantially more tax for unimproved services. As my hon. Friend Mrs. Spelman said, that additional tax is an unashamed wealth tax. In fact, it is a stealth wealth tax, because it does not even have the decency to declare itself as a wealth tax.
The council tax system certainly needs to be amended and revised, but I caution the House against going down the route of rebanding and revaluation. The Welsh experience is a bitter one and, if it is writ large across England, the Government will be in severe trouble with taxpayers. As for the Liberal Democrat proposals for a local income tax, most average earners—the people on £35,000 or so a year cited by Dr. Cable—would think that something was terribly amiss if they had to pay an extra £600 a year for unimproved services. I urge the House to accept a warning from Wales, and beware the future.
I shall deal with some of the points raised in the debate, starting with the assumption by Mr. Jones that average incomes in this country are £35,000. That shows how out of touch he must be with ordinary lives. Average household income in the United Kingdom is about £26,000. The idea, as Mrs. Spelman suggested, that under local income tax an average couple would find their bills rising by £650 seems to assume that the average couple in her constituency, or at least in her head, receive an income of around £50,000. That is extraordinary. Hon. Members should realise that people on salaries such as ours are in the top few per cent. of the population by income.
Hon. Members, including Mr. Jones, who is no longer in his seat, have been concerned about two-earner couples. Figures from the Institute for Fiscal Studies show that half of two-earner couples would be better off under local income tax. Of course, it depends which band they are in at present, but in any case only one in 10 households has two full-time earners.
The question of beneficiaries from local income tax was raised. Contrary to what the hon. Member for Meriden said, the main beneficiaries would be pensioners and the low paid. During the election I met people in my constituency who were paying £1,000 in council tax on an income of £10,000. In one extraordinary case, someone was paying £1,300 on an income of not much more than £10,000. I challenge the other two parties to tell those people face to face that they think a tax system that does that is in any way fair. The council tax is an extraordinarily regressive tax. The local income tax provides a permanent solution to the regressive nature of that tax, not just a one-off that might work for a few people for a short time.
The idea has constantly been repeated that under local income tax, each local authority would collect the tax. That is not how it works in any other country in which it works properly. The system is administered by the national tax authorities and the same rules apply to local income tax. There is no requirement at all for a separate administration in separate local authorities.
Various hon. Members, including the hon. Members for Guildford (Anne Milton) and for Bournemouth, West (Sir John Butterfill) and, very surprisingly, Mr. Raynsford, confused setting the rate and collecting the tax. It is quite possible for local authorities to set different rates, yet for the tax to be collected through the national revenue system. The right hon. Member for Greenwich and Woolwich tried to make out that only PAYE payers of income tax would be caught by local income tax. That is not the case.
I think the hon. Gentleman will find that my right hon. Friend was quoting the Liberal Democrat spokesperson on PAYE as the basis of the local income tax. If the policy has changed, I should be grateful if the hon. Gentleman would let the House know. On his main point about collection, could he clarify the answer to the other question raised: where would the local income tax be assessed—on the place of work or the place of residence?
Clearly, local income tax would be assessed on the place of residence. I am not aware of any policy change. The policy has been unchanged for many years. I do not understand where the right hon. Member for Greenwich and Woolwich got his idea from.
I am grateful for that clarification, for which I have waited about 18 years in various debates with the Liberal Democrats. Can the hon. Gentleman confirm, therefore, that in a central Manchester location—say, British Aerospace—workers working alongside each other would pay different rates of local income tax?
Indeed. That is correct in all places that have local income tax. As I tried to make clear in an intervention, the Revenue already knows where people live. That is how people receive their coding notices.
I am asking these questions in a spirit of genuine inquiry. On the point made by Sir John Butterfill, does the hon. Gentleman accept that because labour is more mobile than property, such differentials in local income tax are likely to produce a rapid movement in labour—that is, people moving into lower income tax councils—than is currently the case with council tax?
That has not been the experience in the rest of the world.
One hon. Member raised a point about student nurses, which my hon. Friend Sarah Teather answered, although I am not sure other hon. Members heard her answer. The bursaries that student nurses receive are not taxable. According to the basic rule, the tax system locally and nationally would be based on the same tax code, so student nurse bursaries would not be taxable under local income tax either.
No, I am sorry. I do not have much time left. I might give way at the end, if I have some time.
Mention was made of shared houses, which are often very large. The comparison must be made not with the average band of council tax, but with the actual band within which those houses fall. That is likely to be at the higher end, possibly even in band H. Even a single-earner household in band H can find itself not losing from local income tax on an income of almost £75,000 a year.
Another point that was raised quite frequently related to tax avoidance. As we tried to make clear in the debate, our view is that second homes should be treated as businesses. They would therefore fall to be taxed under our land value taxation proposal. Our view is that that also meets the worries about foreign-owned properties.
If a property is occupied all year round, every day of the year, would it fall into that category if it was owned by a foreign national?
As I said, second homes would fall under the business rate regime and taxpayers would have to opt for which of their various homes was their main residence.
Dr. Whitehead raised a good point about business rates. One important point that he did not seem to take on board was that if business rates are relocalised, the ratio between national and local tax-raising is automatically changed, and our proposal is to relocalise business rates.
Mr. Allen, who I am sorry to see is not in his place, and who did not have an opportunity to speak, raised an extremely important point about the connection between financial settlements and the constitutional settlement. I agree entirely that there needs to be a new constitutional settlement between national and local government, as well as a new financial settlement. The two must go together.
The hon. Member for Bournemouth, West asked a simple question—who would pay under local income tax? The answer is people who pay national income tax. It is not true to say, as various hon. Members have tried to argue, that there would be no redistribution under the local income tax proposal. There is redistribution under all local taxation systems. The various questions about tax bases are misplaced.
I was somewhat surprised at the contribution of Mr. Dunne who at one stage in his remarks said that under the local income tax proposal, there would be a massive increase in tax in his area, assuming that there would be no redistribution. He followed that with his second criticism, that the redistribution under local income tax would be too great. He cannot have it both ways. He must make one criticism or the other.
No taxation system is perfect, and none is likely to be popular, but our local income tax proposal is fair, efficient and cheap to administer. It uses an existing system, it reduces local bureaucracy—there is no need for a local valuation or benefits bureaucracy—it makes decentralisation more possible in the future, it increases accountability and it works elsewhere.
The only opponents of local income tax are those with a vested interest in protecting those on very high incomes. Traditionally in this House they have been members of the Conservative party. I hope that they are not joined in that position by new Labour.
Thank you, Madam Deputy Speaker, for giving me the chance to speak. I thought that it was important that I should do so when my hon. Friends the Members for Clwyd, West (Mr. Jones) and for Preseli Pembrokeshire (Mr. Crabb) decided to allude to the record and the progress of the Liberal Democrats in coalition in that part of the United Kingdom. I thought that I could bring my experience to the House from the Scottish Parliament, where the Liberal Democrats have been in power for nearly seven years now, with the Labour party. I thought also that it might be interesting and important to translate rhetoric into reality under the Lib Dems.
Anyone with experience of the Lib Dems in power, either in a local authority or an Administration, as in Wales or Scotland, will find that that reality is different from the stated policy aims of their party. As I said to Jo Swinson, when the Lib Dems came into power with the Labour party in Scotland, one of the first things they did was to vote to increase the business rate. Under the current system they made Scotland less advantageous as a country in which to settle a business than the other countries of the United Kingdom. That shows clearly that there is a difference between what the Lib Dems say and what they do.
In neither of the coalition documents—the documents set down, first, with Donald Dewar, a former Member of this place, and with Jack McConnell, the First Minister of Scotland—did the Lib Dems ever raise the unjust system of council tax and the demands to reform it. That campaign was not part of those documents. Interestingly enough, the Lib Dems wanted to reform the voting system for local authorities. Clearly it was more important to get themselves into power first before they tackled incomes and the difficulties for people in terms of council taxes.
I represented the north-east of Scotland—Aberdeenshire—where I was under a Liberal Democrat council. Many Members may remember that during the recent general election the Liberal Democrats campaigned on local issues, including saving bus services. The Lib Dem candidate whom I faced campaigned to prevent Lancashire county council from cutting bus services, even though the council was under Labour control and it was not going to cut bus services. Under the Lib Dem administration in Aberdeenshire, school bus services were cut. There we go again. We also saw our council tax raised to a higher and higher level every year. It is important to contrast rhetoric with reality.
There is talk of free personal care. The hon. Member for East Dunbartonshire laid claim once again to that, but it is important to note that the Liberal Democrats voted on two separate occasions in the Scottish Parliament against free personal care.
I am grateful, Madam Deputy Speaker. I am trying to point out the difference between rhetoric and reality in the context of the Liberal Democrats. That leads into the detail of income tax.
I am a member of the party that introduced the poll tax. Adam Price pointed out that trying to link the use of services to the rate of pay was, in one sense, a noble aim in that a poll tax should be based on consumption. However, problems were faced when the poll tax was implemented. Local income tax seems an attractive policy on the Lib Dem website, but when we start asking questions about PAYE and how the tax will deal with large-scale redundancies in an area, issues arise about the income base. For example, my constituency is next to British Aerospace and Springfield nuclear fuels. There is also a manufacturing plant in Calder Vale, which recently announced a fairly large number of redundancies. How would local income tax respond to that, for example? There are more than 3,000 jobs—perhaps 10,000—that are reliant on British Aerospace.
I am grateful to the hon. Gentleman for allowing me to intervene given that I did not allow him to intervene on me.
The answer is that in the current year there would be no change and no problem. The grant would be as it was in the previous year. The redistributive system would be able to adjust in the following year.
It is interesting to consider what we would be saying to the boundary committee. In future, it would have to redraft boundaries to take into account redundancies for the year before or the year before that. We would all find ourselves within peculiar district or county boundaries, which would be redrawn not on the basis of geography but on that of income. That has to be noted.
As for students, I take the hon. Gentleman's point that bursaries would not be taxed. However, there is a range of students who do not receive bursaries but who earn income. There are some who perhaps pay tuition fees. They go out and earn during all their holidays or during term time. If their earnings are above the threshold, do they suddenly become liable for local income tax? All students who currently have a de facto exemption would be brought into the tax bracket.
Another example is cadets. Armed forces personnel sponsored by the Ministry of Defence as cadets are paid a salary. Every cadetship officer or cadet in any of the armed forces will immediately—I think they get about £7,000 a year—come within the scope of taxation. That means that another group of people will be brought into the system.
I have mentioned the footprint but there is another word of which I am rather suspicious, and that is "affordable". We have heard quite a lot from the Liberal Democrats that the tax will be affordable and that people could pay it. I could live in a large house and have no income, or a low income, or I could choose to sell my house and live in a small house, putting my money into dividends so as to get an income in that way. Affordable is a subjective concept that creeps into the conversation or into policy. What exactly is affordable? That issue must not be overlooked in the long run.
The contrast between rhetoric and reality is interesting. We must consider the record of a party that has set the highest rates of council tax throughout the United Kingdom. Why could we trust it to run a local income tax system? It is interesting that, according to its current policy, it wants to repatriate business rates on a local level. The income generated by Aberdeenshire has funded a large part of Scotland. On the basis of localisation, however, the constituency of the hon. Member for East Dunbartonshire would lose out and Aberdeenshire would be very rich, thank you very much. That is a peculiar way in which to manage local government finance.
I think that everyone agrees that we are dealing with a difficult issue. However, I agree with those on the Opposition Front Bench that people did not complain about council tax until the level of that tax became higher and higher. There are people who say to me that they quite like the idea of a local income tax. I then go through it, explain it and ask them questions. For example, I ask them, "Would you be upset if your council tax was half the price?" They then say that that is not really the issue. There are many questions still to be answered on local income tax detail. There is PAYE, dividend payments and income from other areas. How will those factors be taken into account?
There are some similarities between local income tax and the poll tax in the sense that the number of people in a house will often determine the rates that people will be paying. There could be three earners in a house. There are many in that position because housing is not very affordable. Many young men and women are living with their parents, which means that sometimes there are three income earners rather than two or one. I have serious concerns about the application of local income tax in reality and I therefore urge the House to support the Opposition's amendment.
I am most grateful to you, Madam Deputy Speaker, as I have spoken only three times in this House and each time you have been in the Chair. I am beginning to think that you must be my lucky charm, and I hope that you will call me many times in the future.
There is no doubt that council tax has several difficulties, including those to do with its structure. However, it is not, as Liberal Democrat Members claim, a wholly regressive tax. Some taxes are purely regressive—road tax, for example. The air passenger levy is a purely regressive tax because one pays exactly the same no matter what one's income or wealth. Council tax is mildly, although not perfectly, progressive, because, broadly speaking, the bigger and more expensive the house one has, the more one pays.
When I was campaigning to win my seat in the last general election, I met a pensioner whose council tax was higher than his pension. There is no doubt that that is a problem. However, it is a question not only of the structure of the tax but of its level. In many places, including my constituency, council tax has doubled since 1997. If one has a mildly regressive tax and then proceeds to double it, a small injustice becomes a big injustice, and that is what has happened. In my constituency, the local income tax cost the Liberal Democrats votes. That was not only because teachers, doctors and nurses saw that their tax would increase, but because in places where Liberal Democrats ran the council, they increased council tax. In my area of Waverley, they increased it by nearly double the rate of Guildford next door. People felt that it was hypocritical of the Liberal Democrats to say how awful council tax was for pensioners, and then, when they had a chance in power to do something about it, to increase it in ways that were painful to those same pensioners. The danger with local income tax is that one not very successful system will be replaced by one that is even less successful.
Will my hon. Friend join me in congratulating the Liberal Democrats on their wonderful website, "Axe the Tax"? That is one of the reasons why I am here, because towards the end of the general election I ended up suggesting to householders that they look at the proposal to see how much more the local income tax would cost them.
I am not accustomed to congratulating Liberal Democrats on their campaigning techniques, but in that respect I wholeheartedly agree with my hon. Friend.
This is, in all seriousness, something that the Liberal Democrats need to consider. My constituency is an expensive part of the world and, yes, there are people on high salaries, but there are also people on low salaries who have to deal with very high costs. I met a couple of teachers who lived together in Godalming. They had bought their first house with their first mortgage, and their combined salary was around £60,000. I accept that in some parts of the country that is a very generous amount of money to live on, but it is not much when one is having to buy a very expensive house and to deal with a mortgage on it. That couple's council tax would increase by about £600 under the local income tax, and they would really suffer. When I talked to pensioners who would benefit from the local income tax, would many of them stop thinking that it was a good idea if I explained to them that the reason why they would benefit is that hard-working young couples would have their taxes increased in return.
On top of that, there are all the problems about the cost of collecting local income tax and about equalisation. That is significant for my part of the world.
Unfortunately, we have exactly the same problem in St. Albans. Even a starter home costs about £200,000, which is more than three times the income of the couple my hon. Friend mentioned. The Liberal Democrats assume that a high house price equals wealth, but that is not so. The biggest flaw with the local income tax is that it takes no account of the fact that many people—often key workers such as police, nurses and teachers—will need to have a huge mortgage to live in areas such as St. Albans, Guildford, and my hon. Friend's constituency.
None the less, I am grateful to my hon. Friend for her valid point Madam Deputy Speaker. The local income tax might relieve the pain for some suffering groups but it would do so by transferring it to others who would suffer just as badly and are the very people whom we want to help—those who are just starting on the property ladder, are not on particularly high salaries and may find it hard to make ends meet.
The other problem with the local income tax is that of equalisation across the regions. Income levels are very divergent in different parts of the country, and bodies such as the Chartered Institute of Public Finance and Accountancy warn that a local income tax would place greater demands on the need for resources equalisation between areas. One of the big injustices of the current system of local government funding is that Government grants lead to a great deal of reallocation of resources between different parts of the country, and that would have to increase under a local income tax.
It is entirely unclear whether that is true. There are also vast disparities in property values. The question is a relative one between disparities in property values and disparities in incomes. It is not clear that disparities in incomes are much wider.
The hon. Gentleman and I have to accept that neither of us knows the answer to that. The divergence in income levels might be higher than the divergence in property prices, and were that the case there would have to be even more resource equalisation.
Local income tax fails to address the real problem in local taxation, which is that far too high a proportion of the funds spent by local government is not raised locally but distributed from national Government. That leads to all sorts of anomalies in the local taxation system. In the case of my own county council, Surrey, I discovered that a significant amount of its expenditure every year goes towards building cycle lanes, which it has to do on the basis of central Government diktat, not what the voters of Surrey chose as their priorities in electing it. Another significant factor for Surrey county council is that if it gets a bad grant one year, it may find that it has to put its taxes up even though it has been very prudent in managing money.
In dealing with the issue of local taxation, we must ensure that people can vote for a local council that then reflects their choices. We need to reconnect local taxation with the people who pay for those services. In general, councils that tax and spend wisely tend to get voted in—coincidentally, they tend to be Conservative—and those that do not tax and spend wisely do not get voted in. People do not feel that local councils do a job that they can relate to directly or that their choices as voters will have a direct impact on the delivery of local services. That is the real issue, not whether we have a council tax or a local income tax.
It is a pleasure to follow my hon. Friend Mr. Hunt, who made an excellent speech in which he spoke with great integrity about the problems that his constituents face.
The Minister of Communities and Local Government said three things with which Conservative Members can agree. He is not in his place, but with his customary kindness and courtesy he has given me a note saying that he regrets that he cannot be here as he has a prior engagement. First, we should like to associate ourselves with his remarks about Mr. Raynsford. The second matter on which we agree is that those on dual incomes would indeed be disadvantaged through a local income tax. The third point on which we agree is the link between council tax and Government grant and the importance of devolution not only to councils but to citizens. If that is the hallmark of the right hon. Gentleman's approach to local government, he can look to the Conservative Benches for some co-operation.
I was, however, shocked that the Minister did not know that two out of three people who are eligible for council tax rebate fail to claim it. That marks a deterioration; it used to be three out of four people. It must be the only example of deterioration in the take-up of a benefit. I hope that the right hon. Gentleman will examine the matter urgently to encourage those who are entitled to the rebate to take it up.
It was a pleasure to hear Sarah Teather speaking from the Front Bench. However, she appears to be in denial about whether the Liberal Democrats voted for revaluation. We have given her the dates and column references for 2003. She has been out of the Chamber for most of the debate, so surely she has been to the Library to check and is in a position to apologise to us for the Liberal Democrats' vote for revaluation.
We voted against revaluation. I confess that there was a time when I believed it was a good idea, but I fear that I was deceived by the emperor's new clothes. Once we realised that the difference between the north and the south and between authorities would remain roughly the same as it was when the council tax was introduced, we did not see the point of spending hundreds of millions of pounds on a revaluation that would get us to precisely the same place. At least we found out that the hon. Member for Brent, East was one of the few remaining true believers in local income tax on the Liberal Democrat Front Bench.
My hon. Friend Mr. Turner spoke with great passion about the problems caused by local Liberal Democrats on that fine island. He managed to elicit from the Liberal Democrats some discussion of resource equalisation. Under the proposal, there would be more resource equalisation. I therefore look forward to meeting my hon. Friend on the streets of Cheadle, where he will bang on doors and explain that the position in the Isle of Wight and in Durham means that local income tax in Cheadle would have to be a little higher. I was shocked by the accounts of the incompetence of local Liberal Democrats.
The hon. Members for Cambridge (David Howarth), for Brent, East and for Kingston and Surbiton (Mr. Davey) learned a valuable lesson: one should never intervene on my hon. Friend Sir John Butterfill unless one is sure of one's facts. One of the pleasures of being here this afternoon was listening to my hon. Friend demolish the local income tax and the interventions.
The right hon. Member for Greenwich and Woolwich appeared to be more robust about revaluation than his successor. The Government, certainly in the press, appear to be wobbling on it, and I look to the Minister for Local Government for a robust statement to the effect that revaluation will go ahead. For our guidance, we have some views from Mr. Geoff Mulgan, who is now director of the Institute of Community Studies but was formerly the Prime Minister's head of policy. He told the Chartered Institute of Public Finance and Accountancy, as he doubtless told the Prime Minister, that
"revaluation is a complete nightmare just ahead", and that it was making local government reform "hard to sell". I am sure that he is right and that Ministers have inherited a poisoned chalice. If they have any sense, they will do their best to spit out the poison as soon as possible.
My hon. Friend Mr. Dunne spoke of unease about taxation. He spoke especially well about the problems of Stockport. My hon. Friend Anne Milton considered the problems of hard-working families. She gave us the example of a police officer married to a teacher and provided a long list of Liberal Democrat taxes. If she will forgive me, I should like to quote her predecessor, Sue Doughty, who was defeated at the general election:
"local income tax was a real sticking point for them . . . young professionals such as two teachers living together struggling to pay the mortgage really didn't like the policy".
Andy Mayer, the director of Liberal Future—if that is not a contradiction in terms—said that
"we're not convinced that the association of income tax with fairness is correct".
My hon. Friends the Members for Preseli Pembrokeshire (Mr. Crabb) and for Clwyd, West (Mr. Jones) spoke with great knowledge of the catastrophe that awaits the people of England following revaluation. On Second Reading of the Local Government Bill in 2003, which legislated for revaluation in England and Wales, the then Local Government Minister pledged that
"revaluation will not lead to increases in the council tax yield."—[Official Report,
Sadly, that was not the case.
No wonder the Association of London Government recently warned of the likely effect on London of revaluation, based on the Welsh experience. It stated:
"The worrying prospect for London is that Cardiff appears to have fared badly as a result of the revaluation."
I have been here for rather longer than the winding-up speeches. The hon. Gentleman speaks of the nightmare of revaluation. Surely the nightmare is the council tax itself, which places such a burden on the poor and lets the rich off scot free. That has always been a Conservative policy.
If the hon. Gentleman had been here longer, he would have heard more of the arguments, but I shall deal with that point shortly.
I am grateful to my hon. Friend Mr. Wallace for his knowledgeable contribution.
The Government's dependency on council tax is a case study in addiction. It starts with a small transfer of a little public expenditure to councils, with the addition of the odd unfunded burden on local councils. Only a few people notice, and the Government begin to feel good. Now it has become a habit. Each year, a little bit more is added. Each year, it becomes more difficult to disguise the dependency. Every four years or so, the Government realise that they have a problem and they swear off the habit, only to fall off the wagon in a post-election binge. It will ultimately kill them.
Some people believe that identity cards—the plastic poll tax—will bring the Government down. However, I believe that it is their abuse of property tax—revaluing and adding bands—that will bring them down. Even including an element of local income tax will make no difference. As The Independent put it,
"The sensible response, therefore, ought to be to look at the causes of the rise."
The causes of the rise are the causes of the problem. Labour Members and their Liberal Democrat allies are beginning to resemble "Desperado".
"These things that are pleasin' you will hurt you some day".
That day is known: it is 2007. The Government's world will truly rock—to its foundations. They will bitterly regret fiddling the council tax.
Thank you, Madam Deputy Speaker, for calling me to speak in this debate. I saw its title, but I should have realised that its real subject would be the Cheadle by-election. The Opposition have clearly not grasped this opportunity to hold the actions of Her Majesty's Government to account. Rather, it has been an Opposition day debate in the sense that the Opposition have been opposing the Opposition, who in turn have been opposing the Opposition's opposition to the Opposition. I think that the watching public will be very confused indeed.
Two Members have taken part in today's debate: the hon. Member for Scaremongering, South, representing the Conservative Front Bench, and the hon. Lady for Naive, North, presenting the Liberal Democrats' ideas for a local income tax. In relation to the review of the balance of funding between local taxpayers and the national contribution, we should point out that the national contribution comes from taxpayers, not from the Chancellor's back pocket. At the last general election, the Conservatives' formal policy was to freeze the amount of money that would be given on grant to local authorities at 0 per cent. for two years. That renders their protestations over the amount that could be given in rebate—
The hon. Gentleman has had his chance to put his point of view. My right hon. Friend the Minister of Communities and Local Government quoted the then shadow Chancellor on this point, and that remains on the record.
I should like to answer some of the points raised in today's debate. I hope hon. Members across the Chamber will join the Government in our campaign to improve the take-up of council tax benefit. I do not doubt that many of the problems that have been mentioned are real ones for Member's constituents—I recognise their credibility in that regard—but they could in many cases be addressed by better take-up of that benefit. My right hon. Friend the Secretary of State for Work and Pensions is working very hard on a comprehensive programme to improve that take-up, particularly among pensioners.
The policy of Sarah Teather, who spoke on behalf of the Liberal Democrats, was teased out, not least by Sir John Butterfill, the Chairman of the pension trustees. I can see that he retains that position—at least, I hope he does because his grasp of finance has clearly not diminished since the election. Frankly, he demolished the Liberal Democrats' case for a comprehensive local income tax, and he addressed very well the questions of how the tax would be assessed, how resource equalisation should be met, how the area cost adjustment should be taken forward, and how the council tax collection rates could be matched with equal collection rates for local income tax.
The hon. Member for Brent, East did clarify one point. Perhaps inadvertently, she said that she hoped that the balance of funding would shift from 30 per cent. local and 70 per cent. national, as it is now, to 70 per cent. local and 30 per cent. national. My research has quickly shown that that would result in an increase of 10.6p on income tax. That figure is winging its way to the Labour committee rooms in Cheadle even as we speak. The good work force of the Woodford BAE Systems plant in Stockport will now know that not only could they be paying more income tax depending on who they were working alongside, but that it could go up by 10.6 per cent. That is an amazing figure.
I am delighted to pay tribute to my right hon. Friend Mr. Raynsford who, with typical politeness, has passed me a note apologising for the fact that he cannot be here for the end of the debate. I think it was Mr. Pickles who urged Members to read my right hon. Friend's articles in the "Municipal Journal". I can tell the hon. Gentleman that, however hard he has been reading them, he has not been reading them half as hard as I have. I congratulate my right hon. Friend on them.
On a serious point, my right hon. Friend said that the goals of local government finance policy were greater certainty, greater equalisation, incentives for high-quality delivery of local government services, and the sustainability of long-term funding with equal, if not greater, emphasis on expenditure control, both through the Gershonefficiencies—the successes of which my right hon. Friend the Minister of Communities and Local Government has already reported to the House—and through macro-expenditure decisions. In the coming Session, we will debate the three-year settlement that we intend to fulfil to bring about that greater certainty and stability.
I should like briefly to reply to some of the constituency points raised. I congratulate Mr. Turner on his new appointment as Conservative spokesperson on voluntary affairs. He had great fun attacking the Liberal Democrats on the Isle of Wight—an easy target, but he had great fun none the less. I must point out to him, however, that his own council has recently received a 5.8 per cent. increase in its grant from central Government, and above-inflation increases for the past eight years running. I invite him to give the money back if he does not want it, but I suspect that there will not be a cheque in the post to my right hon. Friend the Minister of Communities and Local Government.
I am sorry, but I shall not be able to do justice to the many intelligent points that have been made if I give way.
My hon. Friend Alison Seabeck made a brief but very well informed speech, and I look forward to her being able to use the platform of her membership of the House to give us the benefit of her vast experience and knowledge of local government finance. She has found her voice now, and we look forward very much to benefiting from her advice.
Mr. Dunne made some important points on his constituents' behalf about the fact that some people in his area are on lower incomes. He asked how that could be taken into account if the Lib Dem policy were to be introduced. That was precisely the question asked by the hon. Member for Bournemouth, West and others: how would greater resource equalisation take place if the local income tax were to be genuinely local? That is the paradox that was teased out of the Liberal Democrats' policy.
Jo Swinson got mixed up when she said that her constituency was the most middle class in Scotland, yet incomes there were under £25,000. I take her point, but she must acknowledge that a couple on average incomes, not on average household earnings, as was suggested, would experience average council tax increases of £600. It is all very well the hon. Lady shaking her head, but if the tax base were based on income rather than property, it would be narrowed, a greater burden would fall on those people paying income tax, who are on the whole members of hard-working families. The Lyons review's remit is to consider whether an element of income tax could be used in balance with the existing property element—[Hon. Members: "Ah!"] This is not news. If hon. Members had read the Municipal Journal—or, indeed, the answers to the parliamentary questions that someone has been writing for them—they would know about this.
We have requested the Lyons review to consider the balance of funding, building on the work that my right hon. Friend the Member for Greenwich and Woolwich has done, and to make recommendations on how best to reform the tax, taking into account the possible impact of revaluation. It will also assess the case both for providing local authorities with increased flexibility to raise additional revenue and for making the shift in the balance of funding that I have just mentioned, and conduct a thorough analysis of options other than council tax for local authorities to raise supplementary revenue.
This has been an interesting debate, if only because it has teased out the differences between the two Opposition parties, both of which are clearly concentrating on what is going on in Cheadle rather than on the Lyons review.
This Government's record in providing a 33 per cent. real-terms increase in resources to local authorities since 1997, providing incentives to councils such as those in Surrey and giving better freedoms to improve services—as the Audit Commission is reporting sustained increases in local services—is one of which we should be proud. We look forward to Sir Michael Lyons's recommendations, and to further debates on this matter.