I beg to move, That the Bill be now read a Second time.
It is a relief to be called after all that waiting, Madam Deputy Speaker.
The coalition agreement committed the Government to supporting sustainable growth and enterprise, balanced across the country. It also pledged the radical devolution of power and greater financial autonomy to local government. This Bill delivers on those promises. It aims to introduce much-needed reforms to make England’s local government finance system more effective at supporting local jobs, local firms and local enterprises. This is not just about redistributing a pot of cash differently; it is about providing the best possible chances to foster more growth, generate more cash and make a bigger pot.
The case for change is widely recognised. The OECD has called the English local government finance system one of the most centralised in the world. The Labour Government knew that, but failed to deliver on reform. There were Green Papers, White Papers, the “Balance of Funding” report, the Lyons inquiry and, if that was not enough, the Labour party manifesto at the last general election boldly pledged another commission on local government finance. What little reform was introduced, such as the so-called local authority business growth incentive scheme, was timid, inconsistent and ineffective. The only thing Labour managed to do was to double council tax and halve local services, such as bin collections—pay more and get less.
Where others have failed to deliver, however, the coalition is ready to act. Nowhere is the need for change more apparent than in relation to business rates. Currently, councils collect rates for local businesses, but they are no more than the agents for central Government. No sooner is the cash in than Whitehall whisks it away. Whitehall feeds the figures into a very complex formula. Each council waits with bated breath to see how much it will get back. The 160-page local government finance report requires a detailed knowledge of multiple regression to fathom it out.
The system creates a perverse regime of incentives. Councils that work hardest to boost local businesses do not see their efforts reflected in the state of their finances. In fact, local economies that become more successful can effectively see their central Government grant cut. The regime actively encouraged councils to talk down their area, to mask their success and to amplify their deprivation; it breeds a begging-bowl mentality and a race to the bottom. Surely, now more than ever, we should welcome growth and reward incentives.
There is some criticism that Labour failed to deliver on its election pledges. Well, we are here to help. In the Localism Act 2011, we introduced a general power of competence, implementing a pledge in the 1983 Labour party manifesto. However, we have now moved on to the 1997 Labour party manifesto, and we are moving towards the localisation of business rates. The Government believe that councils should have every possible incentive to encourage local business, support local jobs and create the conditions for the local economy to thrive.
The Bill paves the way to repatriating business rates. We want to give councils a greater proportion of the rates they raise locally. Every council that grows its business rate base can be sure that it will see an increase in its income, compared to the status quo. Putting in place the right incentives gives every council every possible reason to go for growth, which creates the potential to raise more cash overall to invest in local services and local community priorities. Of course, we have heard a few grumbles already.
I spent nearly 12 years in local government, and I accept that it is an important catalyst for encouraging local economic development, but it is not the only one. There is a huge disadvantage in all this for my constituents, compared, for example, with constituents in south-east England. Surely, in any consideration of local government finance, the disparities between the economies of such areas should be taken into account.
Frankly, I am amazed by that contribution, because Durham will be one of the big beneficiaries of the scheme. Had this system been in place, Durham would undoubtedly have more money in its coffers. I strongly urge the hon. Gentleman, for whom I have enormous respect and affection, to talk up Durham, because it will do very well under this scheme.
The hon. Lady needs to look at the facts. Durham will be a beneficiary. The level of support it will get in terms of top-up—in terms of its actual growth —will increase, and that will give the people of Durham considerable respect and pride.
Let us just deal with some of these grumbles. Some are worried that the reforms might lead to polarisation and that deprived areas might fall behind. I can entirely understand—we have seen examples of this today—that people are reluctant to see change. It is always hard to let go of a security blanket, but we have been clear that we will ensure the hardwiring of safeguards for the most vulnerable in these reforms. Protections, including a system of tariffs and top-ups, will ensure that councils that start from a low business rate can still meet people’s needs. We will have a levy on authorities that see a disproportionate benefit, with a safety net for authorities that see their business rates fall significantly.
I very much welcome the principle of allowing local authorities to retain a proportion of their business rate. That is a very positive move. My right hon. Friend has made the case that he is being rather pragmatic, but perhaps he will go into a little detail about two areas where I am concerned he is perhaps being overly pragmatic: growth for inflationary reasons and growth where there has been a revaluation. As he knows, there has been significant revaluation in recent years, so why cannot some of that revaluation, where a substantial part has been in a particular local authority area, be used as an element of growth for the purposes of the business rate adjustment that is being brought into play?
Of course, in that process of revaluation, we would seek to adjust the multiplier so that it had a neutral effect on the amount. What we are talking about is ensuring that, between periods of revaluation, an authority that grows above the national average can actually bank that. However, some authorities will clearly get a disproportionately large increase, and we have a levy, through which we seek to take that sum away and to apply it to the safety net.
I am happy to confirm that fact to my hon. Friend, because he raises an important point about local businesses needing a degree of certainty. Of course, the Secretary of State—the person holding my position—will set the multiplier and the sum.
There is something strange about all the objections, some of which we have heard already, in that they betray a lack of faith in the people whom we represent. No one area has a monopoly on the formula for growth. Economic success is not a southern phenomenon.
I do not know whether colleagues were listening but I heard an Opposition Member say that economic success was a southern phenomenon. If that is what Opposition Members think, they should seriously consider whether they are doing their electorate a service.
If our reforms had been in place over the past five years—since the last revaluation cycle—places such as Liverpool, Doncaster, Durham and north and south Tyneside would have benefited, because their growth in business rates outstripped the national average.
Most of all, however, the grumblers have missed the key point. This is not simply about redistributing the proceeds of growth. If these reforms lead to every council working as hard as possible to help business to thrive, there is the potential to increase overall growth.
As part of the south-east phenomenon—the area that I represent covers Canary Wharf and the London borough of Tower Hamlets—my constituency would naturally, I assume, be a winner from these reforms. Has the Secretary of State seen the briefing issued today by London Councils to London MPs? It welcomes the retention of part of the business rate but then states:
“However, the Bill as drafted creates a fiendishly complex system in which the level of the business rate incentive is uncertain and unpredictable”.
Will he respond to that concern from London Councils?
Yes, of course. The idea is to give the maximum incentive to councils. That is how the system is being devised. However, it is much simpler than the existing system, which is just about impenetrable. Indeed, London Councils considered that point some time ago when it described the four—[Interruption.] Ah, I have it in front of me. How very helpful! This is marvellous. Bob always comes up trumps. This quote comes from the London Councils’ report, “Four Block Muddle”:
“The current formula grant system…lacks transparency and is inherently unstable and unpredictable, generating fluctuations in grant allocation that defy logic… Even finance experts, let alone members of the public, struggle to understand the working of this complex system.”
So here we are introducing a much better system, and, to coin a phrase, I would have expected local councils to rejoice, rejoice, rejoice.
I am grateful to the Secretary of State but I have to say that many other people besides me were architects of the existing system. However, given that doubts are being expressed by many local authorities about whether the provisions in the Bill will achieve the objectives that the Secretary of State has set out, will he, in words of one syllable and in plain English, explain the provisions in the first seven clauses of the Bill, which to most people are absolutely incomprehensible gobbledegook?
I feel a little stung because I have always been most helpful to the right hon. Gentleman.
Clause 1 deals with the local retention of the non-business rate and provides for the framework of the rate retention scheme in England by inserting a new schedule 7B into the Local Government Finance Act 1988. Clause 2, on the revenue support grant, gives effect to schedule 2, dealing with the amendment of provisions about revenue support grant in England. Clause 3, on additional grant, amends the 1988 Act to remove the provision for the Secretary of State to pay additional grant to local authorities in England. It also makes consequential amendments to the Local Government Finance Act 1992 and the Greater London Authority Act 1999. Clause 4, on the local government grant, amends section 100 of the 1999 Act so that from
I thank my right hon. Friend for giving way on this key issue. One of the key concerns for people raising additional business rates in the future will be that they gain from the benefit of that growth. I welcome that proposal. However, there is another problem. Will he confirm that if a major employer or site of employment closes down within the first two years of operation, the local authority will not lose the business rate income?
My hon. Friend raises an important point about the very nature of business rates. There is a high degree of buoyancy within the system and there can be sudden movements, particularly where firms move out and following claims for revaluation, which is why we have built into the system adjustments to iron out those things. We have suggested to local authorities— but it will be entirely a matter for them—that they pool their resources in order to get over those fluctuations.
I shall move from the incentive effect to another aspect of the Bill: the introduction of tax increment finance. This was recommended in the 2006 Barker report and promised in the 2009 pre-Budget report but never delivered by Labour. For the first time, councils will have the ability to borrow safely and sustainably against the anticipated increase in business rates. That will give them a new means by which to fund infrastructure, attract investors and secure jobs for local people.
We are determined that the transition to the new system should be effective, fair and workable. Over the summer, we consulted widely, and we heard loud and clear that small firms, charities and voluntary groups, which play such an important role in local life, should not face adverse changes to their bills. Local firms can rest assured that this is not a means of increasing their bills by stealth; rather it is a measure to help local businesses. The Bill also proposes a replacement for council tax benefit.
I am grateful to the Secretary of State for giving way on the point about tax increment financing schemes, of which I have been a strong supporter from the outset. Will he confirm that the area and rate take in the TIFs area will be ring-fenced and protected from levies and any reset? Without that confirmation, there will not be the confidence and certainty about the revenue stream necessary to allow the borrowing to take place for the up-front investment.
The right hon. Gentleman makes an important point. He will know, because he has taken an interest, that we are offering two types of TIF. TIF 1 will be subject to the levy and the top-up, but TIF 2 would not be subject to either, so it would be possible to borrow over a longer period than the reset.
Before the right hon. Gentleman responds, I would like to add something else. I can see that we are going to have one of these really interesting discussions—we might even get on to hereditaments in a little while. Because TIF 2 would affect the levy pot, as well as the level of public borrowing, we will clearly need a degree of Treasury co-operation, but authorities can proceed with TIF 1 straight away.
I wish the Secretary of State good luck in seeking that Treasury co-operation. He will understand that the time horizon for TIFs stretches beyond one decade, and sometimes beyond two. He said that TIF 2 would be ring-fenced and protected from the levy; can he also say whether it will be ring-fenced and protected from any reset?
The whole point about TIF 2 is that it goes beyond a reset. That is why there needs to be a degree of co-operation from Treasury colleagues. The period for TIF 1, of course, is potentially 10 years. We will encourage local authorities to work together on TIFs and pool their resources—I think I recall the right hon. Gentleman speaking about this some time ago—which will be enormously liberating for them.
The Bill also sets out a replacement for council tax benefit, which is essential in supporting those who, through no fault of their own, struggle to pay their council tax bills. However, rather than having a national, one-size-fits-all scheme, designed and directed by Whitehall, we propose that councils themselves should set up council tax support at the local level. We will give them the flexibility to design schemes that reflect local priorities. Tailor-made approaches will also be essential to making the 10% saving, which is an important component of the plan for reducing the deficit inherited from Labour. Some councils are already considering how they might exercise the new powers and discretions. Westminster city council, for example, is looking into the idea of social contracts, such as linking council tax benefit with obeying the law, actively seeking employment and undertaking voluntary work. That is fundamentally no different from councils such as Manchester and Newham, which are seeking to prioritise individuals in work for council house waiting lists, ending the “something for nothing” culture while providing a safety net for the vulnerable. I believe that benefits should provide the right incentive to get people back to work and to reward social responsibility.
The reality, surely, is that on day one councils will receive what they are currently paying out in council tax benefit, minus 10%. They will have no choice about where that 10% comes from, because pensioners will be protected—we might support that—as will people in work, because councils have to observe the 65% tapers under the universal credit. In the end, therefore, the totality of those cuts will fall on the unemployed of working age, leading to probably up to 20% to 30% of their benefit being withdrawn. If unemployment goes up and more people claim council tax benefit, that will mean either money drawn from other services to fund it or further cuts for those on council tax benefit who are unemployed.
The hon. Gentleman makes a reasonable point, but I would put it this way:
“Beveridge would have wanted determined action from government to get communities working once again, not least to bring down that benefits bill to help pay…the national debt…He would have wanted reform that was tough-minded, and asked everyone to work hard to find a job.”
That seems a very reasonable way to express it; indeed, those are the very words of the shadow Secretary of State for Communities and Local Government, in his article in The Guardian last week. I am pleased that that approach was also endorsed by the Leader of the Opposition on the “Today” programme this morning, so frankly, I am not entirely sure that I understand the points being made by Opposition hon. Ladies and Gentlemen.
I very much support the idea of innovation and flair, and allowing for inventiveness, which will certainly apply positively to Westminster city council and all who live in the area. However, my right hon. Friend will be aware that, in the case of some local authorities that try to adopt the new powers, the scheme will perhaps work somewhat less well. Will there be any residual power in the hands of the Department or the Secretary of State to intervene where such local authorities fail to provide the lead that we would all wish for?
Local authorities are statutorily obliged to deliver a scheme, and that scheme needs to be approved, but we need to have confidence in them. We are talking about a substantial and significant effect of localism. We took the decision to give more powers to local authorities, and we need to be able to trust them.
However, hon. Ladies and Gentlemen opposite have been saying that their leader did not say those words. I happen to have a transcript from the “Today” programme. He was asked a question about welfare, and this is what the right hon. Gentleman said: there do need to be “big changes”, with a
“greater sense of responsibility in the system...Anybody who can work should work”.
We have to
“have sanctions in our system…I…see…a minority…of people on benefits” who have been given a
“false sense of security…The Beveridge system was about saying people should be rewarded…for contributions.”
The right hon. Gentleman said that there should always be a safety net, and that
“In housing…need matters, but…you should also be rewarded with extra points…if you…work or volunteer,” saying that some
“councils…are starting to do this…I am not against a cap” on benefits. My word, how out of touch hon. Ladies and Gentlemen opposite are with what their leader is saying!
In a moment.
Part of the Opposition now concedes that the housing benefit bill is too big and needs reform. I hope that they would accept that the sister benefit—council tax benefit—should also be reformed. The reform must take place to help reduce the budget deficit. As the shadow Secretary of State for Defence conceded last week, a credible Opposition should reject “shallow and temporary” populism and accept the need for spending reductions. I am very sorry that Labour Members seem to have rejected that advice and that of their leader, given so recently.
We should all agree that reforms must also offer proper protection for vulnerable groups who cannot return to work. We will therefore be putting in place special safeguards for low-income pensioners, who will continue to be eligible for support. As championed by the Royal British Legion, this Bill will make council tax support a rebate—a discount—rather than a benefit. The previous Government changed the law to rename council tax benefit, but never enacted their own provisions. The Bill also allows changes in council tax to help reduce bills for hard-working families and pensioners. Homes left empty for the long term can be a blight on a neighbourhood. It is immensely frustrating for people who desperately need housing to see houses sitting idle, and for communities to have to tolerate the eyesore and crime that such houses cause. Currently, even when houses have been left empty for many months, councils can charge no more than the normal rate of council tax. We propose that councils should have the option of charging a higher rate of council tax when homes have been empty for more than two years. That will provide a stronger incentive for the owners to bring such homes back into use and end empty property blight.
Alongside the Bill, we have consulted on other proposed changes to council tax—changes that do not require primary legislation. They include reforms to council tax on second homes. Currently, councils are obliged to charge a reduced rate on second homes, of between 10% to 50%. We propose to allow authorities to remove this special tax break completely, treating everyone equally and fairly. Taken together, those flexibilities on council tax have the potential to reduce families’ council tax bills by £20 a year.
Some have asked whether it is time to review other discounts and exemptions. The Intergenerational Foundation, endorsed by the shadow Minister for London, called for an end to the single-person discount, which would tax the elderly out of their homes. We have looked at the case for ending the single-person discount, and we have rejected it. This Government have no intention of imposing a new stealth tax on 8 million single persons; nor will we increase the tax on hard-working people who pay their taxes, who save and who invest in their homes.
The Bill stands alongside the action that this Government have taken to make local finance fairer and more effective, including the two-year freeze on council tax, the cancellation of any council tax revaluation, the abolition of the new bin taxes, and the introduction of new rights for residents to veto excessive council tax rises. The measures that we are introducing today will build on those improvements. After years of indecision and inaction by Labour, these measures represent a positive and practical step forward. The Bill will help to create the right conditions for growth, reward councils that boost the economy, and make local government finance more effective and fairer for all. I commend it to the House.
I should like begin by wishing the Secretary of State—and, indeed, you and all other Members, Madam Deputy Speaker—a happy new year. I am sure that our return to the House has been looked forward to with even greater anticipation than usual, given that the first piece of legislation that we are to address is the Local Government Finance Bill.
The Secretary of State touched on the fact that local government funding has long been debated and much argued over. At the heart of the matter is the age-old question, which was highlighted by the Layfield report in the 1970s, of whether central or local government should take the decisions. That question has never been fully resolved because the answer depends on the decisions involved and on what we are trying to achieve. Partly for that reason, Bills proposing fundamental changes to local government finance have not come along very often. The previous two were the Bill that brought in the poll tax, which should stand as a warning of what happens when a Conservative Government get things spectacularly wrong, and the one that replaced it with the council tax. That experience should remind all of us that how we fund local authorities and the services that they provide to all our communities is a matter of the greatest importance.
The Secretary of State reminded us of what the coalition agreement said about a radical devolution of power and giving greater financial autonomy to local government. Indeed, he also referred to his words of last July, when he said that councils would no longer have to come to him with a begging bowl. He has set a very high bar against which his Bill is going to be judged.
Let me start by examining the way in which the Bill is being handled, which is the subject of tonight’s programme motion. The local government resource review was first announced in the summer of 2010. The terms of reference were published in March last year. I recognise that there has been consultation on the proposals, but that consultation has simply not been carried through into the consideration of the Bill. The Bill was published on
The Government seem determined to take all the stages of the Bill on the Floor of the House, not because of the nature of the Bill but, as everyone knows, because the business managers are desperately trying to fill up time in the Chamber following their mishandling of the long parliamentary Session. They are not scheduling it in this way as a matter of precedent. Neither the Act that created the poll tax nor the one that replaced it with the council tax—the two Acts that this Bill, in the main, amends—had their Committee stages on the Floor of the House; they went into Committee. This Bill should also go into Committee. That is why we will vote against the programme motion.
By not allowing the Bill to go into Committee—[ Interruption. ] No, I hope that the Under-Secretary of State for Communities and Local Government, Robert Neill will listen to me. If the Bill is not allowed to go into Committee, there will be no opportunity for wider scrutiny of what the Bill—as opposed to the consultation —says. There will be no pre-legislative scrutiny of the Bill, and there will be no evidence sessions. Nor have we seen any of the regulations in draft. This is a pretty shoddy way for a Government who say that they support pre-legislative scrutiny and evidence sessions to deal with the scrutiny of a Bill.
On the substance of the Bill, the Secretary of State has advanced three main reasons for the changes—namely, that the present system is too complex, that it gives Governments too much power and that it does not provide sufficient incentive to local councils to develop their economies. I want to address each of those points in turn.
I accept that the current system is complex, but the truth is that any system will have a degree of complexity if it is to take account of the differing needs and circumstances of different communities. That is why we have complexity in the system. The alternative would be to leave councils and communities to sink or swim, saying, “Right—you take what you can in council tax and business rates; the Government will not get involved at all.” I do not support that.
Many of us, however, are in favour of as much localisation as possible, and, in principle, of allowing councils genuinely to benefit from business rate growth. However, those who put forward these proposals have an obligation to come up with a system that meets a number of tests. Those tests must determine whether the proposals will actually put more power into the hands of the councils, whether they will provide the right incentives, and whether resources will be distributed fairly. They must also determine whether councils will be reasonably certain about the money that they will get, and whether they will get the right help to enable them to meet local need and changing circumstances.
The problem with the Bill, and the reason that we will oppose it tonight, is that it does not give the reassurance that many people are looking for on those five fundamental principles, either on local government funding or on the localisation of council tax benefit. There is no guarantee that any council will not be worse off, except in the first year. It is unclear exactly how much incentive will be offered. As my right hon. Friend Mr Raynsford suggested, the Bill will replace one complicated system with another that is, in the words of London Councils, “fiendishly complex”. One might think that that body would be arguing strongly in favour of these measures, given its position on business rates. Lastly, the Bill will give the Government a huge amount of control over how the money is distributed and the how the system works, even though they claim that they want to devolve power.
When we read the Bill, which is supposed to be about putting local authorities in charge, what is really striking it is the amount of power that it puts in the hands of the Secretary of State.
Will the hon. Gentleman bear with me for a moment?
Under the Bill, the Secretary of State will determine the baseline for every local authority, including, in effect, what he thinks every council needs to spend. He will decide how much business rate income central Government will take and how much will be left with local authorities. He will be able to change the central share from year to year, and to specify the tariff or top-up payment for every local authority in England. He will also decide how much any council must pay him in levy in respect of disproportionate gains in business rate income—and he will decide what “disproportionate” means.
Will my hon. Friend bear with me for a moment?
The Secretary of State will determine safety net payments, and decide how much of the remaining balance in the levy account may be distributed to one or more authorities. He will determine how much billing authorities must pay to major precepting bodies. He will designate pooling areas, and decide which groups of people must receive a council tax reduction. He will decide which classes of dwelling cannot be charged extra council tax, taking account of the characteristics and circumstances of any person liable—whatever that means. He will decide which areas are to be enterprise zones, and issue regulations to designate TIF areas. And in case all that is not enough, in clause 14(2) he gives himself a Henry VIII power that will allow him to amend, repeal or revoke any legislation he wants. That does not sound like localisation to me.
I agree with my right hon. Friend about the centralisation of powers. The one power that is being given away to local authorities is the administration of council tax benefit, where local councils will have the invidious task of cutting council tax benefit to individuals. The Secretary of State is basically giving away the unpopular decisions, making sure that local people get the impression that local councils and not the Secretary of State are to blame for the cuts.
The right hon. Gentleman really must make his mind up. On the one hand, he rejects a system red in tooth and claw; on the other, he wants the system to be incredibly fair. Can he explain by what mechanism he and his party would make the system fair, other than by some central interference?
I would merely say this. First, if councils had a choice between the system under the last Labour Government and the resources made available then, and the cuts imposed over the last two years and the system offered now, I suspect that they would say, “We prefer the old system.” Secondly, the Secretary of State argues that this is all about giving away power and responsibility, but I am pointing out—I can understand why the hon. Gentleman and his colleagues get irritated—the huge number of powers that he is keeping for himself to shape the whole system and how it works. Given that the Secretary of State has all this power, I gently say that I doubt very much whether the local authority begging bowl is going to disappear any time soon. The right hon. Gentleman has form on this, however. In his equally misnamed Localism Bill, he took for himself more than 100 powers. He says that he is passing down the levers of power, but the truth is that he is hanging on to them very tightly.
The right hon. Gentleman professes to be in favour of localism and to want to see it in local government, but he was a prominent member of the previous Government who for 13 years produced numerous White Papers, manifesto commitments, and the entire Lyons report, which took three years to compile—yet nothing was produced or brought before this House over that period to localise business rates. He nevertheless stands up here and complains about what is being done.
First of all, if we are talking about centralisation, the hon. Gentleman needs to think about who nationalised business rates. It was his party. Who was it who abolished London-wide government and who made a mess of the poll tax? In all honesty, I say that making a change in haste in the wrong way is done at one’s peril. The warning of that is provided in the poll tax. If we look back at the debates when the poll tax was being argued for, we find Ministers arguing that this was the most wonderful thing. The people who have really made a mess of local government financing in this country are the Conservatives. Local government would much prefer to have the resources they had under the 13 years of the Labour Government than what they are experiencing under the current Government.
The point is this. It is not about whether we trust local councils or local communities. The question people looking at this Bill will be asking themselves—and, to judge by the consultation, they are—is whether they trust this Government and whether they trust this Secretary of State to use all these powers in a fair way. To judge by what has been done so far, there is not much room for confidence. We know that this Bill is being introduced at a time when local authorities are facing unprecedented cuts. Cuts do have to be made—[Interruption.] Well, I have said that on a number of occasions, but there is no excuse, no rationale and, so far, no justification for why these cuts are being applied in such an unfair way to communities.
As the House knows, one shocking statistic from SIGOMA—special interest group of municipal authorities —tells us everything we need to know about this Government’s idea of fairness. It is the fact that the 10% most deprived upper-tier authorities are facing a reduction in their spending power that is nearly four times greater than that faced by the 10% least deprived authorities.
Let us take just one example from figures produced by Newcastle city council. For every local authority, it looked at the cuts for 2010-11, 2011-12, 2012-13, transition and council tax freeze grant and the provisional new homes bonus allocations. The figures show that Basingstoke and Deane authority will see a cumulative gain of £6.30 per person, whereas Knowsley will see a cumulative loss of £227.35 per person. If that is not balancing the books on the backs of the poor, I do not know what is. What possible justification can there be for such unfairness? When I asked the right hon. Gentleman about it at Communities and Local Government questions recently, all he could do was bluster, so how can councils have any confidence that they are going to be treated fairly under the Bill, particularly for communities where there is a great deal of deprivation, communities with fewer opportunities for business rate growth and communities where a lot of people cannot find a job?
That is not true in relation to local authorities such as my authority. For example, the number of children in poverty across the country was reduced by 600,000, while this Government is in the process of increasing child poverty, as the hon. Gentleman knows, so I am not taking any lectures from him about how to tackle inequality and unfairness.
The truth is that councils are worried that under this Bill, as SIGOMA warns,
“the gap between more prosperous and less well-off authorities will widen as a result of the policy”.
Local Government Yorkshire and Humber fears that
“the Government’s proposals are...likely to favour urban over rural areas and retail development over manufacturing growth…we could easily lose out.”
Those are the concerns that the Secretary of State must address.
Let me deal with the second argument we have heard—that the changes will incentivise economic development. Here, I have a request for the Secretary of State. It would be really helpful if he could clear up the confusion he has created about the Government’s view on whether local authorities want to see economic growth in their areas.
I ask that because in paragraph 1.16 of his Department’s response to the consultation on business rate retention, it says:
“We know that local authorities are keen to grow their local economies.”
I agree with that, which is exactly what councils up and down the country want and seek. So can the right hon. Gentleman explain why the impact assessment published by his Department at the very same time on the very same day says the very opposite—that
“local authorities are generally reluctant to....promote economic growth”?
These are two completely contradictory statements—
“keen to grow their local economies” in one document, and
“reluctant to promote economic growth” in the other. They cannot both be true, so which one represents the Government’s view? I am happy to give way to the Secretary of State for him to explain. Well, there is no answer. It would be helpful if documents were read a bit more carefully before they were published.
On the question of incentives, I note that business rate localisation—the term that used to be used—has now become business rate retention. No doubt that is because it has become clear that the Government will take a proportion of business rate income in the form of the central share payment. In effect, it will allow the Government to top-slice such income and, as the Secretary of State has said, to control local government spending.
Before anyone on the Government Benches says that all that money will be returned to local government, the House needs to be aware that although that sounds good, the money is of course fungible across Government. Using that income from retained business rates to pay for other grants to local government will, in effect, create a saving for the Government because it will relieve the Treasury of having to find the money from elsewhere. So, in effect, we have set-aside by another name and in another form.
We do not yet know what size of share the Government intend to take either in the first year or in subsequent years. Nor has any promise been made—I did not hear it tonight—that the share will not change from year to year. It is, in the words of the Local Government Association, one of the many detailed points that “remain unresolved”. As this is, in the main, an enabling Bill, we will not see that detail until later.
Thirdly, I turn to the question of fairness. The Secretary of State is on record as saying:
“we will ensure that no one will be worse off when the new system is introduced than they would have been under the old system.”—[Hansard, 18 July 2011; Vol. 531, c. 663.]
That sounds reassuring, but it is only valid for twelve months. What about years 2, 3 and 5? Can the Secretary of State guarantee that no council will be worse off then as a result of the change he wants the House to bring in? These are really important assurances, for which councils are still looking. As the Secretary of State’s colleague Sir Merrick Cockell, chairman of the LGA, put it,
“Reform must…ensure that those areas that do not have the capacity to raise huge amounts of funding through business rates do not lose out.”
SIGOMA has asked why Ministers have decided not to restore resource equalisation to its 2010-11 cash level, which could have been used as a baseline for future grant allocation.
What guarantee has been given to councils that the tariff and top-up mechanism will produce a fair result, especially given the coalition’s track record? Why do the Government think—or, to be strictly accurate, have the “aspiration”—that resets should happen only every 10 years? We think that they should be more frequent, as do most of those who responded to the consultation.
What about the circumstances, which were mentioned earlier, in which councils lose a major employer, and hence business rate income? That is a very serious matter. How quickly will such councils be given help, how much will help will they be given, and how long will it last?
What about the perverse incentives in the business rate system that encourage retail units and gyms more than manufacturing, and encourage warehouses employing few staff more than factories employing a large number of workers?
Then there is the levy mechanism. Last July the Secretary of State told the House:
“There will be no cap on the amount of business growth from which such councils can benefit. A council will be better off as a result of growth”. —[Hansard, 18 July 2011; Vol. 531, c. 663.]
Yet the Bill gives the Secretary of State power to decide how much of any growth in business rate income a council can keep. He alone will decide what constitutes a disproportionate benefit. That is the reverse of the localisation that he promised. The retention of business rates is clearly not all that it seems.
If the purpose of the levy is only to fund safety nets—and that is not clear—why does paragraph 28(1) of schedule 1 make it possible for only part of any surplus balance in the levy account to be given back to one or more local authorities? Does that mean that, in effect, a second top-slicing mechanism is being created by the back door?
All that makes clear that no one can say at this stage what the incentive from keeping some business rate income growth will be. That is why London Councils said, in its briefing on the Bill,
“'the business rate incentive is uncertain and unpredictable”.
What is more, in some cases there could actually be a disincentive. Under the current system, if a council decides to engage in a big redevelopment and regeneration scheme in the centre of its town or city, such as rebuilding that centre, the loss of business rates for an extended period is not a problem, because it does not affect the resources that the council receives. Under the Bill, however, it could well be a problem. It may cause the council to conclude that it is not sure whether it wishes to proceed with the scheme, although the Bill is supposed to be all about encouraging growth.
Let me now deal with the other main part of the Bill, which concerns council tax benefit localisation. It constitutes a step backwards towards a time when different areas gave different help to people in need. The big question is this: why are the Government making this change, and why, if they are determined to do so, have they not linked it to universal credit, as was suggested by many people in the consultation? The fact that they have not done that will lead to a great deal of confusion.
Rent is one cost that people face in order to live somewhere, and council tax is another. In the first case there will continue to be a national scheme to provide help; in the other the national scheme is to be abolished, and councils will be left to decide what benefit should be provided. However, the Government intend to legislate to protect certain council tax payers, while at the same time imposing a 10% cut in the amount that goes to local government to meet the cost of paying the benefit. In areas where there is a lot of need—for different authorities have different needs and different circumstances —that will constitute an additional cut on top of the existing reduction in local authority resourcing of over 19% in the last two years.
Because the Bill will rightly give continuing protection to pensioners, it is inevitable that, unless councils try to reduce benefit for those who are out of work, people who work but are on low incomes will be hit the hardest. Indeed, that is what the Government’s own impact assessment says. The House of Commons Scrutiny Unit has made an estimate of the impact of the 10% cut with protection for pensioners which suggests that non-pensioners—people of working age, whether working or not—will face an average cut of 16% in their council tax benefit support. Of course, in areas where the number of pensioners is higher than average, the cuts facing everyone else will be even bigger.
The New Policy Institute, which has also looked into the effects of the cut, has found that five of the 10 hardest-hit local authorities are among the top 10 most deprived areas, according to the 2007 indices of multiple deprivation: Hackney, Newham, Liverpool, Islington and Knowsley. Meanwhile, according to the same indices, the two least affected areas, Hart and Wokingham, are also the two least deprived. Does that sound familiar? Of course it does. Once again, cuts are being imposed unfairly by the coalition Government. Moreover, the Government’s policy is completely incoherent. The Department for Work and Pensions says, “Hey! We want to make work pay!” but here is a policy that will end up doing the very opposite.
The Secretary of State has a completely inconsistent attitude when it comes to protecting people from council tax increases. When he announced the council tax freeze in March last year, he declared resoundingly:
“we are determined to protect hard-working families...This is about giving real and immediate help to families struggling with the daily cost of living.”
Yet here he is now, proposing a policy that will result in a significant increase in council tax bills for some people, particularly those who work and try to do the right thing, but are on low incomes. Those are the people who he said, less than a year ago, that he was determined to protect, but now he wants us to vote for a measure that could, in some instances, wipe out all the benefit of the council tax freeze. Furthermore, the cuts are being introduced at the very moment when more people are going to need help with their council tax bills. Why? Because unemployment is rising. Why do we know that? Because the Chancellor has told us so.
Costs could also rise because of increased take-up. What account have the Government taken of that—and what about higher unemployment? How are councils expected to cope with that? Given that they will possibly end up designing different schemes, there is a risk that people will decide to move from one council area to another because of the different levels of council tax benefit. And what about the collection costs? As the Conservatives learnt when they introduced the poll tax, when councils start trying to collect money from people who do not have a lot of money, they have a problem. People who are poor must make decisions about what bills to pay, and in what order. What assessment have the Government made of the practicality of collecting the money? What about all the other benefit changes that will affect the same group of people at exactly the same time? I hope that the Secretary of State realises that that when a lot of people discover that they are being hit with increases in their council tax—for that is what his Bill does—there will be a great many appeals. How much will that cost?
Finally, there is the timetable for the implementation of the change. The decision to implement it from April next year was widely criticised by respondents to the consultation, and the Select Committee on Communities and Local Government has called for a delay to allow councils time to put their schemes, software and administration in place.
We do not support this change, just as we do not support the Bill. It does not pass the tests of fairness, incentive, certainty, and helping councils to meet local need. It does nothing to deal with the unfair way in which the Government have imposed the largest cuts on the least well-off communities. The Secretary of State claims to be the great champion of localism, but he has presented the House with a Bill that gives him all the power to determine what happens, including the power to take and keep a top slice of business rates. No wonder the LGA said in its briefing for today’s debate:
“That is not a localising policy and goes against the Government’s stated commitment to localism.”
Say one thing and do another: that is the story of this coalition, and that is why the right thing to do is to reject this Bill.
Order. Twenty-six Back Benchers have indicated that they wish to speak in the debate, which is due to end at 10 o’clock, with the wind-ups starting at 20 minutes to 10. We shall therefore start with a limit of five minutes on each Back-Bench speech, from now on. There is nothing else that I can do to give more Members an opportunity to contribute to the debate.
It was a great privilege to speak in last year’s Second Reading of what is now the Localism Act 2011 and to serve on the Bill Committee, but I always considered that legislation to be only a part of the overall programme of localisation that this Government are, happily, determined to introduce. In the financing of any system, the old truism still holds that he who holds the purse strings controls the power. The way in which local government is funded is an important aspect of localism. That is why I am pleased that we are completing early in this Parliament the process of radically shifting the balance of power in this country from central Government towards local government, local communities and individuals. The Localism Act was a significant contribution to that move, and this Bill completes it.
For seven years I was a county council leader operating under the system we are seeking to remove. My right hon. Friend the Secretary of State rightly noted that, as the OECD has said, it is incredibly complex and completely lacks transparency. Worst of all, it is incredibly subjective. Ministers have therefore been able to use this complex system to fund parts of the country that they favour politically. I witnessed that several years ago when I was a council leader. The funding formula produced for West Sussex county council—an authority that covers more than 750,000 people and 770 square miles, and with a capital and revenue budget of about £1 billion—was an increase of just £6,000. At the same time under that formula, Birmingham city council received an increase of £12 million. West Sussex county council tried to find out how the funding formula was calculated, but there was a complete lack of transparency. The central Government Department did not want to tell the authority how it was worked out. We then invoked the Freedom of Information Act, and an obscure measure from 1947—the Statistics of Trade Act 1947—was used to explain why we could not be told what the funding formula was. The system desperately needs reform, therefore.
I welcome the retention of the business rates scheme, which will localise business rates. Most people are perplexed about why business rates currently go straight to Whitehall in an inefficient way and are then inefficiently redistributed around the country.
Gatwick airport lies within my constituency. It is a massive economic driver. It would be nice if we could keep all the business rates. If so, I do not know whether we could quite pave the streets with gold, but we could probably fill in a few potholes with gold. It is right to have a system whereby central Government can redistribute in order to support less economically buoyant areas around the country, but it is also right that we localise a large proportion of business rates and thereby allow local authorities to be much more responsive and to encourage economic growth. That is good not only for localism, but for economic growth in each local area—and therefore for the economic growth of the country as a whole and for our deficit reduction programme, which is so important to the well-being of the country.
I wholeheartedly support the Bill. It is good for our local communities and for council tax payers. Finally, I thank the Secretary of State for working with our local authorities to freeze council tax for another year; it rose by 128% in Crawley between 1997 and 2010.
I am a localist. I believe that this country is too centralist and that, in order to further localism, local authorities need to have more control over their own finances.
In 2004, the Select Committee that I now chair produced a report on local government revenue in which it concluded that business rates income should return to local authorities, where it was raised. I have no problem in principle with measures that seek to give local authorities more incentives to encourage development in their areas and that allow them to retain more of the finance raised in their areas, but let us look at what the situation was in 2004. The components of local government finance then were council tax, which councils kept, and business rates, which were taken to the centre and then redistributed, and about one third of local government revenue came in the form of central Government grant and was distributed according to the resources of councils and their needs. Under the Bill’s proposals, there will be a fundamental change. When they are introduced in 2013-14 local government finance will, essentially, come from only council tax and business rates; the Government grant element will go completely.
The Government therefore face a problem. They propose that the council tax will be left as it currently stands, so they have two objectives for business rates. On the one hand, they want local authorities to retain them so they can provide an incentive for development in their areas and have more control over their own financial futures. On the other hand, the Government want business rates to be used as a mechanism for redistribution—for taking from areas with higher resources and giving to areas with greatest needs. That is the fundamental conflict at the heart of the Government’s proposals. They are trying to do two conflicting things with the one tax of business rates.
That is why the proposal is not for a simple retention by local government that everyone could understand, whereby money raised in an area is kept in that area. Instead, we have a complicated system in order to try to ensure that one tax addresses two conflicting priorities. That is why we will now have a complicated system, and one that further centralises power by giving more powers to the Secretary of State. This is centralised localism once again. The proposal fails to achieve what the Secretary of State says he wants, which is to ensure that authorities with great needs have the same amount of resources to spend as previously. All the information we have received suggests that authorities in the greatest need will lose out.
I welcome the Secretary of State’s proposal not to put council tax into the universal credit, as I think it should be kept at the local level. My problem is with the 10% savings authorities are meant to make. Rightly, pensioners will be protected from many of the cuts that that 10% saving will impose. However, if authorities take account of the tapers under universal credit, so there cannot be reductions for those in work claiming council tax benefit, the total burden will fall on the unemployed of working age who claim council tax benefit. Up to 30% of their benefit could be taken away, and if unemployment rises there will be a further reduction in income so authorities will have to cut either other services or, again, the benefits of the unemployed who are of working age.
There is a further issue. Council tax has been a stable source of income for local authorities over the years. It is not like a sales tax or an income tax, in that revenue from it does not tend to fall at times of economic difficulty. Now, however, for the first time local authorities will find that their main source of income, council tax, will go down at a time of economic difficulty. That will create instability at the heart of local government finance. The Select Committee looked into this issue. It is impossible to believe that bringing in a system in a matter of a few months—consulting on it, designing it, bringing in all the new technology required to implement it—will not result in any disasters caused by a failure to implement things properly, and such disasters will cause genuine hardship for people. I do not think this proposal can be delivered with certainty within the time period.
People whose income changes will also find that they have to go to one office for council tax benefit changes and another office for housing benefit changes, which will add further confusion. The Bill does not take that into account.
As is declared in the Register of Members’ Financial Interests, I am a part-owner of a very small business.
First, I welcome the general thrust of the Bill: to devolve greater financial powers and freedoms to councils, which is very important to me. On business rates, I believe the case for reform is overwhelming. The proposals in the Bill will move us away from a complex, non-transparent, centralised system, which offered no built-in incentives for councils to drive economic growth.
Of course, it is difficult and I think brave of the Secretary of State to propose such a radical overhaul of the existing system, and it is easy to focus on all the fears, which have to be addressed in our subsequent discussions. In utopia—if there are such things as taxes there—perhaps we could draw up a system where all decisions are taken locally, where all business rates are retained locally, where there are real incentives for local authorities to promote economic growth, where there is a perfectly fair outcome for all, and where there are not unpredictable changes in business activity or devastating impacts from structural changes in our economy. I rather doubt that, but it is clear that in the real world we have to take a pragmatic approach and achieve a balance between the objectives of localism, fairness and incentivisation, while providing a safety net and transparency. Incentivisation must be balanced with protection of appropriate resources for all areas, especially those with the greatest needs. This needs to be done equitably, effectively and transparently for all.
The Government have made the commitment that there will be a fair starting point, so that no council is worse off at the outset of the scheme. Tariffs and top-ups are proposed, but with provision for councils to benefit from growth in their business rates. Of course, the devil will be in the detail; we have a lot of scrutiny to do. There are safety net provisions, with a levy to tap into disproportionate gains. Personally, I would like to see local government playing a full role in operating these equalisation mechanisms, along with central Government.
There is a need to provide clear incentives for individual local authorities to gain from additional local development, but I do have some concerns about possible unintended consequences. We have heard mention of the incentives to promote large warehouse developments. They will yield the business rates, but perhaps not the same incentives to promote SMEs. SMEs may well be more job-creating, which is all important for the local area. We have a great deal of careful scrutiny to do there in order to avoid such distortions.
On set-aside, there is a degree of centralisation. It is a first step. In the longer run, I, as a Liberal Democrat, think there is a lot more scope for local decision making. Taking a purely localist view, the localisation of council tax benefit should be welcomed and I certainly welcome the theory, but I do have concerns about the practicalities. The 10% reduction in the overall budget and the centralised decision to retain existing benefits for pensioners, right as it may be, does put constraints on each council devising its own scheme. It also raises genuine concerns about whether it will be possible to protect all vulnerable groups of working age adequately.
In order to implement a local scheme, each local council will have to use different software, so there are many practicalities that need to be looked at.
On empty homes, there is a real opportunity to drive this agenda further than in the past. With 300,000 homes being vacant for more than six months, I am excited by the Bill’s proposal to go further than just giving more discretion to local authorities, and to introduce an empty home premium after a property has been empty for two years. One of my own local authorities is not very keen on this, arguing that an empty home cannot be defined. I am astonished by this response to the consultation—I thought we had gone beyond the days when we said what was furnished and what was not, and so on.
I want to touch briefly on council tax, which is dealt with mainly in the consultation and not in the Bill. I welcome the fact that we can perhaps have a higher tax on second homes. Some 7.29% of homes in part of Purbeck, which I represent, are second homes. This issue is important, and I would like to examine the case for a second home premium, similar to the empty homes premium. I would also be interested in considering allowing the billing authority to keep some of the extra revenue. If we can do that for the business rates, which I welcome—obviously, in a two-tier authority the district council will be the driving authority—why cannot—
The Government’s promise today is that the measures contained in the Bill will encourage local economic growth, and in these times there cannot be a Member on either side of the House who would not back legislation that would do that. Over Christmas, many of my constituents told me that it already feels like the bad old days of the 1980s are back—and not just at the cinema. They want us, as a Parliament, to do something about it.
Encouraging enterprise and enabling local councils to promote growth are good policies that I support in principle. I have always believed, particularly during my time as a councillor, that local authorities should have more tools at their disposal to tailor policies to their area. However, I am not convinced that the measures in this Bill will deliver these aims.
At the heart of the Bill are plans to localise both council tax and business rates, but as time is limited I will concentrate on the collection and distribution of business rates. As we have heard, under these proposals councils will retain the business rates they collect, which will then be subject to a top-up or a tariff. Clearly, the Government intend that those authorities where the economy is booming in excess of expectation will benefit financially through the increased collection of business rates. As a result, residents in those areas may find their streets a little cleaner, the flowerbeds in the parks better stocked and their libraries open longer; but underneath those plans the cost of the better services in the booming areas will be met by areas where economic growth has faltered. In these areas, where deprivation and unemployment are increasing, councils will not benefit from the additional funding, no matter how desperately it is needed. It is these residents who will suffer the loss of vital council services as a result.
The measures in the Bill are likely to lead to a growing divide between “winners” and “losers”, risking some areas spiralling into decline while others continue to grow. Already the Government’s own figures have shown that their spending cuts have disproportionately impacted on areas such as Greater Manchester. The unfairness was so pronounced that last year the Manchester Evening News began a campaign against it. The Government should have taken more notice of that campaign and campaigns like it.
I understand that the changes in the Bill will use the already announced spending allocations from 2012-13 as a starting point for the new scheme, but in doing so they will build a system on unfair foundations. What the Government propose will exacerbate that unfairness. It is the job of the Government to mitigate the impacts of the recession, not compound them by leaving those in trouble to fend for themselves. I appreciate that the Bill does mention top-ups, tariffs and safety nets in order to prevent this, but there is no indication that these measures will be robust enough. In fact, there are no estimates as yet of the impact the changes will have on individual local authorities. I do not believe the Bill should be allowed to progress until there are stringent mechanisms in place to ensure equity in resource allocation.
The Bill also fails to recognise that the actions taken by a council are not the sole determinant of economic growth in an area, no matter how effective it is. I am intensely proud of Tameside council, my local council, which has always played an activist role in the local economy. It has always been forward-thinking and willing to use the private sector or anyone else to try to make services better. Tameside is of course one of the 10 Greater Manchester councils that have worked together to develop one of the most successful systems of city region governance in the country: first, through the Association of Greater Manchester Authorities, and now the Greater Manchester Combined Authority. The Government should recognise that this successful collaboration, which includes councils under the political leadership of all the main parties, stems from an acknowledgement that the authorities in a city region must have strategies that are complementary, not competitive.
Successful business growth in the centre of Manchester is good for my area, because the people who work in those businesses may move out to Stalybridge or Hyde, where they will get a bigger house and more open countryside for their money. However, if we localise the business rate in the wrong way, that collaboration is broken, to the detriment of everyone concerned.
Greater Manchester’s councils are among the most innovative in promoting business and growth on a local and regional basis, but successful as they are, they are not the sole determining factor of economic growth in an area. Indeed, official figures from SIGOMA, reported in the Financial Times last week, suggest that 80% of the factors relating to promoting business growth in a given area are nothing to do with local government. Particularly in this era of economic difficulty, there are factors that impact on local economic growth that are way beyond the control of local councils. Implementing a system that would penalise hard-working and innovative councils when external factors come into play would be wrong. The Government may feel they are justified in recognising economic growth in this way, but if they are rewarding areas for circumstances beyond their control, this is no more than a lottery.
We have very little time to discuss this important Bill today. Those who are not involved in local government finance may consider it an unimportant technicality; however, it will have a serious impact on our local authorities, and I will vote against it today.
I welcome this Bill as yet another example of this Government’s commitment to localism, private sector business growth, local democracy and local accountability. For too long, councils have not had sufficient incentive to drive business growth in their boroughs and districts. The proposals will mean that councils that have been unwelcoming to the private sector and job creation, or even those that treat the private sector with antipathy, will be found out. They will be answerable for their actions or for their inaction, and will risk punishment at the ballot box, where they will rightly be held accountable by their electorates.
At this point, I should declare an interest. Nine years ago, I relocated my business. I wanted to grow the business and create more employment in a district which is now the constituency that I represent. The unhelpful nature of the then Labour-controlled local authority meant that the project took eight years—it took eight years to go through planning and construction, and the issue was resolved only when it dropped on Tony Blair’s desk as the worst case of red tape and bureaucracy holding back a small or medium-sized business in Great Britain. Since the eventual relocation, in 2003, the company has created more than 150 new jobs for the district, and has paid just under £3 million in corporation tax and £1 million in business rates. We will never know how much more the company could have done if it had not been so mired in bureaucracy for so long. Happily for residents and businesses in North West Leicestershire, the district council is now Conservative-controlled, and has been since 2007, and only last week, I was discussing with the council leadership how the authority will be focusing this year on creating jobs and business opportunities in our district.
If we examine the words of the shadow Secretary of State today, we find that they reveal the real beliefs of the Labour party about business and democracy, and go some way to explaining why Labour is not supporting the measures in the Bill. Interestingly, the Opposition now agree with the need for reform, but that raises the question of why they failed to act for 13 years in government. The facts suggest to me that they ignored the need for reform because of the central command and control that the current system gives the Treasury or, alternatively, they simply did not have a clue what do—perhaps it was a combination of both. What I would say is that we need to move away from the dependency mindset in local government, which leads to councils investing much of their effort in lobbying central Government for funding by demonstrating deprivation. Instead councils should be investing in local growth, in a system where they can raise more than 80% of their revenues locally, which gives them a tangible stake in supporting local shops and local enterprise. Such an approach is in stark contrast to the command-like structure that the previous Labour Government favoured. The shadow Secretary of State has said:
“The proposals don't sufficiently incentivise councils to get growth going”.
Yet Labour left a legacy of no incentive for local councils to go for growth, and so the stance could be construed as hypocritical.
Another concern that the shadow Secretary of State expressed was that there is no guarantee that some councils will not lose out, and so we get to the nub of real Labour party thinking. I believe that Conservative-led councils will do rather well out of this policy, but that is not because the proposals give an unfair advantage at the beginning. The starting point has been explained, and it is transparent and fair. Councils will have a set baseline and those already above it will pay a tariff to the Government, while those below it will get an individually assessed top-up from the Government. So it is fair to say that all councils will start on a level playing field. I would therefore say that a fear of democracy, transparency and a loss of central control is driving the Labour party’s opposition to this Bill. In a nutshell, the current system encourages councils to take part in a race to the bottom in order to get funding, whereas our proposals will incentivise a race to the top.
I warmly welcome this Bill as another step towards creating the growth we need to deal with both the financial and democratic deficit left by the previous Administration. This Government are proving, yet again, their commitment to devolving decision-making powers to local people and making them both responsible and accountable for their actions.
First, may I draw attention to my interest, as declared in the register?
The Bill speaks volumes about the Government responsible for introducing it. First, it is largely incomprehensible, and I challenged the Secretary of State, when he was in his place, to explain, in plain English, the meaning of the first seven clauses. Of course he immediately had to rush to get a copy of the explanatory notes, which he read out in a rather tedious way, because it is impossible for the lay reader to understand the clauses. They are phrased entirely in terms of amendments to existing legislation. Interestingly—this is perhaps why he was unwilling to rise to the challenge—the very first piece of legislation referred to, in clause 1, is the Local Government Finance Act 1988. Some people will know what that was—it was the Act that introduced the poll tax. So the people responsible for the poll tax are back with us again, only this time they have the Liberals on board with them.
The Bill is incomprehensible as legislation and it is contradictory in that its effects will be very different from what it claims to do. It talks the language of localism but, as my right hon. Friend Hilary Benn ably pointed out from the Front Bench and as was equally highlighted by my hon. Friend Mr Betts, the Chair of the Select Committee on Communities and Local Government, it is actually a deeply centralising measure that gives huge powers to the Secretary of State to determine what amounts of local revenue can be retained by individual local authorities and, crucially, how much will be clawed back by the Treasury. One of the key provisions, which the Chair of the Select Committee highlighted, is the erosion of grant support from the Government to local authorities. The main source of revenue to local authorities will now be business rates but authorities are not even going to have the benefit of retaining all those rates because of the claw-back provisions in the Bill. The Bill is a deeply flawed, centralising measure that does not do what it says on the tin; it covers itself in the language of localism but is a profoundly centralising measure.
Let us address the part of the Bill that deals with council tax benefit, which is a nasty little piece of legislation and which does not just cut 10% from the benefits of people who depend on this for support with the cost of their council tax. There are large numbers of these people—almost 6 million—and, on average, they are getting about £15 a week, or £800 a year. A very large number of vulnerable people depend on this revenue, some of whom will have all of it taken away and some of whom will have some of it taken away. We do not know what the consequences will be, because the Government have not yet set out the detailed rules. Therefore, local authorities, which are expected to introduce the provision in just a year’s time—they are to have the scheme in place by the end of January 2013—do not know how to begin to plan the scheme because they do not know what the Government’s reserve requirements are.
I must say to the Government that the approach being taken is horrifyingly reminiscent of another disaster of the 1980s: the introduction by the then Conservative Government of housing benefit. The Conservatives like to forget or obscure the fact that it was the Thatcher Government who introduced housing benefit and were responsible for the scheme which Conservatives are now attacking, criticising and saying needs reforming. Its introduction was done in just the same way that the current Government are proposing to introduce these changes: in a rush, without adequate consultation and with a lot of the detail unavailable until very much the last minute. The consequence then was administrative chaos, which was described by some of the country’s most respected newspapers as the
“biggest administrative fiasco in the history of the welfare state.”
I have to say to this Government that they are on track to repeat that experience now. They are rushing ahead with a highly complex scheme without giving local authorities the time to prepare properly, and they are going to do it in a way which imposes steep cuts and therefore affects the living standards of people who depend on this benefit for their welfare. The approach is profoundly irresponsible and I sincerely hope that the Government will at least use one of the powers that they have given the Secretary of State in this Bill and, by order, amend the date on which this scheme can be introduced. I sincerely hope that they will listen to the good advice of the Select Committee and defer what otherwise promises to be an administrative fiasco that will cause immense hardship.
It was said at the beginning of the debate that we live in one of the most centralised states in Europe, if not the world. Only Malta, according to the Government, has a more centralised system of local government. The Netherlands, in my understanding, is the only other country that collects less of its tax locally than Britain. That is bad not just in itself but because it goes against the Government’s stated objectives of localising as far as possible, not just down to local government but from local government to communities, from the European Union to national Governments and so on.
The shadow Secretary of State, Hilary Benn, put the debate in the context of Layfield and the broader history of local government finance, and correctly so, but we cannot speak about local government and its relationship with business without thinking about why we have many of our local authorities and why they were successful 100 years ago or 150 years ago in creating the great towns and cities that many of us are profoundly lucky to represent.
Tristram Hunt has written eloquently on this subject and I feel that, as he sits on the Opposition Benches, we almost have the ghost of Joseph Chamberlain with us—a man who showed that the union of business and local authority, through municipalism and corporatism, could create urban spaces that were good for every type of person in that authority, creating wealth, prosperity and growth and the great civic buildings of our towns and cities. That approach created the urban growth that made wealth and prosperity possible in the latter half of the 19th century, with the first great slum clearances, the provision of a good water supply and all the things on which we still depend today.
The way in which we have gone from that position to where we are now, when, if we are honest with ourselves, councils represent in many cases a desiccated, demoralised and often moribund arm of the state, is a profoundly sorry story and one for which responsibility is shared, as the shadow Secretary of State so correctly said, by Governments over many years. It started a long time ago, in 1835, which was the first time that central Government took a precept from local taxation. Even by the 1870s, 90% of taxation was still raised locally and that figure did not fall beneath 70% until the 1950s. The decline fell to the point at which, between the period covered by 1993-94 and the 16 years that came afterwards and 2011, there were only two years when 50% or less of the funding was provided by central Government. The result is threefold: we have a declining calibre of councillor and officer from parties represented in every part of this Chamber; we have a rupture in the relationship between business and councils that has stifled economic growth, especially in our provincial towns and cities; and we have falling participation and democratic interest from the electorate.
The Bill does an enormous amount to start to turn the clock back to a position in which local authorities have responsibility for growth and can reap the benefits of seeing businesses start up, employ people and create prosperity and wealth in their areas. Importantly, it also includes the downside risk, and this is where I welcome the Government’s reform of council tax benefit. Councils must feel the heat under their feet that will caused by the fact that if they do not get local economies going, they will have to bear the consequences of dealing with the result, which is joblessness. It is important that they do everything in their power to ensure that companies can prosper and employ, creating jobs and growth.
The much-stated aim of councils is that they want to work with businesses, but frankly, as we know, they often pay just lip service to that. I ask the Government to look even further at tax competition between local authorities, so that we can have a genuine fight for jobs, prosperity and growth in the towns and cities across our country.
The Bill brings about the most fundamental change in local government funding since the poll tax. Like the poll tax, it is a big change that is being forced through too fast and, like the poll tax, there is no consensus of support behind it. This reform and this Bill build in unfairness like a ratchet.
At the moment essential local services are funded on the basis of need. After this legislation is passed, they will be funded on the basis of the ability to raise tax and pay locally. Ninety years ago, 30 councillors from Poplar went to prison to establish the principle of equalisation in local government funding. That equalisation means that we now have a system of funding that enables each council to provide services to residents to a similar standard. That is why the current formula for grant to local councils takes into account population, need and the capacity to raise funds through the local council tax. It takes account of the fact that there are more than three times more looked-after children in Newcastle than in Surrey. It takes account of the fact that Bexley and Barnsley have similar populations, but Bexley raises more than £37 million more in council tax each year than Barnsley does.
The Bill ends the equalisation that George Lansbury and his Labour councillors in Poplar fought for just after the first world war. With council tax frozen or capped by referendums, the increased funding for increased spending and increased need must be met through increased business rates. The problem for the future is that the opportunities to grow the business rate are unevenly spread across the country, as is the business base. Kensington and Chelsea has a smaller population than Barnsley or Rotherham, yet it raises more than three and a half times the business rates of Rotherham and more than five times the rates that we raise in Barnsley.
The local government finance system is, as the Secretary of State said, complex and incomprehensible. The Bill will make it more complex and less comprehensible. It has, in my view, four big flaws. First, from year one the gap between affluent and less affluent areas will grow. The affluent areas with the higher business tax base start with an advantage that will just get bigger and the system of tariffs and top-ups will reduce but not remove those disparities as otherwise they would remove the incentives to grow, too.
Secondly, the idea that the legislation will localise business rates is largely an illusion. As my right hon. Friend Hilary Benn, the shadow Secretary of State, said so clearly, some of the most critical decisions about how the system will be designed and operated will be made by central Government and not local government.
Thirdly, local government’s certainty about funding for the future and therefore long-term planning will be badly undermined by the new system because business rates income is volatile and hard to predict. The Secretary of State’s decisions about the design of the system will, it seems to me, inevitably have to be made annually, undermining the ability of local government to plan for the long term.
Fourthly, business growth is not the same as business rates growth, so the incentives to councils to see and support the economic growth of their area might prove to be weak or even perverse under the new system. Business rates are levied on buildings—the bigger the better—so supermarkets, gyms and warehouses are good, but small starter units with high-tech design and manufacturing are bad.
Finally, the changes this Bill makes to council tax benefit are a hospital pass to local government. Many people in Rotherham benefit from that support by about £15 a week. That will be cut by £2 million in 15 months’ time, and although pensioners will be protected, other groups will find the cut is even bigger. This is a bad Bill and we must oppose it.
I should like to draw Members’ attention to my entry in the Register of Members’ Financial Interests.
It is a challenge to follow the two very thoughtful speeches of John Healey and my hon. Friend Ben Gummer. The historical context they gave is very useful, but I cannot help but be persuaded that localising business rate collection and incentivising local councils to grow their own areas in terms of the economy has to be the right thing to do. I met the cabinet of Havant borough council, which is not a wealthy council by any manner of means, on Friday to explain the implications of the Bill, and those members were genuinely excited by what they heard. They said, “That means we are going to have to rethink everything we do. No longer are we going to be pleading for funding—we are actually going to go out there and find it for ourselves.” That is an exciting development.
I particularly welcome pooling. The Select Committee on Communities and Local Government, under the chairmanship of Mr Betts, went to Manchester. There is a huge appetite in that part of the world—and, I suspect, in many other large metropolitan areas—to see private, local and locally generated ways of creating regeneration. Given the lack of central funds at the moment to promote more regeneration, the pooling of business rates, of ideas, of enterprise zones and of TIFs across a whole local area creates a genuine way forward. That is another reason why I am excited by the proposals.
On TIFs, there was some disagreement among those who replied to the consultation about options 1 and 2 and about enterprise zone issues. Should we have small limited schemes that are not subject to the tariff and top-ups regime or should there be ring-fencing to ensure that longer-term schemes can be put together? The Government listened and both those options are available. Clearly, option 2 could create a drain on the overall business rates pool and might therefore have to be limited. I think we all understand how that works. Likewise, we need to be able to have a more flexible, shorter-term version of the TIF pool to ensure that smaller local councils, perhaps in better financed areas, can also get shorter-term projects enabled. That is why I welcome the flexibility being built in.
On empty properties and second homes, it is right that people who own second homes should pay full council tax. After all, they rely on the value of their houses being backed up by an enabled local council that allows rubbish to be taken away and planning decisions to be made. It therefore seems quite proper that they should be asked to make a full contribution to the rateable value of their houses. I also strongly welcome the potential to charge those who have long-term empty properties in their possession a premium on council tax. Given that there are 400,000 long-term empty homes in Britain, the Government must do everything they possibly can to get those houses back into occupation.
I want to spend a little more time on the issue of council tax benefit localisation, with which I have some issues in principle. I was on the Welfare Reform Bill Committee and it seemed unusual to me to single one benefit out of all the benefits being put into universal credit and put it to one side. That made no great intellectual sense to me. I understand that there is a perfectly reasonable argument about localisation and about local councils being able to create local schemes for their local areas to reflect local circumstances, but this issue added another layer of complexity and it came out of a Bill that was meant to create simplicity. For me, the argument did not stack up. However, we are where we are.
I have some questions for the Minister to answer later today or in Committee. Is there any reason why we should not have an official pooling of council tax benefit schemes across my area in Hampshire, for example? Why cannot all district councils in an area get together to create some sort of agreed pool? That would allow some flexibility in under-collection and over-collection and would stop some of the perverse incentives that there might be in the scheme that would push people, particularly those in social housing and where there is a joint housing register, to move into one of the areas on that register. There is a potential problem with this issue and a county-wide scheme in two-tier authorities might be very useful.
On parishes, I noticed in the response to the consultation that in chapter 5 there had been some discussion about parishes. If there is to be a grant to local government to be distributed as a council tax discount, what will be the status of parish council precepts given that they are not part of the same authority? Will there be a legal system by which parish councils can be compensated for the lack of collection of council tax? I am not sure that has been wholly resolved. In my part of the world, certainly, this issue will be very important.
Finally, discussions on clause 107 of the Welfare Reform Bill suggested that the single fraud investigation service would deal with all benefit investigations. That is on the record in the Hansard of the Bill Committee’s proceedings. However, chapter 8 of the consultation document and response suggests that this will now be the province of local councils. I would welcome some clarification on that.
I draw the House’s attention to my indirect interests in the Register of Members’ Financial Interests, as previously stated in other debates.
The Bill covers a number of areas including the non-domestic rating of council tax with specific reference to changes to council tax benefit and additional taxation for empty homes. I should have liked to spend more time on the empty homes proposal but unfortunately time does not allow that. I will simply say that although sticks are welcome, the clauses on this issue are poorly drafted and will leave opportunities for smart operators to find their way around the additional charge. For example, the allowance that the property must be substantially unfurnished could leave considerable room for argument.
On the section relating to the localisation of council tax benefit, the Government might package this as being about passing down powers to councils, but the reality, as my right hon. Friend John Healey said, is that it is a hospital pass to many communities and that the Secretary of State would continue to pull many of the strings. Cuts will come—there is no doubt about that—because if the pensioner element is effectively protected then, as we have heard, the 10% reduction in income will have to be shared out among the remaining groups.
In Plymouth, about 25,000 people are currently in receipt of council tax benefit. Of those, a significant number will have a child dependant, will be single people in low-paid work or will be disabled, but there is no mention in the Bill of protection for people with disabilities. This reform is dressed up as providing discretion and choice, but all it will do is localise cuts and target pain on those who are least able to cope. Unless Plymouth city council can find the money from elsewhere in its budget to make up the lost 10%, it will have no choice but to cut the amount paid to people or to find cuts from other services that have already taken quite a hit and that will see further reductions in the coming years of the current comprehensive spending review.
Plymouth has also seen an increase of over 36% in the last five years in the take-up of council tax benefit, as compared with an England average of 25%. Answers given to Members of the House who have asked parliamentary questions reveal significant disparities in take-up in different areas, and I am not clear from the documents that I have seen that the Government have taken that into consideration. What protection would be offered if in Plymouth, hypothetically, the dockyard failed and the naval base closed, after the scheme had been established by the individual authority? How would it cope with the additional council tax benefit burden and the loss of business rates—a double whammy, and at present with no specified safety net? We have talked generally about a safety net; the detail is not there.
Where will the baseline for these changes be set? Is it possible that it could have perverse outcomes if set in the wrong place? What assessment have the Government made of the potential cut-off points, and are those public? Can the Minister answer the SIGOMA queries that we have heard in the debate? This is complex territory and it is not an area where things should be rushed through, unless we want to see further delays to this legislation as it starts to unravel under scrutiny. I am sure the other place will take a close interest in that.
On business rates, does the Minister not accept that we could see a postcode lottery on a grand scale, where services vary markedly from one authority to another, which could threaten the very ability of some councils in areas of low economic growth to deliver necessary services? That, of course, leads to a downward spiral in those areas, which certainly would not be attractive to inward investment.
What is the role of the local enterprise partnerships in all this? None of that is clear, particularly in relation to pooling, as we have heard. Will the pooling arrangements be allowed to cut across LEP boundaries, and if so, how and where does the risk lie? They will certainly have an interest in that. Ben Gummer talked about councils feeling the fire at their feet, but does he understand what will happen if one of the other Government Departments does not do its job? Let us take transport for example and look at the far south-west—how will those local authorities be able to invest in new roads, new rails, new airports? They simply cannot do it. It is unfair. The Bill is not about local choice; it is about local cuts.
I shall focus my comments on the business rate proposals, and I should like to share with the House the example of my local authority, Milton Keynes council, to show how the Bill will benefit growth and help deliver better infrastructure in the local area.
At present, Milton Keynes loses out pretty badly under the current system. According to figures that I got from the Library this morning, in the current financial year businesses in Milton Keynes are due to contribute £132.5 million in business rates, yet Milton Keynes authority will get back about half of that—just under £70 million. Opposition Members may think that Milton Keynes is a very affluent place, part of the golden south-east, but there is fairly significant deprivation and very often we lose out in our share of the funding formula, be it for local authorities or for the health service. What we want is our fair share. I quite accept the principle of fiscal sharing of revenues across a country; any western country has that. The more affluent areas will contribute more to help those that are less so. I am not saying that we should move away from that principle, but the history of Milton Keynes shows that we have not had our fair share over the years, and I very much welcome the proposals that will give us that fair share.
Milton Keynes is a fast-growing area; it has developed enormously in recent decades, but I do not believe that in terms of business growth we have realised our full potential. Certainly there has been huge housing growth in recent years, but that has not necessarily been underpinned by the necessary business growth and the necessary infrastructure to support those new houses. The measures in the Bill, coupled with those that have been introduced by the Localism Act 2011, will make us more masters of our own destiny, and I think in my local area we will seize that opportunity, and help develop Milton Keynes and grow it into what we want it to be.
The measures on business rates are warmly welcomed by the local business community. This morning I was in contact with Colin Fox, the new chief executive of the local chambers of commerce. He endorsed the view that local businesses very much support them, and that they want business to be a genuine partner of the local authority in boosting growth and developing the infrastructure that underpins that business growth in the future. I believe that, whatever mechanism the local authority has to work with business, that should be decided by the local authority. There is potential for a very good partnership to develop our local place.
I finish by giving just one example of how I believe the Bill’s measures can work, particularly the power that it will give to borrow against future revenue streams, which is not currently permitted. Just before Christmas, the Chancellor announced the building of the east-west railway line, which will go through my constituency—a very welcome announcement. One addition to that which is not currently part of the scheme but which some people locally have promoted is the building of a rail freight terminal in Milton Keynes to encourage more transport of freight by rail rather than road. If the local authority could borrow against its projected business rate revenue, it would help develop that project and enhance the scope of the scheme that is already in place and is already worth while. I offer that up as one example of how the measures could really drive the local economic growth that we all want to see, and I am very happy heartily to endorse the Bill.
It is a great pleasure to follow Iain Stewart.
I am instinctively in favour of some of the reforms that we are discussing. Undoing the damage which the previous Tory Government did to local authorities always seems to me a good idea. It would have been nice to hear a slightly longer and deeper apology about John Major’s decision to nationalise the business rates, but we cannot have everything.
The reason why I am instinctively in favour of the thinking behind the Bill is that the past 100 years have witnessed, as Ben Gummer suggested, a relentless emasculation of local government power and autonomy. As this place has found less and less to do with questions of war, empire and global affairs, it has concentrated on and interfered relentlessly with the powers of local government, most of all in the field of local government financing.
Perhaps you will allow a little history, Mr Deputy Speaker. The great age of local government—of municipal socialism, of gas and water socialism—was the period
1870 to 1914. This was when our great urban centres were civilised: Birmingham, Glasgow, Manchester, Stoke-on-Trent and even London under the London county council. This was the age of museums and parks, town halls and swimming pools, schools and hospitals. There was a widespread belief in the virtue of local government and its capacity to deliver real change for the life chances of the poorest in Britain. The London county councillor and dockers leader John Burns described “a revived municipal ideal”, the goal of which was
“to do for all what private enterprise does for a few. It is the conscious ordering of the city, through ownership of public services, of its own comfort, happiness, and destiny”— in fact, pretty much everything that this Government are opposed to.
But of course this cost money. There was extensive borrowing by local authorities—I welcome provisions to allow for extra borrowing by local authorities—and there was expenditure. In 1905, local authorities accounted for more than 50% of total Government expenditure, a figure which has come down to around 18% today, a clear indication of the decline of local authority power. We are all guilty in that process—inter-war demands for national efficiency, post-war demands for centralisation, demands for rationalisation in the 1970s, and privatisations in the 1980s.
At the heart of this story is finance. The capacity of local authorities to raise funds and be responsible for their allocation has been crippled. Today far too many local authorities seem overly dependent on car parking charges, for example, rather than any other income stream. This is in stark contrast to the situation in America and on the European continent. The lack of a plural funding base has undermined our councils’ ability to deliver for local communities, and made them overly dependent on the decisions of Whitehall, rather than town hall. So councils need the power which comes from financial autonomy, all of which makes the Bill so disappointing.
On the issue of liberty and equity, on the freedom of councils to act, as set against the broader need for social justice across the country, the Secretary of State’s Bill fails. The Government’s system of tariffs and top-ups will see a wholly unacceptable loss of income for those local authorities with less business rate income than their peers. This is, Mr Deputy Speaker, as you will know, a north-south issue. We have spoken of Knowsley v. Basingstoke, of Bexley v. Barnsley. On the Government’s plans—for all their talk of recouping disproportionate incomes—there will be a massive boon for high-performing cities in the south-east and marked loss of incomes for struggling cities in the north.
What is more, the reset mechanism and support funds do not properly account for the loss of a major employer—a dock, for example—and as we have heard, there are perverse incentives in the business rate model that encourage services over manufacturing when we are meant to be rebalancing the British economy, and large square-footage over intensive employment.
It is even unclear from the Government’s own ambitions how these plans will stimulate growth when the Treasury top-slice takes away the incentive. It is uncertain, it is unpredictable and it is fiendishly complex. This will not benefit Stoke-on-Trent, which we all want to see benefit from Government legislation. In fact, it will be hard hit in the ensuing years, which is why I urge Ministers to think again about the Bill. We believe in some of its propositions, but I will be voting against it.
I give my broad support to the Bill and its Second Reading this evening. It will enable the start of the journey away from central control of council funding, and will give councils more autonomy both to raise local funding and to set spending on local community priorities, rather than the perceived priorities of Whitehall. Pursuing the latter over a number of years has created a perverse system whereby councils have constantly been looking to the next Whitehall initiative and the next Government grant. That system has let down some of our most deprived communities, as despite external and formula grants increasing in real terms for more than a decade from 1998 onwards, the gap between rich and poor actually widened during that period.
In the scramble to get funding into local authorities, those prescriptive grants would quite often not match the priorities of an area, of if they did, they would often overlap with the current authority provision because the grant criteria could not be tailored to local need. Services could often not be integrated, leading to very poor value for money and a continuous bolt-on of services, which councils then had to make very difficult decisions on, in terms of deciding whether to retain them or not, once the grant funding from Government expired. Pursuing the former and moving away from a central grants system will allow councils to make clearer long-term decisions based on the priorities of the communities that they serve.
I wholeheartedly welcome the mechanisms in place in the Bill to ensure that no council is worse off at the outset of the changes. That, together with a system of top-ups and tariffs, will ensure fairness. I also welcome the concept of the retention of future local business rates. I believe that that will make councils, particularly planning authorities, think far more carefully about creating a good mixture of commercial development and housing in their local plans. Many of my constituents feel that any plans for new housing must be matched by the creation of new employment to ensure that communities are sustainable and cohesive, and not just commuter belts for the larger conurbations, with poorly thought out, over-intensive housing developments.
It is also vital that the Government address the problem of empty dwellings, which the Bill does. As a Conservative I am a firm believer in a property-owning democracy and therefore the right of an individual to use a property in any way they wish within the rule of law, but I am acutely aware of the situation that we now face with huge numbers of long-term vacant properties—nearly 280,000 in England last year alone—and the councils covering my constituency have 1,100 such properties. With such a housing shortage, and with the proposal of new housing developments across the country, it is morally right that we try to correct the failure of the market in this case and get those long-term empty properties back into use. Therefore I welcome the Government’s move to allow councils to charge additional council tax where a property has been vacant for more than two years. That, together with the incentive to get existing properties back into use through the new homes bonus, will have a hugely positive effect on getting our properties back into use.
There are many more matters that I would like to speak about in some depth, but I will not do so on this occasion. I welcome the fact that the Bill will come before a Committee of the whole House rather than a Bill Committee, which will give Back-Bench Members an opportunity to raise their concerns about some of the minutiae of the Bill at that point.
The Bill aligns with the coalition agenda to move communities from a culture of dependency to one of greater-self reliance, but provides the safety net to bridge the gap where communities have the problems that make it difficult to achieve that self-reliance. I will therefore support the Bill this evening.
Given the time constraints, I will focus my remarks on part 1 of the Bill, which deals with local business rate retention. I have concerns about the localisation of council tax benefit, but I will save those for another day.
Earlier today we had a lecture from the Secretary of State on how councils need to be financially incentivised to encourage business growth and start-ups. We were told that the current arrangements, whereby central Government redistribute national business rate income to councils based on local need, is a complex and opaque system that does little to encourage an authority to foster economic growth. But the reality is that the partial business rate retention scheme that the Bill proposes will simply replace one complex system with another. It will not boost economic growth as the Minister claims. It is the wrong policy at the wrong time.
The idea that a council’s ability to fund child protection or elderly care should be determined by the number of businesses it boasts is not right. The idea that councils will act to improve their area’s economic fortunes only if they stand to gain some direct benefit for their coffers is insulting, and the idea that this policy is the correct one at a time when businesses are paying off debt rather than investing in new facilities goes to show how desperate the Government are. I am not suggesting that councils do not have a role to play in local economic development—far from it—but I am realistic enough to know that the actions of an individual council will only ever be one part of the jigsaw.
Let us take Lewisham as an example. Lewisham has one of the smallest business bases in London, as 70% of its working population leave the borough every day to go to work. The police station in the heart of the town centre is the borough’s ninth largest business rate payer, the other large rate payers being supermarkets and schools. It is a densely populated residential borough. There are pockets of prosperity, but there is also high unemployment. Before becoming an MP I was Lewisham council’s cabinet member for regeneration. Despite what Government Ministers might think, I did not sit around twiddling my thumbs and thinking that if only we could retain growth in future business rates we would do X, Y or Z to stimulate development. Funnily enough, I remember doing quite a lot to try to grow the local economy, not because it would mean money for Lewisham council, but because it was the right thing to do for Lewisham people.
A huge amount has been done to try to stimulate local economic development, but Lewisham’s business rate growth over the past few years has been modest, from a small base. The biggest business rate payer is a media company based in offices above Lewisham’s bowling alley. It is paying £2.8 million in business rates this year, an increase of over £2.7 million from the £80,000 it paid in 2008. Why the sudden growth? What did Lewisham council do to encourage that growth? The honest answer is very little. The business did not undergo development, expand its occupation or intensify the use of its site. Basically, the company had to pay business rates on the fibre-optic cables it had laid across London. Its offices in Lewisham are the biggest it has in London, so Lewisham collects the £2.8 million. What does that experience tell me? It exemplifies how an increase in business rate income may have very little to do with the actions of the local authority and that, although economic growth might be encouraged by a council, unless a range of other positive factors coalesce, businesses may not grow and start-ups may not emerge.
Old Street’s silicon roundabout was always more likely to develop in Old street than, say, Catford. Why? Old Street is on the tube map and Catford is not. Extend the Bakerloo line to Lewisham and on to Catford and we might have more of a chance. Even if we regenerate Catford town centre, would we be able to woo those high-tech start-ups from Shoreditch? I suspect not, because businesses like to locate next to other similar businesses—the agglomeration economies we all learnt about in our geography lessons—and success breeds success.
I believe that councils have differing potential to attract and grow business in their areas, and I do not understand why that gives local authorities the right to grow their resources in order to be able to provide extra services to their local population. The factors that determine growth in an area’s business rate income will sometimes have little to do with what a council is or is not doing. It will never bear any relation to the number of elderly people who require care packages or the number of children who require child protection plans. Linking the two, albeit through a convoluted system with all manner of supposed checks and balances built in, does not seem right to me. I cannot help but think that this is another case of the Government trying to pass the buck and shift the blame for their own failings. Councils are not the reason why the economy is flatlining, but they might be part of the solution. The ultimate responsibility lies with the Government.
In the short time available I wish to focus my remarks on business rates and tax increment financing. I will pick up on an issue that has been raised throughout the debate, particularly by Opposition Members, which is that the partial retention of business rates is unbelievably complicated and that it is somehow a centralising step; it is anything but that. The fundamental principle is incredibly simple: it is about creating a mechanism whereby there is a greater degree of common cause between business growth in the business community and the decisions a local authority might take.
I have heard no one in the debate support a totally localised system, with councils keeping every single penny of business rates. That would exacerbate the problems that Opposition Members have spoken about, which is why that is not what is set out in the Bill. A totally nationalised system would be totally centralised, taking business rates completely away from local authorities. What is proposed instead is a very simple and powerful idea: giving local authorities, in a fair way, the power to retain some of the business rates they collect, creating a much more physical link between them and the local business community. When we talk to constituents, we often find that they think that that happens anyway. Some are surprised to learn that business rates are simply passed up the chain, and that the link between the local business community and the local authority is not there to the extent that it used to be.
That link will help councils to develop proactive strategies on regeneration beyond those they have at the moment, and to develop better relationships with their major employers, so that they can work together to see how they can foster business growth. Although these are difficult economic times, some businesses are looking to expand. I see them in my local authority, and the council is having discussions with them on what it can do. The business community wants a greater sense of urgency on the part of local authorities—even local authorities that have a good relationship with their businesses—in planning decisions and consultations, and in working together and saying, “What can we do to help you to grow your business?”
I agree with Heidi Alexander that it is difficult to see how growth can be stimulated in local authorities where there are pockets of deprivation and low business activity. Such problems have existed in Folkestone harbour and the east end of Folkestone since the departure of the channel ferry business and the closure of the traditional port. There, a private investor and philanthropist has invested to create a new business community based around the arts and creative industries. I wholeheartedly support that scheme, which has been driven by big private investment, but the challenge is to ask what the local authority can do alongside that to help drive the process forward, rather than simply taking planning decisions and having a friendly relationship. Can the local authority look to invest alongside that development, to create a new raison d’être for that local economy that will attract other businesses?
In that respect, the tax increment financing powers are interesting and important, because they create a mechanism whereby local authorities can borrow to invest to improve business infrastructure to attract business. We know that in areas of market failure, market forces on their own are not enough to drive regeneration. There are fundamental reasons why the business base in that area has collapsed, and it needs special help and support. The tax increment financing powers in the Bill can deliver that, and the incentives for local authorities to grow their business rates. They will know that doing so gives them more money to spend on local resources. The powers will also give local authorities an argument to make to local people when they are considering planning applications for business expansion. They can say, “The community gets something back from the local authority’s proactive relationship with the local business community and from seeing business rates grow.”
Tax increment finance powers enable local authorities to behave in the way that a major commercial landlord of a large estate would behave. In most parts of the country, town centres are not dominated by a single landlord, but we find that situation in the centre of London. Such a commercial landlord will invest heavily in improving the quality of the business stock and business infrastructure, in the knowledge that they will gain when the higher rents come in.
Some landlords that operate in central London, such as the Grosvenor estate, which operates a mixed commercial and residential portfolio, invest in commercial areas and give discounted rates to make the community a nicer place to live, knowing that they can recoup the discount through the residential income they get from rent on their properties. They take a view on investing in their estate and getting the money back. In areas of the country where no single dominant landlord can do that, taking such a view is a role for local authorities. With the new relationship with the business rates and the powers of tax increment financing, we give local authorities a way to develop a local plan for regeneration that will be better and more targeted than any Government Department could ever devise for that community.
I shall speak about the business rates proposals, the many gaps in the Bill and the unanswered questions. The councils that have faced the biggest cuts will lose most from the proposed changes to business rates. The impact of the local government cuts on businesses will take many years to work their way through, because there will be less money in the economy where the cuts in the public sector are greatest. In Sefton the cuts are already affecting businesses that rely for much of their trade on the public sector. The economy in Sefton, Liverpool and across the north-west will face greater pressures than the areas where the cuts have been far smaller.
Would my hon. Friend be surprised to hear that when I asked the Secretary of State, in this very House on
“guarantee that Liverpool will not see a real-terms cut in its funding” in the first two years following the changes, he said:
“Yes, it is going to do better out of this system”?—[Hansard, 18 July 2011; Vol. 531, c. 670.]
I am grateful to my hon. Friend, who is absolutely right. The Secretary of State made similar remarks in his speech today, and I will explain why he is completely wrong.
The reality is that even if the starting point for business rate retention is after the main element of the cuts has gone through, some businesses will struggle to survive in areas where the cuts have been greatest. Councils in those areas will therefore experience falling business rates, with a further impact on the services that can be provided by the councils that have faced the biggest cuts. Areas such as Sefton and Liverpool have some of the most deprived communities in the country. The scale of the Government’s cuts has already hit those communities harder than the more prosperous parts of the country, and that includes the loss of services to some of the most vulnerable.
Does the hon. Gentleman recognise that in the past five years Sefton has had an annual increase in its business rate of 6.1%, and Liverpool has had an annual increase of 8.2%?
I am glad the Minister made that comment, because it gives me the chance to make the point that that was before the massive cuts in Sefton, Liverpool and other metropolitan boroughs made it unlikely that such developments will continue. It is very likely that we will see a reduction in business growth as a result of the impact on the economy.
The Minister says it is the same old record—but it is the same old Tories doing the same old things to the most deprived communities.
The Government’s proposals in the Bill are unfair and hit the poorest communities hardest. They also ignore the reality that, as my hon. Friend Heidi Alexander said, councils have a limited role in promoting growth. Only authorities that grow business rates above the level of the Government’s national assumption will benefit, while the others will lose, so the gap between the most prosperous and the less well-off will widen.
The Secretary of State retains many of the powers relating to business rates. The centralising tendency is very much in evidence, and the more the Bill is scrutinised, the clearer it becomes that localism will be dished out in very small doses, at the bidding of the Secretary of State. The Treasury is to take a cut of any growth in business rates. That undermines the stated aim of incentivising local councils, and it risks limiting the likely take-up by the vast majority of councils—a point being made by many local authority leaders.
I am aware of the many concerns about the plans for the local retention of business rates. Many questions still need to be answered. The Government plan to reward councils that exceed national growth expectations, so they will, by definition, artificially punish areas that have low growth, such as rural areas or areas where major industries have recently shut down.
The measures will also penalise areas such as Sefton, where there is a shortage of available industrial land, and where there are limits on the potential for economic development. Sefton is in the process of putting together its core strategy, and it is struggling to find the development land needed to benefit from the Secretary of State’s proposals. I hope he will take on board the very real concerns not only of council leaders, but of businesses that face the problem of being unable to create growth because they do not have land available.
Given the Government’s record in applying the current cuts unfairly, there is no confidence that they will not do the same with business rates localisation. Incentives for local councils to generate economic activity are one thing, but a system that undermines local authorities serving deprived communities and boosts those in least need is not the way forward. The Secretary of State should think again.
At this stage of the debate we always try not to double up on what others have said, but Bill Esterson said it would be fine if the present local government finance scheme had actually dealt with the differences between authorities. Many Opposition Members have talked about perverse incentives and about a lot of history, but let me explain some history.
I spent 17 years as a Conservative member of Hackney council, which the shadow Secretary of State referred to as one of Britain’s poorest boroughs. When I joined the council as a Conservative—as Members can imagine, there were not many Conservatives on Hackney council—it used to proclaim itself Britain’s poorest borough for a reason. There was almost a perverse incentive for it to do so. I am not saying that Labour councillors did not want to see the council and its tenants better off, but it was in their interests, given the funding regime, to exaggerate how badly off Hackney was. It meant that they could get more from the rate support grant.
That perverse incentive has continued. I shall give another example from those days and my early learning experiences in local government in the 1980s. I used to sit on the housing committee, and once while discussing housing benefits I made what I thought was a stirring speech on behalf of Hackney’s tenants when the Labour party wanted to increase rents by 6.8%. I was complimented afterwards on the standard of my speech. Members might not believe it but I was a new young councillor then. But I was told, “Actually Eric, it doesn’t matter. They’re all on benefits so we can just put up the rents.”
We are not saying—although I understand that the Opposition have tried to say it—that the change proposed by my right hon. Friend the Secretary of State is a massive revolution along the lines of the community charge, but, as other Government Members have said, it will mean that we can begin to provide councillors with a way of raising extra money by entering a bargaining system with business. The main thing that counts when encouraging business growth is a person’s ability to put their own money on the table. At the moment, though, there is little in the system to give councillors that ability. I believe that these reforms are the first step along that road.
Members have mentioned the north-side divide. I represent a part of the north, and my district councils are looking forward to these reforms. For example, Lancaster council can now envisage finally being able to raise money off its own back, go into partnership with local businesses and perhaps open that third bridge.
Does the hon. Gentleman realise that his council will also have to take responsibility for council tax benefit, which will come with a 10% cut, so that although it could end up raising money locally it might have to use that to subsidise council tax benefits?
From what I hear from my councils, that is not the prospect that they are looking forward to. Lancaster council wants finally to build a third bridge, for which Lancaster has been waiting years. Wyre district council has been waiting years to open a railway line to Fleetwood, where a railway line currently exists, and by borrowing through some of these schemes it could open up new development plans to business. It is looking forward to being able to close the north-south divide.
My support for the reforms is based on the need to achieve growth. Like many Government and Opposition Members, week after week I meet businesses in the north-west, particularly in my constituency, that have the potential to grow but just want a little extra support. That might mean doing up the road on the industrial estate or providing a bit of extra shedding so that they can meet their orders. With these changes, councils will finally have an interest in encouraging that business. [Interruption.] Opposition Members might scoff, but as was pointed out, in particular by my hon. Friends the Members for Ipswich (Ben Gummer) and for Milton Keynes South (Iain Stewart), the problem is that local councils, for good or ill, have divorced themselves—or have been divorced by the system—from any real interest in encouraging and supporting economic growth.
The best councils have wanted to encourage growth. I take my hat off to those such as Heidi Alexander, whom I have met before in relation to this matter, for all the work that they have done to encourage that growth, but the fact is, as we all recognise, that some councils and council officers have seen little benefit in going out there to support and encourage business because it has not directly affected their income. These changes will at least start to address that situation.
I shall finish on a point that I have raised elsewhere. I think—I might be wrong—that under paragraph 37 of schedule 1 the Secretary of State could allow new types of enterprise zones. Why are we not encouraging university campuses to have their own enterprise zones? I know that that would cause problems with Treasury mandarins and their calculations, but we seem to have missed a trick, because we are talking about something that could be the very basis for creating and developing new businesses, albeit not on such a large scale. Once those businesses got that extra bit of employment, they would have to move off by definition, because of the nature of university campuses. That would mean getting the turnover that we want and would deal with the criticism of the old enterprise zones—that businesses moved in from other areas and stayed there.
I am pleased to follow Eric Ollerenshaw, who is living in cloud cuckoo land if he thinks that this Bill will suddenly drop pennies from heaven on to his constituency and the north of England, to regenerate his and other areas. What we have before us today is an extension of this Government’s local government policy, which is about cutting local government finance, but giving the impression that the tough decisions that local councils are having to make are not the Government’s responsibility, but the responsibility of those very councils. Yesterday, for example, the council in Doncaster cut wages by 4%. The Government are saying, “Well, it’s your decision.” They are giving councils the baby and letting them decide how they slice it up.
I take exception to what Government Members have said about how local government is somehow not interested in regeneration. I spent 10 years on Newcastle city council, serving my final years as chair of the economic development committee. It was a council that put a hell of a lot of effort into regenerating both inner-city Newcastle and surrounding areas. Likewise, Durham, my current county council, is making a tremendous effort, and has done for several years, to try to encourage business into County Durham, but it has been hamstrung. Some of the things that the Government have done recently, such as abolishing the RDAs, have made it virtually impossible for the council to spend nearly £140 million of European regional development fund money. It is sitting there, ready for development, but because of the constraints put on the council by this Government, no one can access the money.
The point about the proposals on business rates is that, yes, local government can have an impact on regeneration; but it is a damn sight harder in County Durham, even with the tremendous efforts of local business and the county council to secure inward investment, than it is in Canary Wharf or other prosperous parts of south-east England. We are not dealing with a level playing field from day one; indeed, local councils are not even the only driver for getting inward investment. It is far easier for people to make investment decisions down here—we only have to look at the investment and the number of cranes going up in the east end of London now, in a recession, in hard times. We can only dream of that kind of investment in parts of the north-east. Every single inward investment decision that has been taken for the north-east has been hard fought for.
The idea is that this small change will somehow make a real difference, but it will not. We will end up with a two-stage Britain, where this measure will be good news for local councils in the south-east of England—I accept that certain parts of the south-east of England are depressed and deprived—because, frankly, they will not have to work very hard to get inward investment and an increase in business rates, whereas that will not be the case in more deprived areas. Over time, we will clearly see a disparity, which will lead to a two-speed Britain, with things made even harder by this Government, who have abolished things such as the RDA in north-east England.
Does my hon. Friend agree that all this is the continuation of a policy, which was tried out in the ’80s by Thatcher and Howe, of managing the decline of northern cities, especially areas such as Liverpool?
It is exactly. Let us look at what this Government and this Secretary of State have done on local government. I take my hat off to him, because he is rewarding his friends and his councils in the Tory heartlands. The idea is that we can somehow just write off great cities such as Liverpool and Newcastle, or other north-east cities, as if it does not matter. Do the Government actually care? No, I do not think they do.
The Secretary of State said in response to my intervention that Durham would gain under the new proposal. I would like to see the figures showing how Durham will gain, because the county council has seen from its own figures—he is using 2011-12 as the baseline—that it will lose out. This is being rushed, and it will become clear, over time, that it is not the radical approach to local government reorganisation that some people suggest. It is in fact a way of ensuring that prosperous Conservative seats will benefit from the measures at the expense of some of the poorest communities in Britain.
I want to turn now to the scandalous situation relating to the localisation of council tax benefit. This measure comes with a 10% reduction from day one, and it will disproportionately affect constituencies such as mine, and more deprived areas with larger numbers of people in receipt of that benefit. Listening to the Secretary of State talking earlier, it sounded as though he thought that those people were the feckless poor. I must remind him that a lot of low-paid workers, who are working blooming hard every day of the week to keep a roof over their heads, rely on council tax benefit. Over a period of time, those people will get the impression that these decisions are nothing to do with the Secretary of State, and that it is the local council that decides how to divide the money up. This measure will have a disproportionate effect on those areas with a large number of people in receipt of council tax relief.
I am sure that the hon. Gentleman suggested only inadvertently that I was talking about the feckless poor and the like. May I respectfully remind him that I was quoting the Leader of the Opposition and the shadow Secretary of State for Work and Pensions? It is with them that he should take up this matter, not me. Do not put words into my mouth; those were their words.
I was not putting words into the right hon. Gentleman’s mouth, but I have to say that he is continuing the mistaken idea that every person in receipt of council tax relief is unemployed and useless. They are not; they are hard-working, low-paid families—[ Interruption. ]
Unfortunately I cannot, as I have very little time left.
Let us not be conned by the Secretary of State’s strategy. In the name of localism, he is pushing decisions down to local government, but cutting grants at the same time. He will then try to say to local people, “It’s nothing to do with me, guv. It’s your local council that is doing this.” That strategy was used by the Conservatives in Canada in the 1990s, and it is clear that this Government have learned from that play book and want to ensure that local people do not blame them but instead blame their local council, which will have been hamstrung by the grant cuts. It is about time that people saw through this bluster from the Secretary of State.
I would like to give an enthusiastic welcome to the provisions in the Bill, unlike the previous speaker, Mr Jones. It is surely right to expect local authorities to support and nurture the business interests of their localities. I believe strongly that the provisions of the Bill will act as a powerful incentive to local authorities to consider what they can do to facilitate business and economic growth. It is also clear that, if localism is to have any meaning, we must re-establish the link between local authorities and their local business communities.
It is my view that the Bill will also make local government finance fairer, and I would like to illustrate that point with reference to my own local authority. The hon. Member for North Durham might be interested to note that my local authority is Labour-run, which might help to scotch the myth that it is only rich Tory boroughs that will benefit from the measures. Thurrock is a net contributor to the national pot, as we have a strong non-domestic rate base. At present, Thurrock collects some £98 million, but retains only £52.2 million.
That is not to say that Thurrock is a rich locality, however. As a borough, it does not score highly on indices of affluence; indeed, we have a number of communities that score highly on indices of social deprivation. The ward of West Thurrock and South Stifford has some communities that are in the lowest 10%, for example, yet it generates some £64.2 million in non-domestic rate income, which is more than is retained by the whole borough of Thurrock. That ward is clearly making a significant net contribution to the Exchequer through all kinds of taxes. It is therefore fair and appropriate that some of those companies’ business rates should be retained for use in the local community, and I am pleased that the community will benefit from the growth in that area in the future.
We should note, however, that there are consequences for a local area that enjoys a vibrant business community. In Thurrock, for example, high volumes of heavy goods vehicle traffic and road congestion cause a nuisance for residents. If we expect local authorities to take a more balanced approach to leading and managing the interests of the whole of their localities, they must have a stake in the economic success of that locality. Without it, there is simply no incentive to think beyond short-term electoral advantage.
I am quite clear that the current system does not encourage local authorities to take a balanced view. It actively encourages local authorities to ignore the needs of the local business community. After all, they have no votes. At best, local authorities take local business for granted. At worst, they view it as an inconvenience. I have certainly received representations from the business community in my constituency to the effect that the local authority does not understand their needs and is unsympathetic to them. Businesses may not have votes, but their needs are important if we are to build strong and successful communities and a successful economy. This Bill will encourage local authorities to be more responsive to the business needs of their communities and, in so doing, they will promote growth and jobs—and who can argue with that?
The Bill proposes that the Government should be able to retain some of the funding where local authorities benefit from disproportionate growth. I am quite interested to hear more detail about this. As I have said, Thurrock is already a substantial net contributor in respect of business rates. That contribution looks set to increase. We have massive inward investments by Dubai Ports; the port of Tilbury is expanding after an already successful 125 years; and, of course, the Lakeside shopping centre is building on its existing success. I am therefore interested in how the Government intend to operate the levy when a local authority receives a disproportionate increase in revenue, and in how to make sure that this is handled fairly. In particular, I remind Ministers that in supporting business growth, there are consequences for the locality. If we are to encourage local authorities to use tax increment financing and borrowing against their future returns, they need to be clear about just how much they will get from the expansion.
In finalising the provisions for the levy, I hope that Ministers will bear in mind the strong principle that local authorities must receive a significant stake in return for encouraging additional investment. Ultimately, we need to make it easier for contributing authorities to contribute even more to the Exchequer through business growth and, as my right hon. Friend the Secretary of State said in his opening remarks, to make the pot of non-domestic rates even bigger.
With about 186,000 people and two MPs, the Stockton borough is one of the smallest unitary authorities in the country. It is also one of the best—it was recently council of the year, and for several years in a row, it has been in the top six authorities for its management of resources.
For all its small size and success in managing resources, some 500 council jobs have gone since the coalition Government came to power. Still more will doubtless go as the attack on local government and the services it provides continue with this Bill. The lost jobs are adding hugely to increasing unemployment in an area where the jobless rate is already much higher than at any time under the Thatcher and Major Governments when areas such as Teesside and the wider north-east England economy were left on their knees.
Now we have a grand statement from the Government: “Transparency, economic growth, flexibility, making communities masters of their own economic destinies”—all this is promised by the Local Government Finance Bill. These are fancy words that we know, and the Government must know, are an attempt simply to be upbeat in the face of a dire and failing economic policy that is in danger of driving our country back into recession. The jobs lost in my borough are reflected many times over across the country, and the charging white horse of the reform of business rates will not matter a jot—well, not for the worst hit areas in the economy. The reverse will be the case.
What Government Members fail to acknowledge is that local authorities cannot all be equally alluring to business—however hard they try. Business taxation revenue varies hugely from place to place. In 2010-11, Westminster collected 33 times more than my neighbouring borough of Middlesbrough. The changes will widen the gap between authorities capable of promoting growth—mainly in the south—and those where growth is slow or non-existent.
Far from there being, to quote the exact words of the Secretary of State,
“no motivation for councils to support local firms or create new jobs”,
local authorities have embarked on economic development in their area for countless years on the basis that this will attract jobs and so benefit their area. It is the right thing for local authorities to do.
I have been disgusted this evening by the denigration of local authorities, their members and their officers. That the Secretary of State could make such an insulting statement shows how little he understands, despite his long service in local government, the way in which it works. The idea that there could be some overnight entrepreneurial revolution is sheer fantasy.
I am particularly shocked that Ministers should believe that the 10% cut in council tax benefit will somehow magically reduce the number of people who need it. In fact, it will be squeezed at precisely the point at which there is the most need for help among low-income households. Pensioners and vulnerable households may be protected from the cuts, but that means that the whole of the 10% saving that local authorities must make will fall on the unprotected group that consists mainly of the working poor.
Will not the 10% reduction also mean more poverty and homelessness? How will that affect the hon. Gentleman’s community?
I have no doubt that communities such as mine, and perhaps the hon. Gentleman’s, will be affected. I believe that we will see more poverty as people try to cope with much lower incomes.
In many instances, the gains that the Government suggest will be made by the working poor as a result of the £1,000 increase in the personal allowance for income tax will be wiped out by the reduction in council tax benefit. The theoretical 10% reduction will equate to a loss of £1.7 million for the Stockton authority area, £1.2 million of it in my constituency. Given the exclusion of pensioners from the change, those affected are likely to be hit by a 20% reduction, which will contribute to a further increase in poverty. The Government’s proposals merely transfer one of the national costs of rising unemployment to councils and local taxpayers, creating a serious risk that every resident will face further cuts in services that are already under threat.
I do not often find myself sharing many opinions with Government Members, but I simply could not disagree with the Under-Secretary of State for Communities and Local Government, Robert Neill, when he said:
“Those in greatest need ultimately bear the burden of paying off the debt”.—[Hansard, 10 June 2010; Vol. 511, c. 450.]
As it is, the Bill tees up the poorest to bear the greatest burden. It neuters local authorities other than those in the most affluent areas, preventing their development, and it will lead to further job losses throughout the country, with no consolation for the nation as a whole. I will oppose the Bill tonight.
I believe that the first three years of the coalition Government will be remembered for three things: constitutional reform, dealing with the economic mess bequeathed by the Labour party, and localism. The Localism Act 2011 gave local authorities, and also local people, power to determine what happens to them. However, we have a hideously fiendish system of local government finance to deal with the money that is spent on supplying services, and I am delighted that we are finally dealing with that.
I am not a stranger to the proposal that business rates should be retained by local authorities. I advanced it at the 1994 Conservative party conference in Bournemouth. Sadly I could not persuade the Conservative Government of the day to implement it, but I am delighted that we are taking the first steps towards ensuring that business rates raised locally are retained locally, because that is an ideal way of providing incentives for local decision-making.
Of course, retaining business rates at local level will require a complicated system, from which there will be gainers and losers. Let me give two examples relating to a local authority of which I was a member for some 24 years. When Wembley stadium was demolished and taken out of the business rate pool, £1 million a year was effectively taken out of the income from business rates. That could have a disproportionate effect. Had the new system been operating at the time, the local authority would have lost the money for five years—some £5 million of income. Therefore, if an employer goes out of business there must be some means of compensating the local authority to address any fall in income. The provision encouraging local authorities to promote business in their communities is important.
There has also been an issue in the suburbs. The last Labour Government encouraged—almost promoted—businesses closing down and sites being turned over to housing. As a result, in the suburbs business rate income has dropped, and it continues to fall. We must take account of that as we encourage local authorities to promote business in their areas.
Local authorities have almost done away with promoting economic development as a main means of operating. The Bill will transform that. Local authorities will need to become business-friendly and promote business and jobs in their local areas. That is clearly the right way to proceed.
Local authority finance has changed greatly. Housing benefit comprises almost one third of the money going through most local authorities’ books. Rightly, that will be taken away. The administrative costs of housing benefit were outrageous. However, I have concerns about the implementation of the council tax benefit in such a brief time scale and the local impact of that. Almost everyone who is in receipt of housing benefit receives council tax benefit as well. Now that housing benefit will be administered through the Department for Work and Pensions, it makes sense for council tax benefit to be similarly administered. The situation currently proposed is bizarre, to put it mildly.
Turning to tax increment financing schemes, many local authorities have huge historical debts, which were incurred as a result of the development of housing 30 or 40 years ago. Are we going to allow local authorities with such huge historical debts to borrow against future business rate income, and thereby incur yet further debt, in order to build more housing or undertake other projects within their local authority control? That would add hugely to their debt and to the amount of interest they are going to have to pay, and it will have a disproportionate effect on their total budgets. We must look at this, and make sure things are administered fairly and properly.
This Bill is a welcome step, but the devil is in the detail and I look forward to debating that as we take it through its various stages to becoming an Act.
I want to talk about council tax benefit. Bob Blackman is one of the few Government Members to have raised concerns. Another Government Member who raised concerns served with me on the Welfare Reform Bill Committee, where we discussed this issue extensively. He, too, expressed considerable doubts about the council tax benefit proposal, especially as another Government Department, the DWP, has a project for universalising benefits under one umbrella—which might not be as easy as it thinks. Why keep council tax out of that?
That is a very good question. One of the main reasons that the Government give for making such a huge change in welfare law in this country is to incentivise work and to make sure there are not the kind of perverse incentives that they think arise as a result of things such as different tapers on different benefits. There are, indeed, different tapers at present for tax benefits and housing benefit, but if we create a situation whereby everything apart from council tax goes into universal credit, we will immediately recreate an anomaly. That will have a work disincentive unless it is very carefully worked out. We must question why two major Departments do not seem to be talking to each other about that.
The 10% reduction is a substantial reduction in the money available to local authorities to provide assistance to people on low incomes who need help. It should not simply be seen as something quite minor. I thought, particularly having worked on the Welfare Reform Bill, that this was primarily about saving money, but having read a lot of the comments in the consultation about this Bill, I realise that it is part and parcel of the Government’s view of local authorities: that they are not trying hard enough to get people into work. The Housing Minister said to the Select Committee on Communities and Local Government that the 10% reduction would encourage local authorities to make sure that business parks got off the ground and that people got into jobs—because of course, if people had jobs they would not then need council tax benefit. Actually, that is not true.
My hon. Friend is making a really interesting point about the perverse incentives that the Bill will introduce. Does she accept that in fact, it will really clobber hard-working families who are struggling to make ends meet on low-paid work, and who rely on council tax relief to ensure that they can afford to work? In areas such as mine, it is those low-paid jobs that people will give up.
It is people in work who will suffer in particular. Of course, this localising Government are not prepared to leave even their own local authorities to decide how the new council tax benefit should be distributed, because they want to insist that pensioners be protected. That is all very worthy, but protecting pensioners creates a greater burden on other people. There has even been the somewhat vague suggestion that some other vulnerable groups will be protected. The definition is not quite clear, but if other people are to be protected—which may not be a bad thing—the burden on those who are in low-paid work will be increased even further.
This is the direct opposite of what the Government say they want to do in incentivising work, and I do not believe that making such a change will alter the way local authorities work. In fact, I do not think we need to do that. This Government are very good at tilting at windmills, and the windmills are creations in their own head. We have heard about one from various speakers today, and it runs like a thread through the consultation: the suggestion that local government is not interested in creating jobs or encouraging development and industry. I do not recognise that feature of local government. Indeed, during my 16 years as a councillor, we were more often accused of favouring business over local people at various times. We created a large office park development in the city, which would not have happened had the local authority not put together the land assembly and the infrastructure and encouraged that to happen. That happened without having our local business rates in our own hands.
I simply do not recognise this false stereotype. It shows that a Government who say they believe in localism actually have a very poor attitude to local government and those who serve it. This Bill will be unhelpful in a lot of ways, not least because it will make the working relationship between Government and local government worse, not better. There is no respect in it for the very hard work that local authorities are putting in. We should not be perpetuating such a factless myth when we are trying to encourage localism.
It is not too late. One Government Member suggested that it is somehow too late to deal with the council tax benefit, but even the Welfare Reform Bill has not yet passed into law. It is not too late for the Secretary of State and his colleague in the DWP to get together and find a better system.
Britain has one of the most centralised systems of local government finance in the developed world, which is why I support this Bill in beginning the process of removing that centrally controlled straitjacket. It is also why I welcome the provisions for the relocalisation of the business rate as a significant step forward in achieving the devolution of financial power. I have been a strong advocate for relocalisation for a long time, in my capacity as chief executive of Localis, the local government think tank, because I believe that relocalisation of the business rate will provide a significant incentive for local authorities to drive business growth. It will also, as the Secretary of State said, significantly change the culture, so that local government will no longer be looking upwards to the centre for grant funding but will be looking for locally driven solutions to issues of economic development.
I recognise, as others have done, the important contribution that tax increment finance can also play in providing a new and innovative mechanism of funding for local authorities, and I very much welcome the Bill’s provisions on TIFs. Dudley metropolitan borough council, one of the local authorities in my constituency, is already looking at projects that it might be able to convert into TIF-funded infrastructure development, which is critical. I welcome both those central provisions.
I also particularly welcome the opportunity for enterprise zones to retain a proportion of the uplift in business growth and in business rates, because that is going to be a good way of incentivising and developing local enterprise partnerships and offering them a long-term income stream. I very much welcome the Bill as a significant step forward and major milestone in the Government’s approach to localism. It is a very important first step in moving towards a genuine devolution of financial power, so I very much support the provisions and welcome the Bill strongly.
I thank my hon. Friend James Morris, a fellow member of the Select Committee on Communities and Local Government, for keeping his remarks so brief in order to enable me to make one or two comments of my own.
Allowing local authorities to retain part of the business rate is a key part of the Bill and I wish to speak from the perspective of a business owner, which is what I was for 25 years before arriving in this place. Business rates were a significant cost to my business, as they are to every other business, being the third largest tax we paid. They cost several thousand pounds a year, and they increased as my business grew and moved to larger premises. As a business man, it came as a bit of a shock to me, before getting involved in politics, to realise that the business rate bill that I paid to my local authority was not spent by my local authority in pursuit of services in the area in which I was based, but went into a central pool. It is entirely right that a proportion will in future be retained by the local authority, because promoting growth is a key role for local authorities. It is also very important to business owners, because that growth develops new customers and new clients for businesses and provides a better situation for staff.
I wish to discuss one issue not covered by the Bill, which is vacant commercial rates. There was an opportunity to extend relief to businesses that own vacant premises. The rating of those premises is causing hardship to the business community and it is making it difficult to encourage business growth, because there is currently no speculative building of business units and it has encouraged the demolition of vacant older industrial buildings so that the tax can be avoided. I wish to distinguish that approach from the provision on empty homes, because the housing market is distinctively different from the commercial property market. I welcome the empty homes premium, because we have 700,000 vacant homes and it is important that we provide an incentive to bring them into use.
I wish to discuss a final point about the influence of planning permissions. We await the outcome of the national planning policy framework, but there is a risk that the retention of business rates could become an additional incentive to grant planning permissions for developments that are not necessarily in the most appropriate locations. I hope that that concern will be addressed by a robust commitment to town centres first in the final draft of the NPPF, as the Select Committee report suggested.
I welcome the Bill. It is consistent with the Government’s decentralisation and localism provisions, it is a step change away from the dependency culture we have had up until now, and it pursues a strong localism agenda that will prioritise economic growth, which I will always support.
This has been an interesting debate, marked by a number of contributions from people with real expertise in local government finance and real concern—from those on the Opposition Benches—about what the Bill means for their communities. I do not have time to do justice to them all, but my right hon. Friends the Members for Wentworth and Dearne (John Healey) and for Greenwich and Woolwich (Mr Raynsford), both distinguished former Ministers, made some serious points, as did my hon. Friend Mr Betts, the Chair of the Communities and Local Government Committee, supported by my hon. Friends the Members for Stalybridge and Hyde (Jonathan Reynolds), for Plymouth, Moor View (Alison Seabeck), for Stoke-on-Trent Central (Tristram Hunt), for Lewisham East (Heidi Alexander), for Sefton Central (Bill Esterson), for North Durham (Mr Jones), and for Stockton North (Alex Cunningham). They were all united in their deep suspicion of the Government’s motives and they are right to be, because as usual the Government began with grandiose declarations about what they intended to do, but that ended in failure.
There has been a failure to look properly at local government finance as a whole, a failure to consider need and a real failure to accept the Government’s own role in promoting economic development. We have ended up with a deeply flawed Bill in which we are asked to write a blank cheque for the Secretary of State. He will decide the tariffs and top-ups, he will decide the amount of the levy and he will decide who gets a safety net payment. He is rapidly becoming the Del Boy of local government finance, selling us all dodgy schemes while he sits there, rubbing his hands and saying, “You know it makes sense.” We are not buying, and we are not buying because we know his record. We saw how in the so-called Localism Act 2011 he gave himself 100 more powers. We have seen him design a local government finance settlement to centralise power and devolve the blame. That is exactly what the Government are up to now, and it was clear from the moment of their consultation, when they said that
“local authorities can be reluctant to allow commercial development and promote economic growth”.
I ask the Government, as I have asked them before, to name one such local authority. I know of no local authority—certainly no Labour local authority—that is not desperate to attract jobs and growth. It is not local councils that have stalled the economy, but this Government, who inherited an economy that was growing faster than the EU average and faster than that of the United States, and who destroyed it with a slash-and-burn approach to public spending. Of course, the Secretary of State is a true believer in that. He began in 2010 with in-year cuts to specific grants, which by their very nature target the most deprived communities. He then designed a local Government finance settlement that we are asked to accept as the baseline for business rate redistribution and that is breathtaking in its unfairness.
One need only look at the heat maps to see where the cuts fall: the north-east, Yorkshire, the north-west, parts of inner London and parts of the midlands. As a result of the Secretary of State’s settlement, by 2012-13 Liverpool will have lost spending power of £235 per person, Hartlepool £183, Newcastle £144 and Wokingham—the Government’s favourite council—just £1. That is what we are asked to accept as the baseline—a baseline, moreover, that includes the new homes bonus and the 2011-12 council tax freeze grant. That all gives advantages to authorities with a high tax base over those with a low tax base. The system starts from inequality and it will go on to entrench it further.
There is nothing in the Bill about the infrastructure that many areas need to allow them to develop and there is nothing about the surplus capacity in many of our cities. Liverpool has empty office space that is already subject to rates, which could create 15,000 jobs if brought back into use, but hardly any extra income for the local authority. An area such as Halton has 22.3% of its business property with an empty rating assessment. Again, that could create more jobs but hardly any extra income for the local authority.
The big black hole in the Government’s Bill is any recognition of their own responsibility to promote growth and help weaker economies to grow. It is not surprising then that they have even failed to address where business rates are a proper measure of economic growth at all. Commercial and retail premises generate far more business rate than manufacturing and small businesses. Small business start-ups, internet businesses and sectors such as tourism are vital to our economy but generate little in business rate. Nationally, we need those businesses. We need the skills they bring, the innovation they develop and the exports they gain. It is typical of the Government’s muddled thinking that they claim to support manufacturing and small businesses but then design a scheme with a built-in incentive for retail. No wonder the Secretary of State has been told by the leaders of local authorities in manufacturing areas that the Bill gives preference to retail over manufacturing.
The Bill also gives preference to the rich over the poor. Under the scheme, the gap between rich and poor areas and between north and south will widen—even if top-ups and tariffs grow by the retail prices index. It will widen even if all local authorities generate the same increase in business rates and council tax, because another thing that the Government have failed to consider is the different tax base of local authorities, particularly the different council tax base, which is not in the Bill at all. They have nothing to say about areas such as the north-east, where 56% of properties are in band A and 86% are in bands A to C. They have nothing to say about the difference between those areas and Surrey, for example, where 75% of properties are in band D or above. They have nothing to say about it because they do not want to address the problem of inequality.
The same is also true of the Government’s suggestion about the localisation of council tax benefit, which we will need to discuss in much more detail in Committee.
The scheme will ensure that the people who are hit hardest will be the working poor—the people who go out every week to earn their poverty—and this from the Government who say they want to make work pay.
Another big thing that is missing from the Bill is any assessment of need. This Government with a Cabinet stuffed full of millionaires do not care about those who need local services. I know the Secretary of State is going to tell me that he is not a millionaire, but he hardly represents the squeezed middle, does he? The Government have nothing to say about areas such as Liverpool, which has seen a 73% increase in special guardianship orders since 2009, or Durham, where nearly 2.5 times as many people require home care as in Surrey. They have nothing to say about areas such as Halton, where 24% of the population have a limiting long-term illness. In future, those services cannot be safeguarded if business rates fall because the Bill introduces a postcode lottery in services and benefits. No longer will a person’s entitlement depend on their situation; it will depend on where they live.
It is for that reason that we oppose the Bill. It will increase the disparity between rich and poor; it will hit the poorest areas most; and it will in the end ensure, as my hon. Friend the Member for North Durham said, a two-tier, two-speed economy in Britain. For that reason, I urge my hon. Friends to oppose the Bill in the Lobby tonight.
Some 26 Members have spoken in the debate, and I too apologise if I cannot follow every one of the interventions in detail. I appreciated the contributions of my hon. Friends the Members for Crawley (Henry Smith), for Mid Dorset and North Poole (Annette Brooke), for North West Leicestershire (Andrew Bridgen), for Ipswich (Ben Gummer), for Meon Valley (George Hollingbery), for Milton Keynes South (Iain Stewart), for Nuneaton (Mr Jones), for Folkestone and Hythe (Damian Collins), for Lancaster and Fleetwood (Eric Ollerenshaw), for Thurrock (Jackie Doyle-Price), for Harrow East (Bob Blackman), for Halesowen and Rowley Regis (James Morris) and for Rugby (Mark Pawsey), all of whom spoke from experience in local government and also, significantly and importantly, often from experience in business too, because one of the Bill’s objectives is to re-establish a proper link between local councils and the businesses that they serve and the communities who benefit from growth.
It has been in other respects, I confess, a classic curate’s egg of a debate, with some thoughtful and considered speeches and some of quite breathtaking banality. When I listened, with every respect, to Helen Jones talking about a golden legacy left by the previous Government, I realised we had finally entered the realms of illusion. While I bring the hon. Lady back to reality—and talking of experience—let me just tell her that this grandson of a London docker is not going to take any lectures on need from the party of Tony Blair.
The reality is that the Bill is a necessary measure to clear up the mess that the Labour party made of Government finance in 13 years. Two of the Ministers responsible have done their very best to defend a local government finance system which they regard as so wonderful that it should almost be a listed building, but which has been described by dispassionate observers as incomprehensible, complex, unfair and unable to provide a proper means of distribution.
It was interesting to hear references to the Lyons review, which the Labour Government sat on for three years, doing nothing. Lyons said:
“there are no coherent or systematic financial incentives that encourage growth either for” councils
“or, more importantly for their communities.”
Labour did nothing; we are doing something.
“The current English model of equalisation is recognised as one of the most complex in the world” said the Lyons review, which Labour set up and ignored when it did not give them the answers they wanted. We are doing something about it.
The university of Plymouth—Alison Seabeck spoke earlier—said:
“the four-block model is deeply flawed and generates an inequitable allocation of this major source of local authority revenue.”
The Labour Govt did nothing about that, although they had the information; we are putting it right.
Secondly, it is shameful—
There has been little time, and I intend to make a few points, if I may.
Secondly, and particularly regrettably, there was the simplistic analysis and the misleading attempt in the debate to create a false north-south divide—particularly disgraceful, it might be thought, when one has only to look at the facts and observe that over the last five-year revaluation period, when the average business rate growth in England was 5%, the following authorities had business rate growth above the average, and therefore would have benefited more than average had our proposed system been in place: Doncaster, Durham, Greenwich, Hull, Liverpool, Manchester, North Tyneside, South Tyneside, Sunderland, Sefton, Stockton, Middlesbrough—[Interruption.] No, I am not prepared to take any lectures from Labour Members when they cannot get the facts right. I will give way once, briefly.
Would the hon. Gentleman like to tell us how much was invested in those regions by the Labour Government to promote that growth—investment which has now been cut under his Government?
That confirms my view that there is an illusion that the racking up of debt is somehow beneficial to this economy, and that is the reason why, I am afraid, in one aspect of the Bill, it is necessary for us to deal with the required deficit reduction in relation to council tax benefit—precisely because the only way in which we will get sustainable long-term growth in any parts of this country is by reducing the deficit that we inherited.
In tackling that important issue, the Bill seeks to meet the concerns of local government that the reform of the benefits system into universal benefit might have meant that there was no longer direct payment of those moneys to local authorities. Our Bill makes that point, but also gives local authorities the ability to design those savings in a way that reflects their needs and their priorities—which, as we all heard from the debate, vary from locality to locality. The unwillingness of Opposition Members to face that simple reality speaks volumes about the shoddiness of their analysis.
It is remarkable that, with one or two honourable exceptions, no attempt was made to pursue some of the important measures which have been put in place to safeguard the underpinning of the business rate retention system. Not only will there be a baseline to ensure that no local authority loses out at the start, but the system of tariffs and top-ups will be uprated according to the retail prices index so that the vast bulk of local authorities’ income will be protected, and at the same time, local authorities that are incentivised to encourage growth will always see some benefit coming through. Similarly, the hon. Lady referred to infrastructure, but she poured scorn upon the introduction of tax increment financing, which is exactly the means of unlocking some of that infrastructure—a model called for by all dispassionate observers, and for many years by Members of all parties, and but consistently ignored by the Opposition. They seem to be stuck in—
I have given way once and I shall not give way again. I am sure the hon. Lady will have plenty of opportunity to raise these matters when we debate the Bill in Committee on the Floor of the House. I find it amazing that the shadow Secretary of State complained about that. It says it all that the first comment that the shadow Secretary of State could make was a debating point that it was objectionable that we should take such business on the Floor of the House, where every Member can participate, since every one of their local authorities is affected by the proposal. That suggests that the Opposition had very few other arguments to deploy. It is a little like the consistent trotting out of the inaccuracy in the growth figures across the UK. When we are reduced to a sort of political re-run of “Z Cars”, we know we have won the argument because the Opposition have nothing else to put into the equation.
The reality is that for the first time the Government have taken steps to redress the balance in a system that is recognised across the world as not working. There is not an adequate linkage with local authorities. I believe there are local authorities of all parties that want to do the best by their community, but they lack the tools and the mechanisms to create that by encouraging growth in their areas. We are replacing a flawed system with one which gives them the scope for growth. I had hoped that Members in all parts of the House would applaud that. However, we get a degree of churlishness and carping, indicating that because the Opposition did not come up with the plan, they regard it as unworkable.
We will talk through the details of the Bill as we examine it in Committee, but it is worth noting that very many of the independent responses to the consultation favoured this reform. It is worth bearing in mind the fact that in 2008-09 the Communities and Local Government Committee said that relocalisation would give local government an additional tool to purse local recession-proofing policies, and it is worth recognising that the new local government network, not normally associated with the coalition side of the House, said that it recognised the potential that the growth incentive presents to create new private sector jobs and prosperity.
Hon. Members ought to wake up to reality and recognise that what is being put forward is an important and valuable reform. I hoped that rather than voting against it, they would have endorsed it and worked with us to make sure that we have a lasting system of finance for the future.