Balance of Funding Review and Report

– in the House of Lords at 2:30 pm on 20th July 2004.

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Photo of Lord Rooker Lord Rooker Minister of State (Regeneration and Regional Development), Office of the Deputy Prime Minister, Minister (Office of the Deputy Prime Minister) (Regeneration and Regional Development)

The Statement, my Lords? I was about to move that the fire Bill be read a third time. I apologise.

With the leave of the House, I shall repeat a Statement made in another place by my right honourable friend Nick Raynsford, the Minister for Local and Regional Government. The Statement is as follows:

"With permission, Mr Speaker, I shall make a Statement about the Balance of Funding Review report which is published today and about the Government's response.

"Before I begin, I should like to say a word or two about the speculation we have seen at the weekend and in yesterday's press that the Government have plans for huge increases in people's council tax bills. This is simply untrue. I will say more about this when I come to the report's conclusions on council tax.

"The review started in April 2003. I chaired the steering group which included my honourable friends the Members for Wentworth and Corby, as well as other senior figures from central and local government, academia, business, the union movement and professional bodies. The remit of the review was to establish the nature and priority of the balance of funding issue and to identify and analyse options for change, setting out the pros and cons of each. We commissioned research, held a public consultation and sought further evidence on the main options for reform raised in the public consultation. We had nine meetings in all. All the papers presented to us are available on the website of the Office of the Deputy Prime Minister.

"I must first record my thanks to the steering group members, to everybody who responded to the review's public consultation last year and to those who presented papers to the group.

"Secondly, I should like to welcome the report published on 16 July by the ODPM Select Committee following its inquiry on local government revenue. There is significant common ground between the committee's conclusions and those of the Balance of Funding Review. The Government will reply formally to the committee in due course.

"As those who read the report will find, some of the press speculation of recent days has been wholly misleading and inaccurate. As the report makes clear:

'The Review has been conducted for the Government, not by the Government. It follows that this report is not a statement of Government policy. It is rather an analysis of issues and options. Although it draws some conclusions, in line with its remit it does not make recommendations'.

"It has always been the case—indeed, it was included in the terms of reference—that the review would simply set out the pros and cons of a range of short and long-term options.

"As the report states quite clearly, the aim of the review was,

'not to provide a detailed blueprint for reform, but to gain consensus at this stage of the argument on the broad issues, and to agree what the most likely options were, as the basis for more detailed work in the future'.

So we are at the start of this process of further work and there is a great deal more detailed thinking to do.

"The main conclusions of the review are as follows. First, like the Select Committee, the review concludes that there are strong arguments for shifting the balance towards more local funding. However, this depends on the feasibility and desirability of any measures to achieve it. And it would have to be possible to achieve satisfactory equalisation for needs in the distribution of resources between local authorities alongside any greater local revenue raising.

"Secondly, again like the Select Committee, the review concludes that council tax should be retained but reformed. It has important advantages as a local tax. However, in the opinion of the group, it will need reform in order to help people on low incomes and to reduce the impact of revaluation. Further work will be needed on the options for such reform. A fair and effective system of council tax benefit will be a vital component of any reform package. It is clear, for example, that levels of take-up for council tax benefit amongst pensioners and others on low incomes remains low in comparison with other benefits.

"As for council tax bands, the report concludes:

'There is a clear case for reviewing council tax bands and the ratios between them at the time of revaluation'.

And I should point out that the Government have always made clear that we would want to consider these issues with other stakeholders ahead of revaluation. But the report adds:

'particular care is needed to ensure that council taxpayers on low incomes living in high value properties are not unfairly affected'.

It goes on,

'further detailed work is now required on how council tax might be reformed, based on a clear vision of the direction of travel'.

Far from proposing a trebling of people's council tax bills, the review actually states that,

'the aim should be to avoid significant changes to the overall liabilities of taxpayers'.

"There has been much comment in the media about the ideas submitted by the New Policy Institute. It is certainly true that the NPI gave evidence to the review on changes to the banding structure and its ideas are well documented in the report. Indeed, its original paper for the review has been available on the website of the Office of the Deputy Prime Minister since January. However, these are the NPI's ideas and they are not government policy. Indeed, they are not actually recommended by the review.

"Thirdly, the review concludes that the only way to achieve a major shift in the balance of funding is to supplement a reformed council tax with either re-localised business rates or a local income tax or a combination of both. None of these options would be easy and further work would be required here too.

"Fourthly, re-localisation of business rates could give councils greater incentives to promote economic development and improve links with business as well as altering the balance of funding. However, business has serious concerns, including potential risks to their productivity and competitiveness.

"Fifthly, while a local income tax would be more progressive and more buoyant than council tax, it would also be less predictable as a result. Considerable further work would be required to address the substantial technical and administrative issues and costs, as well as the impact on individuals and employers before firm conclusions could be reached on the feasibility or desirability of a local income tax. In that respect, the report makes for difficult reading for those who regard local income tax as a simple solution. As we say in the report, the devil is very much in the detail. I note that the Select Committee takes a similar view.

"Sixthly, the review has concluded that smaller taxes or charges do not provide the potential for major change in the balance of funding. The case for and against each such option should be judged on its own merits.

"I turn now to the Government's response. We are developing a new 10-year vision for local government. We want local government to be more effective and more accountable. A fair and sustainable finance system is crucial to this. We welcome the Balance of Funding Review report as a major contribution to the debate.

"The review could not look at everything. However, while it does not make recommendations, it has reached a number of important conclusions defining the issues, narrowing down the options and assessing the case for change as well as investigating much of the preliminary detail. It provides a sound platform from which to go forward.

"The Government can accept right away that council tax should be retained but reformed. It is clear that council tax is far from perfect and that changes are needed. We are, for example, working with colleagues in the Department for Work and Pensions to improve take-up of council tax benefit. That work should continue.

"However, the report flags up the need for more work before decisions can be taken either on how council tax should be reformed or on the possible means for shifting the balance of funding. These matters need to be considered carefully and in detail. We must keep up the momentum, but we must also ensure that any changes are soundly based. As I said earlier, the press speculation that the Government are planning a council tax shake-up that will lead to huge rises in council tax is simply untrue. Any suggestion that we have opted for any particular course of council tax reform is just plain wrong.

"The review concludes that,

'the detailed case for and against some kind of sub-national approach should be considered'.

It is right that we should do this, but not because we want to hit middle England; precisely the opposite. We need to look at options for regional banding in order to ensure that areas of high property price growth such as London and the south-east are not unduly affected by revaluation.

"One thing is clear: there are no easy answers. This subject needs extremely careful examination and detailed consideration. It is far too important to be a political football.

"We have therefore decided to set up an independent inquiry to be undertaken by Sir Michael Lyons to look into these matters and report back by the end of 2005 to my right honourable friends the Deputy Prime Minister and the Chancellor of the Exchequer. Sir Michael is very widely respected and brings to the task a wealth of local government and other relevant experience. I can think of no one better able to take forward the work which the Balance of Funding Review has begun. Honourable Members will recall that Sir Michael has a distinguished background in local government. He is currently director of the Institute of Local Government Studies at the University of Birmingham and between 1994 and 2001 he held the position of chief executive of Birmingham City Council. He was recently appointed as deputy chair of the Audit Commission. He is a member of the Treasury's Public Services Productivity Panel and was also a member of Sir George Bain's review of the fire service. In 2003 he reported to my right honourable friend the Chancellor of the Exchequer on the relocation of public sector jobs away from London and the south-east.

"The inquiry will consider, in the light of the report by the Balance of Funding Review, and other developments such as new funding arrangements for schools, the detailed case for changes to the present system of local government funding. It will make recommendations on any changes that are necessary and how to implement them; and take evidence from stakeholders.

"In particular, the inquiry will make recommendations on how best to reform council tax, taking into account the forthcoming revaluation. It will assess the case both for providing local authorities with increased flexibility to raise additional revenue and for making a significant shift in the current balance of funding. It will conduct a thorough analysis of options to complement council tax, including local income tax, reform of non-domestic rates and other possible local taxes and charges, as well as the possible combination of such options. It will consider the implications for the financing of possible elected regional assemblies, as well as any implications that its recommendations have for other parts of the United Kingdom.

"The Government now look forward to a period of focused study by the independent inquiry which will build on the Balance of Funding Review's work. We can then take firm decisions on the best way forward to put in place the fair and sustainable system of local government finance that is our objective".

My Lords, that concludes the Statement.

Photo of Baroness Hanham Baroness Hanham Shadow Minister, Local and Devolved Government Affairs, Deputy Chief Whip, Whips

My Lords, I thank the Minister for not getting too muddled about which business we were approaching. I agree with him that we face a difficult afternoon in deciding what we are dealing with. I also thank him very much for repeating the Statement made by the right honourable Nick Raynsford in another place.

The Minister was at some pains to point out that the Balance of Funding Review was a report to the Government and not by the Government. But however presented, there are within it a number of areas of considerable concern.

It is of course a sine qua non that when the Government find themselves in a difficult position they call for an inquiry or, in this case, another inquiry; this one to be undertaken, as the Minister has said, by Sir Michael Lyons. That clearly falls into this category. We of course wish Sir Michael well and hope, without great confidence, that he may find the road to the holy grail.

Will the Government say when in 2005 the review will report? Will the Minister also tell us whether the terms of reference of the committee, rather than the broad outline given in the Statement, will be available to the House before it is set up? Nick Raynsford was a brave man when he set forth on the path of reconsidering the options for the council tax and the relationship between the Government's contribution to local government expenditure and that raised by local government itself, which of course now includes the uniform business rate. He was brave because the options for reform have been considered on innumerable occasions and the same difficulties and objections to their alternatives outlined in the Balance of Funding Review report have always come into focus.

As is clear from this report, business does not want to return to a local business rate. Business revaluation will bring untold problems anyway, and any local form of income tax is bound to raise fundamental issues, whether it is assigned from central government revenues or raised locally. Immediately one sees the problems in relation to a tax raised locally, particularly in central London, in view of the number of people who do not actually pay income tax in this part of the world and who therefore might possibly avoid it if paid locally.

All the usual suspects are raised, including local sales tax, tourist tax and now congestion charging which is a tax which should be used, if at all, only for preventing congestion and not as a means of raising missing revenue. Sir Michael will have his work cut out to come to any conclusions which will meet any, never mind everyone's, aspirations and/or concerns. If the members of the balance of funding review have not been able to answer that problem, then Sir Michael's mind is going to have to be very superior indeed.

But whatever is brought forward or thought through again, it is clear that the council tax will remain at the heart of local government revenue. I believe that the Minister made that absolutely clear this afternoon. If I may remind the House, it was much derided when it was introduced by the previous government, but it has proved to be a tax which is simple to collect and to allocate to property, and is understood by those paying it. That has been one of its prime successes, in that it took into account the property base so that there was always somewhere to collect the revenue.

A great deal of the Minister's Statement was concerned with trying to downplay the reports in the press over the weekend that the already scheduled revaluation of domestic properties, along with the possibility of increasing the number of bands and the ratios between them, would have a massive impact on people in the new high bands. It is instructive to recall that throughout the discussions on the Local Government Bill the Government resisted all amendments which would have limited the number of bands and, if there were to be an increase in that number, maintain the current ratio of 1:3 between the top and the bottom. Those amendments, tabled by my noble friend Lord Hanningfield and myself, would at least have ensured that the elongation of bands would not result in vastly increased amounts being paid by those in the upper tiers. Those amendments were opposed by the Liberal Democrats.

It is clear from the balance of funding review that that is not an option and that, whether suggested by the NPI report or the review itself, there could be potentially substantial increases if this route of extending the ratio were adopted. The Minister has said, and I agree, that no one wants families in either low value or high value property penalised by having to pay much too high local taxes. The rise in property values has been a mixed blessing to those who have lived in their houses for a number of years since the Chancellor now seems to believe that they are a suitable milch cow. The Government need to think very carefully before they accede to any proposal which will force people into having to sell their property because they cannot afford to pay the council tax. We might perhaps seek an assurance from the Minister today that that would not be the intention because there are a great number of people who are already living in properties, particularly in the south-east, which have risen in value well beyond their income if the council tax were to increase substantially.

Will the Government indicate what they intend to do about improving the uptake of council tax benefit? The Statement said that this matter is being looked at, but it has been looked at ever since council tax benefit was introduced and still there has been no resolution. I believe that I am right in saying that there are over 1.5 million people who are entitled to council tax benefit but are not taking it.

The balance between funding that is raised locally and that raised nationally, as the report brings out, is a sensitive one. That is why whenever it has been looked at before nothing has resulted. Council tax has risen remorselessly under this Government. It is now 70 per cent higher than when they came to power. A further 20 per cent rise is predicated by the Chancellor's spending review over the next three years. In addition, much of that spending is regulated by the Government in the form of passporting or specific grants. Extra costs are being borne in London as a result of the regional assembly. There is no reason to assume that that would be any less the case for any new assembly. The Statement makes it clear that is an aspect which will be looked at by Sir Michael Lyons, namely, the possible cost of a possible assembly. One ought to note that in the Greater London Authority Bill, now an Act, the expectation was that the cost to the boroughs would be three pence in the pound. That has now risen by 210 per cent since the Mayor's office came into being.

This may not be the Government's review, but it was chaired by the Minister and staffed by people from various government departments. Therefore, it is owned by the Minister at least or it would not have seen the light of day. At least a further review of the review will put off the final day of decision, probably until after the next general election. I would have thought that a very wise decision for the Government to take, as the implications of both a revaluation and the extension of the council tax bands will serve to ensure that it is a hot issue with the electorate. They may not be minded to come out and vote in great numbers at local elections, but they will surely take note of a threat of massive increases in council tax rates, and/or in any other form of contribution that they are asked to make, through local tax, tourist tax, or any of the other options.

The Government are embarking on yet another 10-year plan; good heavens, we have had 10-year and five-year plans for all sorts of things recently. The council tax has stood the test of time so far—it has certainly stood 10 years. The Government will mess with it at their peril. I thank the Minister for the Statement and ask that he be kind enough to respond to the few questions that I have raised. Ultimately, I look forward to the final decisions and discussions on the subject when Sir Michael Lyons finally reports to the House and the country.

Photo of Baroness Hamwee Baroness Hamwee Shadow Minister, Office of the Deputy Prime Minister Local Government & the Regions

My Lords, I, too, thank the Minister for the Statement. I was also unclear which set of papers to have ready at the start of business.

The noble Baroness referred to a 10-year plan, but the Statement referred to a 10-year vision. I am not sure whether what is referred to is a plan or a vision, but I doubt that those struggling to pay the unfair and outdated council tax will feel hugely enthusiastic about the time frame envisaged by the Statement. They may feel—as I did when I read it, and as the noble Baroness clearly did, although our views are different—that to announce a review of a review to report at the end of next year is a clumsy way of saying, "We still don't know what to do, and will postpone it until after the general election and in the mean time repeat some cosy words about how we understand the problems inherent in the current continuing system". It must be undeniable that, now knowing something of the time frame, we will be well into the 10 years before there is any change in local taxation.

The terms of reference of the balance of funding review were to review all aspects of the balance of funding—fair enough; to review the evidence; and to look at the reform options. So perhaps I should not criticise the Government for sticking so closely to the letter of that. However, I criticise them for deferring the decisions, however elegantly. When talking about elegance, I must congratulate the noble Baroness on dancing around the issues so delicately in her support of council tax.

According to the Statement, the objective is to gain a consensus on broad issues. Do the Government not recognise that there is consensus about the unfairness of council tax, and that there will be consensus that the review appears barely to take us forward? The Statement also refers to particular care to ensure that those on low incomes in high-value properties are not unfairly affected. We are not starting from square one—they are unfairly affected today, and clearly will be next year and the year after that. The Statement refers to council tax benefit. We support encouraging the take-up of that, but the problems go far wider than those who are entitled to it.

The Minister recognises that local income tax is more progressive and buoyant. I am sure—I invite the Minister to confirm it—that the Government themselves want to be recognised as progressive although, at this point in the parliamentary term, buoyancy may be another matter. It is sad that fear about the overall tax take being unpredictable, which is what I understand from the Statement, might override progressiveness and fairness. The Minister may not want to commit himself—I ask him anyway—on whether everything that we have heard is code for a disagreement between the Office of the Deputy Prime Minister and the Treasury. That is certainly how it reads.

The Minister refers to work to do, including reviewing council tax bands and the ratios between them. There is a lot of work in that, and once it has been done substantially it will be human nature not to want to ditch the tax. I fear that, by committing the Government to such a course of action, we shall have a self-fulfilling prophecy of, "We've done all this work, so we need to stick to the programme that it supports". In any event, I fear that reviewing banding will exacerbate the problem for those with low incomes in high-value properties.

We welcome visiting the issue of business rates, which the local government world has sought for a long time. The inquiry is to be independent. Can the Minister tell the House anything about its membership? The membership of the review group included local government representatives and others. Will he say anything about how the other members will be appointed, from where they will come, and how they will be supported? Presumably everything will come from the Office of the Deputy Prime Minister. Can he assure us about the independence of the other members? The appointment of Sir Michael Lyons has been announced; I assume that it took place on Nolan principles, but I would welcome some comments from the Minister.

The inquiry is to go further than local, personal and business taxes. There is a reference in the Statement to other developments such as—I emphasise those words—new funding arrangements for schools. What are the Government really saying about funding education and local government? Is there more here than meets the eye?

I hope that the Minister knows that we on these Benches look for the positive and try to be constructive in our criticism. I am sad that I find so little to be positive about in the Statement, but I fear that the Government have given little cause for optimism to those outside the House and another place who have protested so loudly and—I had thought—effectively about the unfair council tax. Those people will feel badly let down by what the Government have said today.

Photo of Lord Rooker Lord Rooker Minister of State (Regeneration and Regional Development), Office of the Deputy Prime Minister, Minister (Office of the Deputy Prime Minister) (Regeneration and Regional Development)

My Lords, I apologise for the confusion at the beginning. The annunciator suggested that the Statement would be at a convenient time after Questions, and no one had informed me that that would be immediately after Questions. I assumed that we were going on to legislation.

I shall deal with as many of the points as I can, in reverse order. Schools funding was not within the remit of the balance of funding anyway, but ring-fencing will halve the gearing ratio for non-school services. In that sense, it will increase councils' financial flexibility. That is a major issue, obviously, because education is so important.

The members of the inquiry will be absolutely independent, because there will not be any. Sir Michael Lyons will conduct the inquiry at the request of the Chancellor of the Exchequer and the Deputy Prime Minister. He will be fully supported, of course, by officials from across Whitehall and by local government experts, and will have full powers to call for evidence from other stakeholders. He will conduct the review on the same basis as Kate Barker did the review of housing supply. The post was not advertised, but no one will question the independence and probity of Sir Michael Lyons, given his track record and his service to local government.

There is no disagreement within government. We are trying to show that we have learnt the lessons from getting rid of the unpopular rates. We never really had a balance of funding review and discussion before the poll tax—the holy grail. The duke and the dustman were to pay the same; that was the phrase used. Those who proposed that came unstuck. A secret inquiry was conducted within government by the great and the good, saying that the poll tax would be a good idea. I shall not list the names on its front cover, because it is embarrassing for people who are still around. We will think about the matter carefully. We are affecting people's lives in a massive way, because council tax is clearly the most visible tax that people pay, so we have to be very careful about the changes.

There may be a consensus that council tax is unfair, but there is no consensus on an alternative. Whatever people might think about a quick-fix, simple option, there is no consensus on it. I do not think that the noble Baroness, Lady Hanham, indicated that.

The date for publication is by the end of 2005—I cannot be any more precise than that. Whether it will be Christmas Eve, the Recess, New Year's Eve or next summer, I cannot say.

The terms of reference have been published today with the press release. I am happy to read them out, but they come to 300 words and that would take an excessive amount of time. I have given a broad summary of what Sir Michael will be asked to do.

The membership of the balance of funding review, in this House as in the other House, was varied. There were people representing local government, such as the chief executive of Luton council, the director of finance of Wigan, the chief executive of Manchester. The group director of corporate affairs of Tesco also attended. The local government trade union, Unison, was also represented, as were academics and, importantly, the leaders of the Liberal Democrat and Conservative groups at the Local Government Association. Let us not run away with the idea that this was a secret government cabal behind closed doors. Three political parties, a trade union, Tesco and Uncle Tom Cobley and all in terms of local government and academics were involved in the review. They are all listed—there is no secret about it—so it was a report to the Government and not by the Government.

The rise in property values has not been evenly spread across the country. If that were the case, we would not need a revaluation, because the percentage and the ratios would be exactly the same. The revaluation has been legislated for and will proceed. There is the question of the economics versus the politics—at some time those issues have to be in the balance. If we were to farm all that out to officials and academics they would come up with a brilliant system, but it would not be acceptable to the people. That is the role of us grubby politicians—to find a way forward, to raise the taxes and provide community services in a way that is acceptable to as large a majority of people as possible. Our role is also to give local government greater accountability. At present, only 25 per cent of funding on average is raised locally and 75 per cent comes from the general taxpayer. That is partly the result of the nationalisation of business rates.

I have to say the following in response to questions: we have set up an independent inquiry and it ill behoves me to give any answers, because I do not know what it will come up with. However, I hope that it comes up with the holy grail, because that would be helpful to everybody.

Photo of Lord Biffen Lord Biffen Conservative

My Lords, will the Minister confirm that the balance of funding review did not cover the capability of local authorities to charge for the services that they render?

Photo of Lord Rooker Lord Rooker Minister of State (Regeneration and Regional Development), Office of the Deputy Prime Minister, Minister (Office of the Deputy Prime Minister) (Regeneration and Regional Development)

My Lords, the review may have looked at part of that issue, but the inquiry that Sir Michael Lyons will conduct will look, as I said in my Statement, at a mixture of things such as charges. We pointed out that some small charges do not make a difference—we are talking about billions of pounds. The amount currently raised by the council tax is something like £19 billion, so even small charges are miniscule. Certainly, there are no no-go areas, although we have said that it is a matter of the reform of council tax, which may be added to other taxes or a combination of other taxes. Looking at charges is not ruled out, but it is not a panacea.

Photo of Lord Smith of Leigh Lord Smith of Leigh Labour

My Lords, first, I would like to declare an interest as the leader of a council, Wigan, in fact, whose treasurer was a member of the balance of funding review. I am sure that the Minister would agree that the council tax was accepted largely because it was not the poll tax. If we can agree that there is a need for a property tax, let us consider renaming it, because the council tax was not well designed.

Secondly—and the Minister will remember that I raised this matter during the last Local Government Bill—will he agree to refer to the Lyons inquiry the prospect of introducing an annual uplift to a property tax based on house price inflation? That would increase the buoyancy of any property tax and would also avoid the political pitfalls of a periodic revaluation.

Photo of Lord Rooker Lord Rooker Minister of State (Regeneration and Regional Development), Office of the Deputy Prime Minister, Minister (Office of the Deputy Prime Minister) (Regeneration and Regional Development)

My Lords, according to the terms of reference, part of the remit of the inquiry is that it will,

"consider, in the light of the report by the Balance of Funding review, the detailed case for changes to the present system of local government funding".

To that extent, people can put their evidence and Sir Michael will no doubt be swamped with all the schemes that could be helpful. Then he will be required to make recommendations on any changes that are necessary to implement them.