Committee (3rd Day)

Part of Cities and Local Government Devolution Bill [HL] – in the House of Lords at 3:30 pm on 29th June 2015.

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Photo of Lord McKenzie of Luton Lord McKenzie of Luton Shadow Spokesperson (Communities and Local Government) 3:30 pm, 29th June 2015

My Lords, we agree with the noble Baroness, Lady Janke, that we should give some thought to this issue, although I hope she will understand if we are unable to support the amendment as it stands. I will spell out some of the technical issues in a moment. But it does provide an opportunity to probe the Government’s intention on the devolution of fiscal resources to local authorities, including combined authorities—that is, where they are going on their journey.

My noble friend Lord Beecham will set out shortly the policy position we reached before the election on the growth of business rate retention. It accords with Amendment 43 in supporting multiyear finance settlements, for the obvious reason of enabling more effective long-term planning. However, we might consider fiscal devolution over three areas. First, we should look at the current funding arrangements: business rates, council tax, revenue support grants and specific grants. Secondly, we should look at how devolution budgets are to be made available—if functions are being transferred, what is happening to the money? Thirdly, we should look at whether any national taxes are to be devolved to local authorities and combined authorities. We seek to understand the Government’s policy on each of these matters.

National taxes are the thrust of Amendment 43, which appears to focus on property taxes, which have an unambiguous attribution to a specific area. This would appear to be perfectly possible for stamp duty land tax, which is levied on the purchase of residential and non-residential land and property, and for the annual tax on enveloped buildings, which applies to UK residential property put in a corporate wrapper. But capital gains tax appears to be more problematic because a tax liability could arise from netting off losses against gains—for example, a loss on a building in Birmingham against a gain on a building in Manchester—and making it more specific would be difficult. Similarly, the use of an annual allowance that is available generally against gains, and the taxation of corporations in relation to capital gains and how that is identified within an overall assessment, could also be problematic.

It would doubtless be possible to introduce rules to govern all of this, but with further significant complications to the tax system. On compliance, these taxes are geared to a national system and it would be necessary to disaggregate such matters. What is the rationale for attributing these taxes to a combined authority: is it the practicality of a ready additional source of revenue being made available, or because the focus of the combined authority’s activity can positively influence the tax outcome? It is presumed, of course, that the proposition is not to change the tax rates.

Nationally, stamp duty land tax raised just short of £10 billion in 2013-14 and capital gains tax just shy of £4 billion. I do not have the figure for corporation tax on capital gains. But these taxes can be volatile. Stamp duty land tax increased that year by 36%. Of course, it is not easy to predict. Is the growth in stamp duty land tax a good thing? The volume of property transactions in an area might be indicative of a thriving local economy—which could attract investment—but in so far as it is attributable to rising prices, it might simply reflect a failure to tackle supply.

We know the total spending power of local authorities in 2014-15 was in the order of £49 billion, including—though we do not have the precise figure—£10 billion-plus in revenue support grant. If the revenue support grant were, effectively, to be at least replaced by directly accruing property taxes and all business rates were to be devolved, what would be the mechanisms for dealing with the differing needs and resources of the local authorities? Presumably, business rates would continue to have tariffs, top-ups, levies and safety nets, which would help, but it is a little unclear whether the proposed full retention of business rates would be at individual authority or combined authority level. Is the noble Baroness suggesting that this could be done by pooling or by another mechanism? I think it could be done by pooling. The amendment refers to “business rate supplements”. Do these not already accrue to the relevant county or unitary district councils? Does the noble Baroness’s amendment contemplate that additional, erstwhile national revenues would substitute for devolved budgets, or eliminate the revenue support grant?

The Independent Commission on Local Government Finance set out the reasons why local government in England and the services it provides are no longer sustainable in the current form. It called for urgent devolution of powers, funding and taxes to groups of local authorities. We know from the Manchester agreement and our debates the main policy areas that central government appear to be willing to negotiate deals on for transferring functions, but we do not know whether they are willing to do anything on fiscal devolution. Is anything being contemplated, particularly with regard to existing national revenue streams such as stamp duty being devolved to local government? To what extent do the Government plan to adopt the recommendation of the noble Lord, Lord Heseltine, in brigading key national budgets and passing these as single parts to combined authorities, to do with as they see fit? In his No Stone Unturned report, the noble Lord argued the need to bring together separate funding streams which support the building blocks of growth into a single funding pot for local areas. He said that the model could be applied across England, but could not be introduced before 2015-16. We are now there. What are the plans? Is the noble Lord’s advice being rejected?

Will the Minister also tell us whether, as part of the devolution agenda, any fundamental change is contemplated to the current business rate and council tax regimes? Will the reset of the business rate retention scheme not happen until 2020? What is the latest position on the revaluation, which had already been deferred by the previous Government?

On fees and charges, it is estimated that local authorities raise some £10 billion a year. Some of these are locally determined and some are not. Is work under way to remove central government’s control over some of these? What scope would there be for a combined authority to seek increased freedom in this regard as part of a devolution deal? Addressing these fiscal issues is a test of how much central government trust local authorities and combined authorities.