Lord Fuller:

Moved by Lord Fuller

43: After Clause 3, insert the following new Clause—“Impact of this Act on local authoritiesThe Secretary of State must, within six months of the day on which this Act is passed, lay before Parliament an impact assessment of the cost of the provisions of this Act on local authorities.”Member's explanatory statementThis probing Amendment seeks to respond to concerns about increased costs for local authorities.

My Lords, I rise briefly to speak to Amendment 43 standing in my name on the Marshalled List. I know that it is late, but my purpose here is to probe whether the Government really understand and appreciate the impact, damage and hurt that these national insurance proposals will visit upon councils, those who work with them to deliver essential services and the users of those services—in many cases, the most vulnerable in society.

Since the Great Reform Act 1832, local authorities have been an integral part of our nation. Joseph Chamberlain unleashed the powers of municipal entrepreneurialism in the 1800s to bring gas and clean water to the growing metropolis of Birmingham. Councils sweep the streets. They collect the bins and run parks. They issue planning permissions and curate the conditions to build the national economy one local economy at a time.

I am a councillor and, for the last 14 years, I have led local government finance for Conservative councillors at the Local Government Association. I have seen it all. My noble friend Lord Pickles once said that there are only two people who really understand local government finance. I am not saying that I am one of those experts, but I am one of the small number of people who does more than most to celebrate the 140 things that councils do to make a civil society for every family, every street, every neighbourhood and every day.

That is why I know that councils’ finances in England are under pressure like never before. Reductions in grant funding, increases in the scale and complexity of service demand, and the recent spike in inflation and wage costs have created the perfect storm for town halls. The fundamental challenge facing the sector is that cost and demand pressures are rising faster than funding. While inflation has fallen steadily since the peak, significant cost and demand pressures remain in the system. In essence, council revenues tend to grow linearly with the growth in the economy, but lately costs have grown geometrically. There comes a point where the lines of income and demand diverge so much that the gap becomes unbridgeable.

Some of the reasons for this geometric growth have been demographic: as society ages, demand increases disproportionately. Some of them have been countercyclical: as the economy stutters, demand in respect of homelessness, for example, increases. There have been some consequences of changes elsewhere in the state. Well-meaning changes by the DWP, for example, have driven up councils’ second order spend on home-to-school transport by 62.7% in the five years to 2024. Of course, the Covid hangover has made things worse. We have already reached the moment where the gap between income and expenditure has become unbridgeable, and that is before the impact of national insurance on councils and their tied contractors, which is the subject of my amendment.

This is not a case of a Tory crying wolf. Just last week, the MHCLG announced that in the financial year 2025-26—next year—the Government have agreed to provide 30 councils with support to manage financial pressures via the exceptional financial support process. For eight of those councils, this included agreement to support in prior years. These are just the canaries in the mine. In aggregate, three services are responsible for two-thirds of all the cost—adult social care, children’s social care and SEND—and these pressures have seen the greatest increases.

Let us get some numbers on the record. Increased costs and demand in adult social care have seen a rise of £3.7 billion, which is 18% since 2019-20. Spend on children’s social care increased by 25% in real terms in the five years from 2019 to this year, owing to the increasing complexity of need and rising placement costs. The Labour-run LGA tells me that, by 2026-27, these cumulative pressures will have added 12.5% to the cost of delivering services in the two years since last year, leaving councils facing an annual funding gap of £6.2 billion across the two years from 2025 to 2027, just to maintain services at 2024 levels.

These pressures come on top of councils having already absorbed a 22.2% real-terms reduction in core spending power from 2011. That is before Labour produced its reckless war on the countryside by cancelling the rural services grant. This cannot carry on. There is no more fat to trim, and I want to explain why this is so serious and consequential, because we get to the nub of the matter.

The additional burden of national insurance on councils’ own payroll is estimated to be £628 million for directly employed staff, but indirect national insurance through commission providers will cost the councils an extra £1.13 billion next year. Taking the £1.13 billion and the £628 million, we see a total financial impact of the national insurance increases on councils and their tied contractors of £1.758 billion. Having given warm words and soft soap that the cost of NIC on local authorities would be compensated for, as they might be with the health service, the reality is that there is just a one-off £515 million allocated to the sector. Let us do the arithmetic. The extra costs and the Government’s grant have left councils with a £1.243 billion national insurance hole before all the other pressures that I have measured have been taken into account. The effect on the tied contractors is important to understand, because those outside contractors put their shoulder to the wheel: they work exclusively for councils, they are an extension of the council’s workforce, and they are on the team, but they cannot afford to take this one for the team.

I notice that he is not in his place, but it is time that the noble Lord, Lord Eatwell, appreciates the magnitude of the damage visited on councils by his party. The OBR and the MHCLG tell us that council tax raises about £40 billion a year, and that excludes parish precepts. We know councils have just put up council tax by between 3% and 5%. Whether it is 3% or 5%, the bold arithmetic is that the clear Majority of last week’s council tax rises, which will kick in in April, will be passported straight to the Treasury through the national insurance tax. The vast minority of the extra money raised by council tax will not even stick to the sides and benefit local people in any measure. It means that most of the extra tax paid by council tax payers next year will not even benefit the local taxpayers themselves.

What this means, of course, is that, taken together with the other cost pressures, this is dangerously squeezing out all the other activities that should be the core purpose of a council—the sort of council that Chamberlain would recognise—such as planning for growth, keeping the streets clean and teaching kids to swim in the local baths. The council is perpetrating a deceit on the council tax payer. Next year’s council tax rises, for the most part, are not financing local services: most of that money is being passported straight to the Treasury. I really think that the noble Lord, Lord Eatwell, who tried to stifle debate earlier this evening, should be here in his place to hear that simple truth.

Put simply, this wholly new, unexpected NIC pressure fails to provide councils with the security of funding they need to reliably and effectively deliver for all their communities. Potentially worse, all this is aggravated because the £515 million that has been allocated as some sort of sop to compensate in small measure councils is for only one year, and none of it is guaranteed in any event after the comprehensive spending review, which could be another insult to injury.

I am conscious of the time, but it is a fantasy to think that local government reorganisation is the solution. Creating huge, remote strategic authorities to replace the local friendly districts will aggravate this funding situation even more. The work of districts still has to be done, but substituting that most efficient part of local government with mayoralties will not result in a reduction in layers of bureaucracy; there will still be three layers, but just bigger and more remote.

I have a warning about the profligacy of the new, larger, more remote tier of governance. My noble friend Lord Kempsell reports on his blog that the Greater Manchester Combined Authority

“has forked out a staggering £472,500 contract to fund its ‘Equality Panels’ … to … ‘advise, support and challenge’ Greater Manchester’s political leaders on matters that cause ‘injustice and inequality’. A further £52,500 has gone to a Faith and Belief Advisory Panel, and £54,000 to the Greater Manchester Youth Combined Authority”.

In total, that is nearly £600,000—money that would keep my district council going for nearly a month.

In fact, half the new unitaries established just three years ago, ostensibly to save the hard-pressed council tax payer in Cumberland and Somerset, are two of the 30 authorities now receiving exceptional financial support. Council finances are under stress, but the national insurance rises, coupled with local government reorganisation, will, if anything, cost council tax payers even more.

My amendment seeks for the Government to report on the effects of all this and, by extension, to open a conversation about compensating for the actual costs of the change. My amendment would have the effect that the doorstep services that residents value the most in cities, market towns, new towns, the countryside, coastal communities and cathedral cities can be protected.

I ask the Minister—I asked him before and he somewhat dismissively dissembled, but the issues are now even more stark—whether he accepts that the LGA’s updated figures are substantially correct when the direct and indirect costs of tied employment on NIC are taken into account. Does he recognise the £1.243 billion shortfall? Last time, he said that he did not really want to understand those figures and that he believed only figures calculated by the Treasury—the same people who told him that only a few hundred people would be affected by IHT.

I ask the Minister why local government is being treated differently from national government, when assurances were given at the outset that there would be equal treatment of the two. What assessment has been made on the most vulnerable? What commitment has been made to the comprehensive spending review? Can he tell us, clearly, how allowing councils to borrow against the additional costs of financing this national insurance rise helps meet the Chancellor’s golden rules?

My amendment is classified as a probing amendment, but it is no less serious for it. Labour has, quite simply, lost control of the handfuls of money that councils rely on to deliver their services, and this national insurance rise will push them to the edge. Labour cannot blame the Tories. This is a crisis devised in Downing Street, delivered by Marsham Street, but felt in every high street. I beg to move.

My Lords, I support my noble friend and thank him for his brief-ish words on local taxpayers and his update on the Great Reform Bill as well. I thank him for his Amendment to ensure that the Government initiate a review into the impact of this tax on local authority finances.

As countless noble Lords have remarked, both in Committee and during this debate, local authorities already find themselves in a perilous financial position. As my noble friend Lord Jamieson said in Grand Committee, local government currently spends more than 70% of its funding on adult and children’s social care. The Local Government Association has estimated that this measure will cost local authorities a total of £1.7 billion. Some £1.2 billion of that is indirect costs. While the Government may have offset the direct costs of local authorities, they have not done so for the indirect costs they will face. They will have either to cut public services or to put up council tax.

Given this, a review of the impact on local authorities is surely the minimum we can expect from the Government. I urge the Minister to accept this amendment.

My Lords, I will speak briefly to Amendment 43 tabled by the noble Lord, Lord Fuller, which would require the Government to publish an impact assessment of the Bill on local authorities within six months of its introduction. The noble Lord set out eloquently the damage the previous Government did over 14 years to public services and to the funding available to local government. He asked me the same questions as he did in Committee, and I give him the same answer as I did then: it is not for me to comment on the calculations made by other organisations.

On impact, as I have set out previously this evening and extensively in Committee, the Government have already published an assessment of this policy and a tax information and impact note. The OBR’s Economic and Fiscal Outlook also sets out the expected macroeconomic impact of the changes to employer national insurance contributions on employment, growth and inflation. The Government and the OBR have therefore already set out the impacts of this policy change. The information provided is in line with other tax changes, and the Government do not intend to publish further assessments.

The Government will of course continue to monitor the impact of these policies in the usual way. I therefore respectfully ask the noble Lord to withdraw his amendment.

My Lords, I am conscious that it is late, and I do not sense any appetite to divide the House on this matter. I regret that the Government do not really appreciate the magnitude of what they are visiting on local authorities and, in particular, on those people, some of the most vulnerable in society, who rely on the council to fight for them and act in their corner. We are in a really sticky situation in local government, and I am not hearing any reassurance or even any acceptance that they are making a £6 billion hole over the next two years that is going to be visited on every town, street and community.

I am disappointed by the brevity and lack of detail in the Minister’s response. But I accept that it is late at night and am conscious of the time, so I will withdraw my Amendment with regret and hope that at some stage the Government will at least take away the importance of this matter so that it is taken full account of in the comprehensive spending review. Councils cannot afford to carry this alone.

Amendment 43 withdrawn.