Graham Soulsby, Councillor David Borrow and Guy Ware gave evidence.

Q We will now hear oral evidence from the District Councils Network, the County Councils Network and London Councils. For this session, we have until 11.25 am. For the record, could the witnesses please introduce themselves?

Guy Ware:

Good morning. I am Guy Ware, and I am director of finance, performance and procurement at London Councils.

Councillor David Borrow:

I am David Borrow, deputy leader of Lancashire County Council and vice-chair of and finance spokesperson for the County Councils Network.

And a former Member of this House.

Councillor David Borrow:

Yes.

Graham Soulsby:

Good morning. I am Graham Soulsby, the managing director of Kettering Borough Council and the finance lead for the District Councils Network.

Thank you very much.

Q In the consultation document, which Ministers put out last year with a view to this legislation coming forward, they very strongly hinted that the improved better care fund, the public health grant and the rural services delivery grant, among other pots of money, would be abolished as part of the package around devolving business rates. What impact do you think that will have on the groups of councils that you represent?

Guy Ware:

I think the overall issue will be the degree to which local authorities—in my case, London boroughs and the Greater London Authority—are able to promote growth to increase the overall amount of money available and to flexibly spend the product of it. At the moment, we operate within a very centralised system where a number of individual policy issues are addressed through specific grant regimes, such as the improved better care fund. We would argue that that produces considerable perverse incentives and distortions, and that we would be better able to respond to the pressures in issues such as adult social care, which your previous witnesses talked about, if we were given the flexibility to raise and spend money in ways that are controlled locally.

Councillor David Borrow:

From a County Councils Network point of view, I think we need to take one step back. Clearly, if councillors are going to be dependent on council tax and business rates, the key issue is the equalisation mechanism. That feeds back to something that is not in this Bill: the needs-based review. Fundamentally, we are looking for a fair, transparent needs-based review that is based on the cost drivers in each area. From our point of view, the bulk of our spending is now on adult social care and we clearly need to get that properly reflected in any needs-based review of funding.

The equalisation mechanism needs to go back to the theory of local government finance that I remember when I first got involved 40 years ago, which was that wherever you lived in England and Wales, the funding that was available at a fixed rate, as it was in those days, enabled the council to deliver a certain level of service. Councils may be bad or good, efficient or inefficient, and may have different priorities, such as having low rates, high spending levels or high service levels. That is fundamental. What has happened is that bit by bit we have moved away from that and there is a lot of unfairness in the system, both between types of councils and due to historical accidents that have exaggerated difference.

The biggest danger we see—and this is obviously a Labour councillor speaking for a network that is overwhelmingly Conservative—is that we will not get what we want, which is something that fairly reflects the responsibilities that we have. We accept that there will be winners and losers, but we want a fair system that is moving away from the inequalities that have built up in the system. If the system is simply based on the existing spending patterns, that reinforces the unfairness. We need to get away completely from that.

Graham Soulsby:

Without going over the same ground as colleagues, I would agree that one of the big things in the new system is the needs-based review and linking it to the fairer funding formula. That is a key thing in getting it right. If we move to a better position in how that works, it should give authorities a bit more power and flexibility. Obviously, the funding pot does not necessarily change, but it is about how that is distributed.

I would make the additional point that it is not just about the allocation of funding to do different things. It is also about how we can promote more prevention-based spending—moving it around and spending more at the earlier end of where the pressures are, which is cheaper than spending it at the end when the costs are a lot more.

Q The Minister painted a picture of 100% business rates retention leading to a new dawn of councils rushing out to encourage huge amounts of new economic growth. I wonder if that is a picture that you recognise. If not, what barriers to that economic growth can you think of? I ask that in the context of a rural area where the space for the type of warehouse facilities that you could imagine generating significant business rates will be much more limited.

Guy Ware:

I think that “new dawn” is an interesting phrase. There are clearly incentives built into this. In our submissions to the consultation at the end of September, we identified a number of issues that prevent those incentives working clearly.

One of those, as we heard about a moment ago, is the appeals impact. Another is simply the frequency with which the system will take away the growth that is delivered by any activity in a given area. There is no straightforward answer to that. The new system has to address both the needs issues that my colleagues have mentioned and also, because it is the explicit intention of the Bill, a way of retaining a significant financial incentive while recognising those needs issues.

What are the barriers to growth? That is a very big question that it is perhaps beyond the scope of the Bill to resolve. From a London perspective, we have been very clear what we need. We think the greater local powers over these issues would enable the capital to respond better to the threats that we currently face, particularly the uncertainty arising from Brexit and also, less topically, the threat to the sustainability of growth within the capital, which to some extent is a victim of its own success.

The ability to house and transport people to keep working in London is a huge challenge. There are specific clauses in the Bill that we think would help that—around for example, the infrastructure supplement and designated areas—but there are others where we think it is unhelpful. For example, on the use of the infrastructure supplements, there is a broad definition of what they can be spent on, which is anything that will promote economic development, but unfortunately, two clauses later, there are specific exclusions, the first of which is housing. If you ask businesses in London, as we have repeatedly, what the biggest barrier is to continued and sustainable growth in London, they will say the lack of housing. So we want to see the Bill go further to free up local government to use some of the products of business rates in ways that are more suitable to their particular economies.

Councillor David Borrow:

Given that the County Councils Network represents large rural areas and small towns, the issue around elected mayors causes a lot of problems because elected mayors are a prerequisite for being able to have greater control over business rates, including increased business rates to put infrastructure in. That is a real problem in shire counties. Conservative Members here know the debates they have had on that issue. The County Councils Network wants that power to be given to combined authorities without it requiring an elected mayor.

Secondly, if the Government are looking to give further responsibilities as a result of transferring 100% business rates, the LGA has clearly identified lots of areas currently delivered by Government that promote economic growth and it seems logical and sensible for those responsibilities to be transferred to local government where they fit in with the policy of developing economic growth at the local level.

Thirdly, in many rural areas a lot of businesses are exempt from business rates as a result of the systems to promote business, and the mechanism affects the income that the council gets. You can promote small businesses, but it is different in rural areas from in more urban areas.

Graham Soulsby:

The last answer I gave was about making sure we get the needs-based assessment right. The other side of that is making sure we get the incentive side of it right. Those are the two key things in terms of how the Bill might operate. The incentive side will be key in whether the changes actually promote more economic growth at local government level. From an incentive perspective, if local authorities and their communities can keep more of the additional money that comes from business growth, there is probably more of an incentive to promote economic growth.

There is an issue that we have tried to flag up through the various working groups that we have been sitting on, which have been very good, through the Department for Communities and Local Government. If a reset comes up in a five-year period, we have argued that we need to be really careful about how that works, because there could be a disincentive to economic growth as you move towards that reset. If you did it in year four of the five-year period, you would not keep much of the additional income that comes through because it would all get redistributed. We have tried to argue that for that to work properly, there needs to be some retention of incentive in the medium term so that if you want to use some of the additional business rate income, you can go out to the market and perhaps get infrastructure funding to promote some bigger schemes, but you would have to pay it back over a longer period of time. There needs to be flexibility in how much incentive there is and in how much business rate increase you can keep for a longer period to get real economic growth.

Q For the record, I am chairman of the county all-party group, for which the County Councils Network provides the secretariat. Mr Soulsby and Councillor Borrow, you very much emphasised the importance of the needs-based review of the fair funding formula being synchronised with the implementation of the provisions in the Bill. Do you think there is a case for including that in the Bill?

Councillor David Borrow:

It is unusual that the two things have been separated. The timing of both parts of this change needs to be as close as possible. If they have to be done in two separate pieces, they need to be co-ordinated. Clearly, until we have sorted out the funding formula, we cannot really move ahead with 100% business rates, and getting that right is fundamentally important.

Graham Soulsby:

It will be okay if the co-ordination is done properly, given that this is more of a framework. One of the things that the working groups at DCLG are working with local government on is the much longer gestation of the needs-based side of it. We have been trying to argue that the timescale needs to be brought back a bit and it needs to be done more quickly. That definitely needs to happen. Whether it needs to be part of the Bill, I am not sure, to be honest.

Q My question is for Mr Ware and London Councils. The Bill provides for business rate pooling arrangements to take place. We are sat in a borough where the band D council tax is £672 a year, looking at a borough across the road where the band D council tax is nearly twice that. Does London Councils have a view about the potential for council tax pooling, and have any discussions taken place with the Government?

Guy Ware:

The short answer is no, there is not a clear view and there are no active discussions about council tax pooling. However, the two things will be closely interrelated. We in London would argue—this will apply in other parts of the country—that we should do this by arrangements that we devise for ourselves, but that is a slightly separate question. The two things will be interrelated because the definitions of the needs and therefore the business rate baselines that determine the top-ups and tariffs that will redistribute business rate resources between authorities will also be informed by the capacity to raise council tax. There is a whole set of quite difficult issues that sit behind that around why council tax can be very different, as you say, between two neighbouring boroughs or authorities in other parts of the country, which is bound up in previous political decisions, previous funding decisions and so on, so it is not straightforward.

We would argue that in the medium term, council tax and business rates should be reviewed together. The London Finance Commission, which reported just last Friday, certainly argues—I think persuasively—that fundamental reform of the way that property taxation is undertaken is really important. Trying to do each of those taxes independently is not necessarily the best way to go about it, because they are interrelated and affect transactions in the market and individual business rate and council tax payers.

Q One of the problems with the current council tax system is of course that Governments do not always have the courage to go forward with revaluations, which is why it is now 26 years since the last one. Is there a view that that should be localised—that that should be a local freedom?

Guy Ware:

I believe it should, and I believe that the chances of it happening would be considerably greater if it were managed at a local level—in our case London-wide. The ability and the accountability of local politicians to tackle those really hard questions is greater, because the incentive is greater and the exposure to voters and taxpayers is that much greater.

Q Finally, does London Councils have a view about the abolition of the GLA transport grant?

Guy Ware:

Again, we are supportive. All our submissions and recommendations on this issue have been made jointly with the GLA and the Mayor. The change that is coming in in April to fund Transport for London and the fire service revenue support grant within the GLA by retaining extra business rates is entirely in the spirit of the way that we think these things should move.

Q Councillor Borrow, you were talking about how unfair the current system is and the need for a review. I think you also said that there will be winners and losers. I agree, as I think most people would. How do we cope with that? Your local authority’s spending power, for example, is around 35% less than some London authorities with much higher spending power. There are going to be winners and losers. Mr Ware is here wearing one hat; you are wearing another. How are we going to deal with that situation without it being a fudge that bakes in the current unfairness?

Councillor David Borrow:

That goes back to the issue that the longer you allow unfairness to build in the system, when you try to bring fairness back, you have to put some sort of transitional arrangements in place. That ties in with the issue of council tax revaluation. I was told 40 years ago that you needed five-yearly revaluations. Otherwise, you end up with a situation like the one I was in when I worked down here: I was in a band E property in Preston and a band E property here, but I was paying less here than I was in Preston and the property down here was worth twice as much as the property in Preston, simply because the revaluation had never taken place.

Any property-based tax system needs to have regular revaluations. We had it for business rates, but we have not had it for domestic property. I understand the political realities of that, but if we are not going to have revaluation but we are going to have some fairer funding system, given the disparity that exists now between certain authorities—you’ve got people in a band D property paying £500 in parts of London and nearly £2,000 in another part of the country—you clearly have got to have some transitional arrangements to make that fair.

Guy Ware:

It will not surprise you that I would also like to talk about that, and you will not be surprised to hear me say that I think we need to be very careful when we talk about London—I fall into the same trap sometimes—as being an area of high spending power. London is a very huge and diverse city and economy. There are areas of London with the highest levels of deprivation and need of anywhere in country.

You have also got nine of the 10 authorities with the highest spending power in the country.

indicated dissent.

Q This is evidence. And nine of the 10 lowest council tax charges in the country. I am not saying every local council in London—

Guy Ware:

We also have nine of the 10 areas with the highest multiple deprivation. The point that we need to get to is that there is a history behind that, as one of the previous questions suggested. The differences between neighbouring London boroughs can be as great in terms of spending power and tax as between some London boroughs and some authorities in other areas of the country.

One of the previous questions this morning was about the Independent Commission on Local Government Finance. One of the commission’s key recommendations was that the variations between authorities were at least as great within regions as they were between regions. As a result, it concluded and recommended that it would be possible and sensible to devise an approach that looked at regional funding needs, which would allow authorities within a region to deal with the distribution within that region.

Q Councillor Borrow will disagree with that.

Guy Ware:

That is something that we have been arguing strongly for from a London perspective. I am sure Councillor Borrow will want to come back on that.

Q Can you answer my question? If you change a formula, there will be winners and losers. I would absolutely subscribe to the view that that should be based on need and need alone—whether that means your local authority, mine, or anybody else’s is better-off—as long as it is transparent, clear and simple, so that we can all understand it. How do we deal with that situation?

Guy Ware:

There are two issues. First, any change produces winners and losers and you need to make sure that the transition is not too sharp or painful. Secondly, however, a system that is based on need and need alone, while it might sound attractive, is actually directly contrary to the spirit of the Bill and Government policy, which is that the desire to introduce an element of incentives to the way in which local government is funded is seen to be important enough to pursue. The reason that it is important is that the amount of money available is not necessarily a fixed quantum. If you can generate more business activity and, therefore, more business rates, you can bring more money into the system.

Q Sorry, we are short of time. I want Councillor Borrow to come back on that.

Councillor David Borrow:

Darra Singh and his committee floated the idea of regional equalisation of the business rate. All that would do is reinforce the inequality between regions, and it is absolutely fundamental that if we are to get a fair local government finance system, you have equalisation across the country. From a mathematical point of view, you can argue that it is easier to do it on a regional basis, but that simply reinforces inequality. The dramatic, obvious example is between the south-east of England and the north-east of England—that would simply reinforce the poverty in the north-east and the affluence in the south-east. It is clearly not something that any Government should be looking to do.

Q Mr Ware, following on from Mr Hollinrake’s questions, does not the capacity to raise income through fees and charges and to generate local economic activity—that is what we are talking about in business rates—need to be taken into consideration? Let me explain myself. I am from the borough of Greenwich, sitting on the outskirts of inner London, and I look in on Camden and Westminster, which can raise money through things such as parking charges, which enables them to finance local government expenditure in a way that other areas cannot. Is that not a major factor? You cannot take the face value of how much one local authority charges for council tax as a way of demonstrating its efficiency.

Guy Ware:

It is clearly not a straightforward measure of the efficiency of the local authority or indeed its ability to raise resources in other ways, as you suggest. There clearly are differences between authorities. There are also a number of restrictions around the use to which such income can be put. Our approach in London Councils and the GLA has been to argue for the need to be able to look at London as a system as a whole. In order to make the success of the economy that I was talking about earlier continue, you cannot look purely at a borough-by-borough level, because the concentration of employment in the centre of the city means that that is where the majority of the jobs—not all of them, but a very large proportion—are going to be, but that is not where people are going to live. We need to think about how we can balance the contributions that various parts of the capital can make to its future success, and part of that will be the ability to invest in transport, to provide housing and to raise revenue through various types of resources.

Q It is that ongoing ability to raise income from other sources that areas such as London can benefit from, but other local government areas struggle to do so.

Guy Ware:

Again, I would make the point that some areas of London have greater capacity than others—that is the point from which you started—and some of those are comparable to cities and rural areas outside the capital and some are not.

Q How much is the capacity to raise money from fees and charges a factor for different local government areas across the country?

Guy Ware:

The ability to raise fees and charges makes a significant contribution to local government’s overall financial sustainability. I know that, as a sector as a whole, we will be arguing that there should be fewer restrictions on the capacity to make charges and the rates at which we can charge. A number of them are constrained not only by what you can spend them on, but the levels at which you can charge in the first place, which do not necessarily cover the costs of the services being charged for. Planning is probably the most well-rehearsed example. So, yes, it is significant to the ability of councils to budget and maintain their services, and as a sector we would like more flexibility and control over how we use that ability.

Graham Soulsby:

I would like to supplement Guy’s answer. If we are going to move a simpler but more effective needs-based system, obviously a local authority’s ability to generate income in other ways needs to be taken into account, to make it fair to other authorities. To do that in a more effective way, look at the current restrictions that are in place. Many local authorities have, over the last few years and longer, tried to maximise their income base in the best way they can, because they have had to do that. There is probably less headroom than there used to be; but nevertheless if some of the restrictions were lifted it might just help with our overall funding issues.

This slightly relates to those issues. Mr Ware commented on incentives being important; I just wondered what your views are about abolishing the levy payments, which basically are a tax on successful business. Would it help to free up more money and make a differenceQ ?

Guy Ware:

We would support that abolition; we think it does help produce a greater connection between the growth of economic activity in an area and the growth of business rates that can be retained within that area. That is currently what is funding the safety net system so, once we do that, we will need to think through the consequences and how you fund a safety net that is appropriate to manage the risk of significant reductions in resources.

There are two further fundamental restrictions on the amount of business rates that can be raised—one specifically covered in the Bill and one specifically excluded. The provision in clause 5, which changes the indexation that will be applied to business rates in future, effectively from RPI to CPI, is a good illustration of my point that it is not necessarily a fixed pot. That change alone, we estimate, will take £80 billion of spending power out of local government over 20 years. At a time when we are all discussing a crisis in funding for social care—that being a good third of local government funding—to reduce by fiat the capacity and buoyancy of the biggest single tax that local government will be collecting seems to me to be worthy of debate.

The second issue—the one that is not in the Bill— is the principle that sits behind the way in which business rates are determined. Each time it is revalued it is revalued to a fixed sum, so that the yield of the tax is determined in advance by the Treasury and the multiplier is set in order to deliver the amount that the Treasury says it should. Again, that is a policy choice that the Government make. It could allow the yield from business rates to rise with the economic activity that is underpinning it, in exactly the same way that income tax and corporation tax rise with the economic activity that they are taxing. It is only in the case of business rates that we have taken the choice to set a cap for the amount of money that can be raised.

That not only reduces the buoyancy; it also distorts the distribution. The issues between London and the rest of the country become really important here, because what happens is that within a fixed sum, every time there is a revaluation, property prices in areas where they rise faster than average—which is central London, but also lots of other places—go up faster than they otherwise would. The concentration of the tax base is getting greater and greater as a result; fewer and fewer businesses are paying a higher and higher proportion of the national business rate take. That could be cured—it could be solved—and in our proposals we have suggested ways to do so; but it is not a given, as I have said. It is a policy choice that has been made, and we think it is damaging.

Graham Soulsby:

On the levy payment, I think the link to the safety net is really important because, obviously, it was used to fund that; so the system needs a mechanism so that it is still able to do that. The stuff in the Bill on the safety net, and additional flexibilities if a major business went under in this particular patch, are welcome. In reality, not having levies in the system is a sensible thing to do overall. What we found in recent times is, because most authorities operate business rate pools in any event—and by operating a pool you do not pay the levy, because you can do different things with it—it is just normalising what most authorities are doing. The evidence from business rate pools is that it is generating more economic growth. For that reason, I would say that it is a good thing to do.

Councillor David Borrow:

I do not really have much to add, apart from to point out that generally county councils cover larger areas. Clearly, the risks are much less for a county council than for a district council, simply because if there were a loss and a problem in one part of the county, within a county council it would be lost in the mix, whereas for a district council in a two-tier area it could have quite a significant impact.

Are there any further questions? We have only a few minutes left.

Q As part of the whole devolution process, in order to facilitate the new business rate retention process, at present various responsibilities are being transferred from central to local government so as to ensure fiscal neutrality. I would welcome your views on that. From your perspective of taking on those responsibilities, are there any unexploded bombs that you might think are being passed to you unfairly?

Graham Soulsby:

That is a really good question, but one that is quite hard to answer at this moment in time. The issue of new responsibilities, as you can see from the drafting of the Bill, is not in there. We have had discussions in the DCLG working groups about different ideas of what those new responsibilities might be, but the big point that all representatives of local government have made is that, obviously, we are open to the discussion. We do not want to take on responsibilities that have that ticking time bomb element where they are fiscally neutral at day one, but by year five a huge deficit is eating into our business rate income. As a principle, we have been trying to argue that with DCLG officials. They understand the debate, but we have not yet got to the detail in terms of thrashing it out.

Councillor David Borrow:

I would go along with that. From our perspective, there is a real risk. The point that the County Councils Network would make—this may be shared by other people in local government—is that there is a first call to be made on any business rates before additional responsibilities are transferred, which is to ensure that the existing funding gap is met. Particularly in terms of adult social care and looking forward over the next few years as the revenue support grant disappears, the figures show a gap. In my own authority, we are looking at a gap of £150 million between income and expenditure in 2020-21. That sort of figure is not particularly unusual among upper-tier authorities.

Guy Ware:

The equivalent figure in London, collectively, is about £2 billion, plus the GLA.

I echo what my colleagues have said. To be perhaps more positive than I have been about some other issues, one ticking time bomb has already been defused in the non-transfer of attendance allowance. I give credit and pay tribute to the joint working groups that Graham mentioned earlier and that the DCLG has been leading with the LGA. That is evidence of some listening and some progress in the joint assessment of problems.

Q Just to follow up the ticking time bomb analogy, if the £3 billion public health grant were to be abolished, would public health become a ticking time bomb for local government?

Guy Ware:

I think public health is a ticking time bomb for the country as a whole. One of the comments that Graham made earlier, about the desire to shift spending into prevention and away from expensive interventions, applies fundamentally to this issue. If the grant were abolished and public health became a local authority responsibility like any others funded from council tax and business rates, the incentive to ensure that we were fulfilling the kinds of policy objectives that underpin public health would become all the stronger. There is risk involved in that, obviously—namely, that we cannot cope with the consequences—but certainly there would be benefits in aligning the responsibility and accountability for managing those services with those who are raising the resources.

Councillor David Borrow:

This raises a bigger issue: local government, in terms of adult social care authorities, needs to find a way of working properly with the NHS. At the moment, there are disincentives around adult social care and the NHS. Clearly that is the direction of travel that the Government want to move in, but they need to look at what they need to do to ensure that the right partnerships between local government and the NHS can exist. With something like public health, if the funding for it is reduced, that would put more pressure on adult social care and on the NHS in the longer term, however useful that may be in reducing budgets in the short term.

Order. I am afraid that brings us to the end of the time allocated to the Committee to ask questions. I thank our witnesses on behalf of the Committee for their evidence.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.