Sean Nolan, Christian Spence, Dominic Williams and Jo Miller gave evidence.

We will now hear oral evidence from the Chartered Institute of Public Finance and Accountancy, the British Chambers of Commerce, the Federation of Small Businesses and the Society of Local Authority Chief Executives and Senior Managers. I would like our witnesses to enjoy their hour. Colleagues will be very warm and friendly, but they are here to take evidence from you. Relax and enjoy it. I would like you all to introduce yourselves. I do not want to hear your life history; just say a few words about yourself, starting with Mr Nolan.

Sean Nolan:

I am Sean Nolan, director of local government at CIPFA. Behind that is 17 years as a county treasurer and national lead in different roles, on business rates and other bits of local government finance.

Christian Spence:

Good afternoon. I am Christian Spence, head of business rates policy for the British Chambers of Commerce and head of research and policy for Greater Manchester Chamber of Commerce. My background is working within the chamber network for about five or six years, and before that, working particularly with Core Cities on amendments to what is now the Localism Act 2011.

Jo Miller:

Good afternoon everybody. I am Jo Miller, president of the Society of Local Authority Chief Executives and Senior Managers. In my day job, I am the chief executive of Doncaster Council—a borough of 310,000 people, which is bigger than both places represented this morning, but it does not yet have the title of city. I am also the regional lead for skills in local government.

Dominic Williams:

Good afternoon. I am Dominic Williams, the Federation of Small Businesses member in charge of Department for Communities and Local Government policy. As a member, I have a day job: I run a consultancy dealing with regeneration and local government matters. I started my career with the Valuation Office Agency.

We have only been running these evidence sessions for a few years. We never used to have them; we used to get straight into Bills. Taking evidence enables colleagues who sit on the Committee to be even wiser than they are already when they scrutinise the Bill word for word, line by line. We will go to the Opposition first and then the Government and keep going back and forth until we run out of questions. If it lasts an hour, so be it; if not, we will go on to the next witnesses.

The Minister painted a picture this morning of a wonderful, revolutionary Bill that is going to galvanise economic growth across the country. I think that is a reasonable assessment of his performance. Do you think there is anything wrong at all with that assessment?Q72

Sean Nolan:

On the basis that it is a long-term opportunity, the Bill has some significant risks and challenges in its implementation. The analogy here is horses running in different directions. Bear in mind that business rates do not correlate with service need. In my view, business rates prospects and potential are more an accident of history and geography than anything else. You cannot all live in the capital; you cannot all live atop silicon valley. Because of that, this agenda is actually not just a technical exercise about how to retain 100% of business rates locally—it is fundamentally about how vital local government services are financed.

On my points about the lack of correlation and on prospects being more an accident of history and geography, there are inevitable inherent policy tensions in the agenda. Some areas feel they have good prospects for growth and can grow, and are very much interested in incentives; some areas are trying to cope with post-industrial Britain and are running hard just to stand still, in terms of growth prospects. Those two tensions—between the haves and have nots—pull apart.

In the world of 100% retention, the incentive—which is really important; everyone needs incentives—is to keep growth local, but it is actually the proceeds of growth that will pay for risk and for those less well off. Those inherent tensions pull in opposite directions. My view is that this is not so much good or bad, but that a reality that has to be recognised is how success is measured. I am interested in how the Bill’s sponsoring Department will define the success of the agenda, relative to those inherent tensions that pull apart—haves and have nots; incentives versus risk.

Thank you. Just to say, there is no pressure on all our witnesses to comment on every question.

Jo Miller:

In so far as the exam question on the paper might be on business rates, it is a decent response. However, I cannot help but think that we are answering the wrong exam question. I dare to suggest that the real exam question is: in a country that works for everyone, with no one left behind, how do we have the state that we can afford, pay for and need? I venture to suggest that, while retaining business rates goes some way towards localisation, it does not nearly address that question.

Similarly, my area is growing its way out of austerity; we have more jobs and more business stock, albeit from a very low base, and we will continue to prioritise growth. However, I am not sure that the incentivisation of growth in the Bill encourages the right type of jobs—for example, the jobs the Government anticipate in their industrial strategy—not least because business rates is a property-based tax, whereas many of the jobs and businesses of tomorrow will not rely on property to deliver the businesses and jobs that are needed.

Christian Spence:

We wholeheartedly support the high-level objective of 100% retention. We agree that, in principle, it is better to create a decision-based model that better aligns local incentives between local authorities and the wider business community. In general, the objective is that local government should, in theory and, hopefully, in practice, be more sensitive to its business community and the opportunities for growth that may be afforded.

However, to echo comments we have already heard, although in principle we wholeheartedly support that high-level objective, we remain concerned about challenges in its delivery—particularly across different economic areas, either because of the different sectors and types of businesses there, or because of long-run examples of those local economies. In principle, it is a very good step in the right direction. In practice, we worry about how some of those things may flow.

Dominic Williams:

One of the complications is that there are two separate things going on, both of which are labelled as 100% devolution of business rates. First, there is the devolution of 100% of national business rates income to the local government sector. The sector will then divide that up and give it to local authorities to spend in accordance with their own local priorities. We are fans of devolution and we think that is sensible. The problem is that local authorities have some statutory duties and some discretionary duties, and what has happened over the last few years is that they have cut business-facing discretionary activities in order to fund a shortfall in respect of the statutory obligations, particularly adult social care. In addition to cutting their own expenditure—for example, if you want planning consent for a minor alteration to your building, that becomes much more difficult because planning departments have been cut back—local authorities have increased parking charges dramatically, cracked down on penalties for traffic offences, increased their waste charges and so on. The upshot of all that is that discretionary business-friendly activities have been cut to meet other shortfalls. The important thing to us, perhaps surprisingly, is that local authorities should be properly funded to meet their statutory obligations, and then there would not be such a squeeze on discretionary activities.

Q How would you change the Bill?

Dominic Williams:

I do not think it is the Bill that needs changing. Beneath the Bill several technical working groups are going through the detail of what needs to be funded and how it should be funded. We are impressed by the way in which the Local Government Association and DCLG are working together on that. We think that it is being done in a grown-up manner and we hope that the outcome of it will be a sensible settlement that is workable.

Mr Thomas has asked the question that I was going to ask. None of you, to a larger or lesser extent, have given the Bill the glowing endorsement that perhaps the Government and Minister were hoping for. What other provisions would you look to put in the Bill to address those concerns? MrQ Nolan said that not everywhere is silicon valley. What are we going to do to help those areas that are not silicon valley?

Sean Nolan:

I genuinely think this is very challenging. Points were made earlier about economic growth. Actually, some of that growth is not necessarily what you would see in a rates valuation. Some of the micro-industries and broadband developments—that kind of thing—do not reflect well in a technical exercise called retention of business rates. That is my first point. Secondly, and I am deliberate with my language, I do think it is a long-term opportunity, but the inherent tensions I have described are real—whether you have or have not, the management of risk and the management of incentives—and this system has to somehow incorporate that.

On the opportunity side, and I say this as CIPFA—I endorse what has been said about how well the LGA and DCLG have worked together—no one wanted too much absolutely nailed down in the Bill, to give a chance for additional scrutiny—

Development.

Sean Nolan:

Development, sorry. However, looking at the opportunities, a lot depends on how the additional quantum is divvied up and how that transfer of responsibilities comes through. I think that is the opportunity set, to be honest. It deals with two bits. One is about unfunded pressures. Government have a choice there, do they not? They can look at the additional quantum to the extent that it can be part of that solution. Okay, there is a question—the Treasury will never be interested—but they have a choice. The second bit is, within that transfer of responsibilities, what is the opportunity for genuinely giving every part of the country access to agendas that they can better influence—work and skills—rather than it just becoming a technical accountancy exercise of swapping over other existing grants for the quantum? I am trying to deal with the positives, but we all need to recognise that this will end up funding local government and not just economic development, so it has to manage those inherent tensions in a grown-up way.

Did anyone else want to comment? If not, I call Mr McMahon.

ThereQ is a tension here between business and public service in respect of the role of business rates. Businesses do not like rates, because they have to pay them whether they make money or not. Governments tend to like rates, because rates are property-based and the Government can know where to knock on doors. I have two separate questions. The first is to business: is there an alternative to business rates that takes into account the new world of commerce and how businesses make money and are taxed? The second is to local authorities: would you welcome it if the types of powers that are offered to combined authorities and Mayors were given to all billing authorities?

Christian Spence:

I will start on that complex question. You are right that there is a natural tension between the business community and local authorities with respect to paying business rates. One of the opportunities that the Bill may offer is to look at trying to repair some of the disconnect that there has historically been between the payer and the recipient and spender of the funds. As for how you repair that, the Bill goes some way towards starting to advance and better connect the opportunities for businesses to further contribute, through the business rate system, to schemes and economic development opportunities of strategic importance in their area—either through the business rate supplement or through the proposed mayoral infrastructure levy.

There are some challenges. From the business side, the one thing that we must see is a way to ensure that there are sufficient democratic checks. In the fiscal climate, across all local authorities, there is a fear from business that it could very easily be seen as an easy cash cow to fill funding gaps that are being determined not through the Bill but through wider Government fiscal policy.

There are undoubtedly opportunities for better engagement, for building those relationships and for allowing those two sides of the coin—the businesses and the local authorities—to start to understand each other a little more. But I think that there are two separate issues: the Bill itself, how it deals with the relationship with business and the financing of business rates in a world of devolution and retention; and, separately, the core funding of local authorities through the supplement.

Dominic Williams:

In autumn 2015, I think it was, the Treasury asked for submissions on the future of business rates and turned its face against major reform. The reality is that it is highly unlikely that a Government would suddenly give up more than £25 billion a year of certain revenue, particularly given what happened to poll tax. So I think dramatic reform is unlikely, but we may see business rates gradually becoming a smaller proportion of Government taxation. The move from RPI to CPI, which the Bill paves the way for, is likely to be a helpful step on that road.

I think Ms Miller wants to answer the second question.

Jo Miller:

The second question from Mr McMahon was whether the proposals in the Bill should be extended beyond mayoral and combined authorities in London to all local authorities, and the answer is yes. It seems to me that the more we enshrine a two-tier system, where one lot of people can have more and another cannot, the more we put inequality in place and prevent economies from being productive and growing. That said, I am clear in my day job that it must be arm in arm with business. We have a fantastic chamber of commerce and we have prioritised services to business, precisely in order to grow the economy, grow the business rate, grow skills and re-enable people to participate in the economy, so that they cost the public sector less. But we should not be in any doubt that simply saying “This type of local authority can have these powers to enable growth and this type cannot” is as regressive as council tax, if I may say so.

Q Perhaps my question was too narrow. For instance, I might have expected some contributions to make a bid for the retention of other taxes and duties that are raised at a local level, such as stamp duty, fuel duties, air passenger duties, as a way of having a broader tax base from which to generate income for public services.

Jo Miller:

Where local authorities, with businesses, can demonstrate that there is a win-win, they should have the power to do so. We are in the most centralised state in Europe. Let me give another example from my day job—forgive me if I talk in examples, but it is what works for me. We put together a road scheme that was initially heralded as costing the taxpayer £110 million, when we had to follow guidelines from the Department for Transport. In fact, we worked out that it could cost £56 million: £18 million came from Government, and the rest was raised through local taxation and through business. It unlocked 10,000 jobs, 10,000 houses and £1.7 billion of private sector investment, equating to 3% of GVA in the region. That is the type of thing that good local authorities can do, working hand in hand with business, so we should grab with both hands any opportunity to make that work on a greater level.

To touch on distribution, which has been referred to a couple of times, the key now is how this pot of extra money is distributed. There seem to be some real disparities in the system at the moment; unfairnesses, I would call them. I will give a few examples at random. Harrow, for example, gets £80 more per head in spending power than North Yorkshire, despite the fact that Harrow has a wealthier, younger population. There does not seem to be any correlation between the spending power of local authorities and the need in those local authority areasQ .

Perhaps it is the quality of representation, Sir David.

I would go for a different explanation, but what is your feeling?

Sean Nolan:

Underneath the detail is a commitment by the Government to undertake what they are calling a fair funding review. That is implicit in this kind of development. In fact, interestingly, we talk about 100% retention from day one, but actually it will be preceded on day zero, so to speak—the day before—by a redistribution, in theory, of resources around the country and between councils, because the Government have committed to doing a fair funding review of need. In a sense, I cannot comment particularly on the rights and wrongs of an historical position; all I can say is that where we are now is a reflection of judgments made in the past about the right kind of formula and what is meant by need. It has been frozen for a number of years, but that is its history.

The Government—and, I suppose, Parliament—have an opportunity to eventually look at what will be, in their timetable, a complete review of needs. You have picked up on a crucial point, if I may say so, Mr Hollinrake, because that will be happening, effectively, the day before a new scheme and it will move money around. Their argument, and it is one we would clearly like to support, although the devil will be in the detail, will be that that will set a fairer base. In my experience, fairness is in the eye of the beholder, but that will be their argument.

Q What you allude to is that there will be winners and losers—it is a zero-sum game. How do we cope with that? Most people will recognise that the system is unfair. How do we move to a fairer system without those people who are going to lose out being particularly concerned about it?

Sean Nolan:

This is a technical point, but genuinely, fairness is subjective, not absolute, so one of the preconditions to make people feel it is fair is the quality of the consultation about the factors and the indicators. Clearly, that will be an important part of the process. The second bit about coping is about having early notice of the impact so you have a chance to plan. With all due respect, that is a political challenge, because essentially you are showing your hand early about distributional impacts, but from my experience that leadership is really important, because you give individual authorities the opportunity to understand why there is change and then begin to cope. The third element about coping concerns the transitional arrangements that the Government want to put in place. Those three conditions are quite important, but bear in mind that fairness is subjective: in my experience, losers do not think it is fair.

Jo Miller:

What matters is a focus on “fair” rather than “equal”, because if everybody gets something that is equal, it does not necessarily mean that it is fair, and we have sometimes lost needs from the equation. At the same time, it is absolutely right that the Government incentivise those who are trying hardest to make their economies more productive. The Government must find a balance, in all those arrangements that Sean has referred to, between incentivising growth and addressing the fact that some places have an inherent structural deficit that means they will not be able to cope. It is right that we make sure the system works for everyone. It is a big challenge.

Q Would you accept that, despite the fact that it might take time to get to a final position—there will be a transitory period—the formula should be based on cost drivers, not on what has gone before?

Jo Miller:

Yes.

Staying on the point about fairness and distribution, can you elaborate on what you think could be the characteristics of potential losers? Ms Miller, youQ mentioned structural deficit. As we work through the next couple of years on the detail of this, what are the demographic and economic characteristics you think we should be looking out for, as we try to balance some of the challenges to be faced? Do you think there is a commitment within the local government family to work collectively and collaboratively on this, or do you think we will see tension around competition and people wanting to put their local authority before the greater good, perhaps?

Sean Nolan:

You start off.

Jo Miller:

We are going to do a double act, if that is okay. First, I think you asked us what the characteristics of good look like. For me, that starts with: what is the essence of our contract with the British people? What do they have a right to expect from the state and what can the state expect from them? I believe we live in a something for something society, in that sense; therefore, what does that mean about the state of the state? How do we recognise, for example, that in the part of the world where I work, people live less long than in some other places, but in their last 10 years they live in very poor health? Yet we have a public health grant that is currently based on how long people live, not the essence of their health. How can we use these systems to take away some of the things at the moment that do not recognise that kind of fairness and equality, which need to be built in? I am pleased that we can incentivise growth, but the challenge is to make sure that we can incentivise all sorts of growth, not just those that relate to property or particular industries. That is a challenge that I cannot see being met by the Bill at the moment.

I suppose there has to be a baseline for everybody. We should encourage and incentivise growth and we should take business with us. In terms of that, will we collaborate? I do not know whether devolution has showed us in our best light in that regard. From a skills point of view, I can guarantee that the country can spend the money it is spending better, and get better outcomes. I do not think it is a good use of people’s time to be having the conversation about what good looks like 15 or 24 times over, when we could have it far less than that. It is a challenge to the sector and the Government should hold us to it, because if we start just with “I’m all right, Jack”, we will have more of the extreme events that we are having at the moment visited upon us.

Sean Nolan:

If I can interpret the question about the formula review and needs, it is very difficult to look ahead and describe what the characteristics will be. Professionally and personally, I think this is an opportunity to look at cost drivers and a different way of viewing the formula. In an open way, what are the cost drivers? An important point is that, because this is a zero-sum game, because it is looking, on day zero, at how you re-divide the current cake, you are talking about winners and losers. More importantly, though, you are talking about relative need, so it is not an absolute statement. It is important to have real openness about what those indicators are and a real opportunity for the whole country to engage in whether it is the right set of indicators, so there is a sense of building consensus about what is meant by “fair”. This is just about the formula itself. On your second point, because it is a zero-sum game with winners and losers, you will inevitably have split personalities all the time. It may sound a bit foolish to say, but in my experience, people can contribute an argument to the greater good, but the following day, they live in a metropolitan, county, district or London situation, and they are thinking, “How does this work for London?”

Ultimately, I think the sector and the system will just have to recognise that when it gets to the moment when all the formulae have been churned, all the exercise of consultation has been done and it comes out with a result, that will shift money significantly, even with transition. It does not matter how good the consultation will be; you will get lots of cries of “Foul”; that is inevitable. You just need to cope with that, look back and think, “How well have we actually conducted the consultation? Can we actually defend our thought processes?”

We are halfway through the time allotted for this session.

I know from my term as a local councillor that often, the relationship between elected members in particular and the business community can be quite strained and not always the best. Often, that is because many members have little experience of business. I am interested in your reflections on one thing that I see as a potential benefit of the Bill: strengthening that link between the council and the local business community. It is very much a two-way thing: the council needs to understand the local business community much more, and the business community will see a direct link between the rates that it pays and the benefit of the local community. I am interested in your reflections on that. Do you see that in the same wayQ ?

Dominic Williams:

First, on the incentive in the system to encourage growth—allowing local authorities to keep 100% of additional business rates generated—our view is that that is not really an effective incentive, for a number of reasons. First, it only applies to the development of new physical property. It is an incentive to permit more development; it is not necessarily an incentive to look after your existing business community. Secondly, throughout much of the country, particularly over the last few years, there has been very little development, so it has been a questionable incentive.

Thirdly, where there has been development, it has tended to be out-of-town shopping centres. The way that the system has worked since the last reform has given local authorities an incentive to give consent to out-of-town shopping centres, which take away trade from the existing town centre. The local authority does not suffer from that, because the people in the town centre carry on paying business rates as normal. That does not get sorted out until you have a revaluation. A number of our members in retail have suffered dreadfully over the last few years through that kind of thing. There are lots of other things wrong with the high street, but that is a contributing factor.

So I do not think that that little incentive works, except in enterprise zones, where it has galvanised everyone. What I think is more important is that if local authorities are correctly funded to do what they are meant to do, they will be supportive of business. If they are underfunded—I do not blame them for this—they have to put the money towards their statutory obligations and cut back on some of their discretionary activities.

I think that there is also a wider question about what happens to activities that are now funded through ERDF European funding. Will they continue to be funded post-2020? If so, who will be responsible for delivering them? It could be that local authorities get that responsibility and get a matching amount in business rates to do it, or it could be done in some other way. We do not know at the moment. There is still a lot to be decided about how this all works.

Q I take your point about growth and development. I was more touching on the direct link and the fact that, at the moment, my local business community pay their business rates to central Government. There is no direct connection between them and their local council in how that money is spent, whereas if the Bill comes into force, there will be a direct connection, and the business community will see that they are directly funding the operation of the council. That was more what I was touching on. I take your point about future growth, but I see the current strengthening of that direct relationship.

Sean Nolan:

That it includes the kind of richness of the conversation between a local council and its local businesses is undoubtedly part of the positive benefit. It feels like trying to do that is an agenda for every council up and down the country.

The caveat we need to bear in mind—I am afraid this is part of the complexity of what will now have to happen—is that it is not a one-to-one relationship. Because of the existence of top-up and tariffs, what businesses pay may not necessarily go to their local authority and may go elsewhere. That makes managing expectations in the conversation a bit more complicated. However, in theory it definitely adds to the benefit of the conversation, although the one-to-one relationship you describe is a bit confused by the top-up and tariffs.

Christian Spence:

The 100% retention on its own has the potential to open up a greater and more transparent conversation between business and local authorities about where the money goes and how it is spent. You are right that most businesses perceive that business rates vanish into a black hole—they have no idea where it goes. However, the 100% retention aspect of this Bill alone will not deal with that. It can enable a better conversation between local authorities and local businesses, but there will be a lot of work to do to develop that aspect.

There is an opportunity in a later aspect of the Bill for greater involvement involving the widening of the bid arrangements to property owners, the Business Rate Supplements Act 2009 becoming applicable to mayoral combined authorities, and specifically the new idea of a mayoral infrastructure levy that is available to those bodies. There is an opportunity in those measures for a direct, two-way, open and honest relationship between the BID and/or the local authority on one side and business on the other, or between the mayor and the greater visibility of local government, which we should see following from 5 May onwards.

That transparency and openness are welcome. The view of businesses across the country is that if local authorities are looking to increase spending or even to levy specifically for additional strategic projects in their areas, business is not necessarily unwilling to pay—the existence of more than 200 BIDs in the country is tacit evidence that that is the case. We are pleased to see the consultation aspect of mayoral infrastructure levies move on from a majority vote of the local enterprise partnership to a wider consultation—that is in the spirit of moving things in the direction that we would like. However, the challenge in the Bill from our point of view is that it stops short of a ratepayer vote against the levy and simultaneously brings forward the wider participation of BIDs to owner-occupiers, and of business rate supplements to combined authorities, which means that the Bill confusing its own purpose directly in two ways. We are very happy to lay on the table the opportunity for the mayor of a combined authority to levy a tuppence supplement in business rates under the 2009 Act, and to be forced to ballot local businesses to ensure buy-in and support, but, under the mayoral infrastructure levy it can deliver that same tuppence levy without a ballot of the members of the business community. If we are not careful, we will introduce a perverse incentive. Where there are opportunities to increase that engagement and build those relationships, one aspect of the Bill will damage that rather than move it forward.

Q One suggestion we have heard is that the needs assessment process should be conducted independently of Government. I wondered where the panel stands on that question.

Sean Nolan:

Can I play back to the Committee some reflections from when I was involved in policing recently as a treasurer in that world? You will remember that the Home Office went through quite a challenging exercise, looking at new formulae for allocating policing, which ran into some difficulties. One of the bits of feedback that professionally a number of us put in on lessons learned is that the needs bit—the conversation we are having—is about complex statistical modelling. As well as having confidence in the actual indicators in a conversation with the sector, you also need to have confidence in the choice of statistical technique. I therefore think that it is not so much about having an independent element outside of the system. What would be really helpful would be if DCLG read across from elsewhere and brought into the process an independent element, perhaps advising in real time on the choices of statistical techniques, and some kind of independent validation of procedure. I have to say that that would be a confidence-building part of building consensus around what is fair.

Jo Miller:

I thought Mr Nolan put it beautifully.

Q As I understand it, the Bill will be fiscally neutral, so in order to get the £12.8 billion of additional business rates income, local authorities will have to do more. Where do you think that will lead? I appreciate that there is still a conversation going on between the LGA and the Department but, as I understand it, they are some way apart in the discussion on responsibilities. Can you give us a sense of the flavour of where you think the extra responsibilities will fall? What do you think the impact on your budgets will be from the end of at least the better care fund, the public health grant, the rural services delivery grant and some other funds? The consultation document from last year strongly hinted at those being ended.

Jo Miller:

The gap in public service funding is well documented. I think the LGA talked to you about £5.8 billion by 2020 and £2.6 billion in social care today. I go back to the point about the amount of money that Government and the people want to spend. There is still no doubt in my mind that we can spend money better by joining things up at a local level. For example, the answer in social care is not just more money, but how well that money is spent and how well the system comes together to spend that money as effectively as possible. The same goes for the criminal justice system and children and families. I encourage Government to look at the totality of money that is spent across the piece. I mentioned skills as another matter where we have to look at how we get better bangs for our buck. While money continues to come down departmental pipelines, we are missing a trick.

This is more of a general question that I would like to put to Mr Spence first. The Bill is all about encouraging growth and generating more business rates, which will hopefully then enable us to pay for more services. Would you say that the way in which that has been handled until now has potentially hampered growth, and do you see the Bill changing it? Some tools in the Bill are supposed to help—pooling, the infrastructure levy and things like that. Mr Spence, would you say that that was going to happen through the BillQ ?

Christian Spence:

The Bill opens up some opportunities where it might happen, and in a moment I will come to why I think there are some problems. On the first part of the question and whether the business rates system today as it stands hampered growth, the answer is clearly yes, it has. The nature of the economy over the past 10 years or more has changed significantly. Usage of physical space is less important to the economy today than it was a decade ago, and we would expect to see that change continue over the coming decades and beyond.

The business rates system is still locked around its old-fashioned way of looking at a predominantly manufacturing and machinery-led economy. The inclusion of plant and machinery within the valuation system not only acts as a detriment to investment and causes perverse incentives directly to businesses as to whether to invest, but is administratively complex and procedurally onerous. As one of the largest revenues for a property tax in the world, it sets us outside our international competition very significantly in terms of how we manage commercial revenue.

Does the Bill move us closer? It has the potential to do so, but to echo some comments from Mr Williams earlier, the challenge is that, by allowing 100% retention—I spoke earlier about why we support that as a high level principle to better connect the incentives through local authorities and business—the Bill has at its heart real challenges. It is still fundamentally property based. To go to Mr McMahon’s question earlier, we do not see any reason why you would particularly want to move away from that system for well-versed economic reasons, but the challenge is that local authorities are going to grow their revenue only by introducing new floor space developments. We hugely welcome the changes in business rates policy to lift 100% relief to rateable value of £15,000 and above, but it means that properties with less than that rateable value do not add any net cash to local authority business rate receipts.

The challenge is that you are incentivising local authorities to grow their business rates revenue, which can have a perverse incentive, as Mr Williams mentioned—are you looking after your existing business base and helping it to grow, because incremental growth of most businesses is unlikely to deliver significant expansion of rateable value properties that can be levied for rates? If you are focusing exclusively on new premises of a high rateable value, the question for a lot of authorities will be: “Is there physically the land available to deliver significant growth in those areas?”

Q Forgive me for interrupting, but what were your views about pooling? There are some good tools in the Bill for amalgamation of bigger areas to give incentivised or different business rates to encourage more economic growth in a wider area.

Christian Spence:

The views representing a national organisation would vary hugely by geography across the UK and the nature of those economies. In general, yes, the pooling opportunities theoretically give greater flexibility in how those tools can be delivered, but that comes back to earlier questions about the ability of local authorities to collaborate at a time of intense pressure to each one of them individually.

In my area in the Greater Manchester chamber, we have an under-banded city centre authority and more open land on the outside. Pooling arrangements might help to spread some of that, but it is going to be hugely predicated on the ability of individual authorities to come together and share those opportunities. The difficulty of genuine, real-terms revenue growth under this system is not clear to us at this stage.

Q Just to reflect some of the debate, is there a conflict in that there are different measurements of success when we talk about growth? There is net jobs and the number of people in employment; equality, or the amount of income people can get in different types of jobs; and there is square footage—building big sheds to generate large business rates, so why not? Is it not far better to have a more rounded system of taxation and incentives so that local areas can determine for themselves what type of rounded economy they need, without being driven down one particular route depending on the flavour of the Government of the day? What I hear form businesses is that they need a long-term plan, strong local leadership and long-term certainty. It strikes me that business has not had that for quite a long time.

Christian Spence:

I would certainly agree with your last point. We have not tested specifically with the national membership exactly how local government taxation works, the different tools they may or may not have at their disposal in future, or any one of those other individual points. To lift it to a higher level, I agree broadly with what you say. Business is looking for a long-term stability in the system so that it can plan for its own success as well as the success of the wider community on which it is so dependent. It wants a long-term, fruitful and strategic relationship with government in its area, locally and nationally, about how to support its own growth and how to deliver skills. You talk about generating revenue through large RV sheds on the outskirts of towns. That is right, but there is often a natural tension between local government strategic plans and the draft Green Paper on industrial strategy about whether they are generating the jobs the country would like to generate.

We have no specific answer on the detail, but business is pragmatic enough to say: “If you can deliver a solution which works in our area, both for an individual business and the wider community, we will be open to those discussions.”

Sean Nolan:

The skills agenda seems to be a great bridge between what a local authority can do and business needs. That plays into an opportunity in how new responsibilities are played out. On Mr Thomas’s question, the examples you quoted—RSG and public health—are relatively neutral because they are existing grants that will be funded from the quantum. I guess the real game is the new responsibilities that will be passed over with which local authorities can influence skills for the better. The skills agenda is definitely a bridge into the business agenda.

Jo Miller:

The answer to the question about whether there is a more rounded way to incentivise growth and deliveries is undoubtedly yes. It seems to me that growth is a number of issues: growing your business, starting to grow the jobs in it, and having more and better jobs. It is also about the ability of people to participate in the economy. That could be through jobs or through not costing the state money by, for example, being a carer. The challenge—I tend to think of it as profit and loss rather than as just one way—is to have a taxation system that encourages growth but that helps people to cost less money. Looking at a place enables us to do that.

The challenge for us with business rates and with what is now, ultimately, a regressive system in council tax—the council tax raised per person in Doncaster is £300, whereas in Richmond upon Thames it is £900—is that there is a better way to fund what local people expect from services than through a combination of business rates and a system that relies on 26-year-old property values, particularly in the context of businesses changing in a digital economy that will not always be property based.

This is a question for Mr Spence. In the briefing that you provided to us, you said:Q

“We also believe that there should be a maximum amount a billing authority can raise its multiplier, alongside the maximum reduction limit per year.”

Could you expand on that, please?

Christian Spence:

Certainly. This is about the provision in the Bill whereby local authorities will have the power, within limits set by regulation of the Secretary of State, to lower the multiplier in their area. Again, for all the reasons we have already discussed, there are potential incentives to local authorities and businesses in doing so. Broadly, there is a challenge regarding how much that power would be used within the current fiscal conditions that local authorities see. However, although we see in the Bill that the power to raise rates at the national multiplier level will remain set by the Department and the Government centrally—the national multiplier will rise by its new indexation from 2010—local authorities appear, as the legislation now stands, to be able to lower their multiplier in any one year and do so again the following year.

If a local authority were, for example, to lower its multiplier to tuppence below the national multiplier in year one, over three or five years the national multiplier might continue to rise and we would have a position in which that local authority’s multiplier could be 10p different from the national one. As we see the Bill now, there is no reason why that local authority could not reclaim all of that 10p difference overnight in one fiscal year. If there are limits, capped nationally, by which the rate that the national multiplier can rise from one fiscal year to the next, it would seem perfectly reasonable that local authorities should also be capped regarding how much, when recovering from a previous rate, they can raise theirs from one year to the next.

Q Mr Spence just made an interesting point regarding the way in which the multiplier may be increased at the point when a particular authority decides to change that policy of having a reduced multiplier. By definition, I take it you are, therefore, against local authorities having the ability to increase the multiplier, as has been suggested by some people.

Christian Spence:

There is no real consensus across the entire chamber network about the rate and about how those work in individual local authorities. You can see examples in situations such as business improvement districts. There is potentially a very good example, if we can agree and move the Bill to a position where there is a ballot on mayoral infrastructure levies. Business might be happy to see increases in levy provided that the reasons given are clear, that it is a strategic scheme, that it is additional to that which has already been committed, and that businesses have been openly and genuinely engaged, consulted and balloted on whether that can take place.

The specific question for us is this: do we want a position where national Government are capping the national multiplier to CPI but local authorities retain an ability to raise their own multiplier by a rate greater if they have chosen to deviate from the national multiplier in earlier years?

Q Is there not a slight tension with that approach? Areas with historically low tax bases have to charge more council tax per property just to generate the same total. We could find ourselves in the same situation with a business rate base—local areas could be forced to increase it dramatically just to keep their heads above water. Although I am not always in favour of a national cap, I think there might be a call for it, so that the gap does not widen and so that there are proper top-ups and tariffs in place. Do you not accept that businesses can thrive only if local areas thrive? Businesses do not sit in isolation.

Christian Spence:

I absolutely agree with that point. A fundamental principle is that business can never exist in its own cocoon—it is dependent and co-dependent within its wider community. The challenge for us is a very narrow point in the Bill. If a local authority chooses to lower its rate, that is its decision, and it must fund that gap on its own. I would hope we could develop a system in which a local authority is not subsidised for deciding to lower its multiplier by any redistribution. That would essentially pull at a natural tension and create perverse incentives. If a local authority does not need more money and has chosen to cut, the understanding should be that the onus is on the local authority. Yes, that may need to rise, and our fear is how we control that rise. The fear is that, in an extreme situation, we might see a 10p rise in one year.

Q But it is more likely that a local authority will be increasing or decreasing the business rate base as part of an economic assessment of growth. It is not going to do it in isolation simply in cash terms. You could see a situation, for example, where town centres have been massively hit by office relocations to out-of-town centres and out-of-town parks—we perhaps see the same with retail. If the powers were extended to a building authority to raise and to lower, you could easily see a council looking to reduce business rates in a town centre for office accommodation for retail, and creating a levy on out-of-town retail parks and office blocks as a way of making that a neutral exercise.

Christian Spence:

Absolutely so, but for us it is about the profiling of those changes and ensuring that we protect against any very sudden and very large one-off rise, essentially to rectify a disparity that has grown over time.

The last very brief question goes to Mr Aldous.

Q I have two questions, one directed to the private sector and one to the public sector. Mr Spence averred that this form of business taxation would be different from anywhere else in the world. At this time when we need to be looking outwards, does he think that that gives us a cutting edge for the country’s businesses? My other question is to Ms Miller and Mr Nolan. Just looking at the central list and how that is to be governed, I have in mind power stations. If you have an existing power station and it is decommissioned, you are going to be facing a lot of costs. If you have a new power station—

Witnesses, there is just one minute left.

Christian Spence:

I will return very briefly to Mr Aldous’s first question. The challenge for the UK system is that we have inherited a system where commercial property rates are significantly higher than those of our international competitors. We understand that that cannot be changed overnight but, within a wider global strategy of Britain wanting to seek greater international competition, we firmly believe—our members would back us heavily—that we should look at the overall levy raised by business rates.

Sean Nolan:

The second question plays into the heart of how you judge the stability of the system. It is a proper question to the Minister and his officials down the line: in that scenario, how would it work? I would contend that a really important test is what I call stress testing—not just whether this works on day one, but a series of scenarios over time. Would this survive stress testing?

Order. That unfortunately brings us to the end of the time allocated for this session. On behalf of the Committee, I thank the witnesses for the detailed responses they gave to colleagues’ questions. Thank you very much indeed for your time.