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Clause 19
7.15 pm
Dr. Cable: I beg to move amendment No. 15, in page 12, line 41, leave out from 'section' to end of line 42 and insert
'shall not take effect until Her Majesty's Government has published an assessment of the effects of this section on local authority finance for 1997-98, 1998-99, 1999-2000 and 2000-01.'.
The background to amendment No. 15 is our general concern about the Budget's advance corporation tax reforms. Because of anomalies and distortions, there is a good case for tax reform in this sphere. It has become clear in the very short time that has been made available to us that many of the anomalies that arise from the reforms have not been properly thought about. The specific matter that our amendment is meant to highlight is the impact the ACT reforms will have on local government. They will result not in a saving to the public sector but in a shuffling of resources within the public sector.
The reforms will affect a large part of the public sector. About 10 per cent. of the asset value of pension funds under management is accounted for by local authorities, so a large chunk of the pension industry and a very large number of people are affected. About 1.25 million people are paying into local authority pension funds and about 1.6 million people are local authority pension fund pensioners.
We are considering pension funds that are in a state of financial crisis, a large part of which was caused by the actions of the previous Government. Local authority pension funds were allowed to reduce their funding requirements from 100 per cent. to 75 per cent. Such a reduction in the private sector would have been excoriated as highly unethical. None the less, local authorities were encouraged to take that action to reduce poll tax bills. Consequently, many local authority pension funds are in dire financial trouble, which must be repaired.
Furthermore, local authority pension funds now have an additional cost to bear of about £300 million. The Local Government Association provided that estimate and, as it is Labour-dominated, one might assume that the figure is not over-estimated. Where will that additional money be found? How will it be paid for? Full understanding of the matter will not be possible until next March when, according to an answer provided by the Minister for London and Construction to a parliamentary question, an actuarial review is due. By next March or April, therefore, we should have a proper understanding of the state of local authority pension funds after the changes.
Our concern is that the Bill is being rushed through before those implications are properly spelt out. Logically, we can think of various consequences, one of which is that the burden will be borne in reduced benefits by local authority pensioners. Another possibility is that services will be cut to top up pension funds. Another is that the burden will be borne fully by the council tax. One estimate is that council tax might have to rise by, on average, 10 to 20 per cent. to make good the deficit.
As the Government have insisted on capping, it is very likely that local authorities will have to choose painful options. The context in which the very difficult decisions have to be made is that local authorities are, as we know, facing great financial difficulties. Many Labour Members come from local authorities under Labour control and have had responsibility for managing them. They therefore know the difficulties.
We estimate that there will be a real cut in local authority budgets of about 1 or 2 per cent. next year. As a result of questions put to the House of Commons Library, we have established that the impact of higher rates of inflation will be to take out of central Government support for local authorities about £570 million this year and double that next year. The Audit Commission report published this morning referred to a gap of about £5 billion in local authority capital spending; so the £300 million, which is the extra damage being inflicted on local authority pension funds, comes on top of considerable difficulties.
We appeal to the Government to give us a clear understanding of what the burden will be and how it will be paid for. Also, we want to hear that local authorities will be recompensed for the additional burden they will have to bear. I commend the amendment to the Committee.
Mr. John MacGregor (South Norfolk):
I support the amendment. I know that the Committee wants to make progress, so I shall be brief.
I was so concerned about this part of the Budget proposals--as I am about all of those that affect pension funds and ACT--that I got in touch with the chief executive of Norfolk county council straight away. He informed me that, although it is a bit early for the council to be absolutely sure and that he hoped to have an actuarial view in the early autumn, his current assessment is that the change will require an additional contribution of £5 million a year from the county council for one pension fund alone to meet the extra bill for county council employees. That would be the current employer's contribution rate.
In accordance with the relevant regulations, the next effective date for increased contributions is April 1999. That seems to reinforce the point made by the hon.
Member for Twickenham (Dr. Cable). There is great concern about what will happen in 1999 and what the effect will be by then of having to meet extra contributions earlier. County councils have very real concerns, and it is likely that the additional cost will have to be met from increases in council tax. It is therefore important to sort the matter out now so that county councils, local authorities and others know where they stand. I strongly support the amendment.
Mr. David Heathcoat-Amory (Wells):
I support the amendment. There is no doubt that all local authorities with funded pension schemes have faced an immediate and large cut in their pension fund income. That started from the actual date of the Budget, so it is already happening. The size of the cut is open to dispute, but it certainly amounts to several hundred million pounds a year.
The answer to a written question asked by my hon. Friend the Member for South Suffolk (Mr. Yeo) states that the local government pension scheme, to which I understand most local authorities belong, has an annual income of some £2.1 billion. If all that were invested in UK equities, the change would mean a drop in income of some £400 million a year. That may be unrealistically large, but even if we assume that only 60 per cent. is invested in UK equities, it still means an annual reduction in income of some £250 million.
My county, Somerset, has estimated that it faces having to make up a shortfall of some £2.1 million. That is for the Somerset fund as a whole, which includes the district councils. Devon county council reports a drop in income of at least £3.5 million in a full year.
The Local Government Association wrote to the Government estimating the drop to be about £300 million a year, and made the good point that it would be quite irresponsible to ignore the matter now. Government advice appears to be to ignore the problem at the moment and simply roll up the deficit in the hope that the Government make good the shortfall in two or three years' time. I suggest to the Economic Secretary that that is irresponsible. No commercial organisation would dream of ignoring a drop of that magnitude in its income; it would reserve for it annually. Local authorities therefore face having to make up the deficit by cutting services.
Somerset expects to be rate-capped later this week by Government order, so, even if it wanted to, there is no prospect of its placing the burden on the council tax payer. It has to cut services. Is it the Economic Secretary's advice that local authorities should ignore the consequences of the Budget and the shortfall in their pension funds, either because she does not think it is very important to maintain pension contributions and eventual benefits to members of funds or in the hope that the Government will make up the shortfall in due course? If the latter is the case, will she promise local authorities and the Committee that she will indeed make up the difference, preferably now? If she can provide no certainty this year, will she at least do so in due course?
The Economic Secretary to the Treasury (Mrs. Helen Liddell):
I congratulate the hon. Member for Twickenham (Dr. Cable) on managing to get the
The hon. Member for Twickenham recognises that the purpose of the abolition of ACT is to deal with distortions in the taxation system. He also recognises that those distortions exist. However, the amendment would delay implementation of the clause restricting the payment of tax credits until after the Government had reported on the effect of the change on local authority finances. Were the amendment to be accepted, one effect would be to produce opportunities for pension funds to sidestep the change by getting companies to pay dividends in the meantime. That in itself would add to the distortion with which we are dealing.
I recognise the extent of the publicity about the abolition of tax credits for pension funds. I am aware of the good intentions behind the amendment, but it is wrong to seek to scaremonger. I share the concern about the impact on any pension fund, but we have to take into account the fact that there is to be a revaluation of local authority pension schemes in England and Wales in March 1998. I am conscious that the hon. Member for Gordon (Mr. Bruce) is in his place--in Scotland, the revaluation will not take place until the following year.
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