Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence

Examination of witnesses (Questions 180 - 199)




  180.  Income is lost as a result of successful appeals, in that people will pay less, but if 10 per cent are wrong because they have been set too high logically there is another 10 per cent that have been set too low?
  (Mr Wood)  There may well have been such cases, which of course are less likely to be subject to appeal by the property owner.

  181.  But it means that the loss of income to the Exchequer falls into two categories: the loss arising because 10 per cent have perhaps been set too low and the loss arising from successful appeals?
  (Mr Wood)  Of course, that must be right.

Mr Olner

  182.  Earlier you alluded to the fact that there had been a move away from external to inhouse valuations. Have you any estimate of the cost of the revaluation in 2000? If so, how does it compare with the 1995 rateable valuation?
  (Mr Wood)  On the same basis - 1998-99 prices - the cost of the 1995 revaluation was £64 million. The cost of the year 2000 revaluation is estimated to be £17.3 million. That is a very large discrepancy. The £64 million included more than £20 million spent then on the computerisation of the system. However, that explains only one-half of the difference between the two. The explanation of the remaining £20 million-odd is that we are now reaping the rewards of the computerisation put in hand in 1995 and an extensive series of improvements which the Valuation Office has put in hand in consultation with the property world to make the whole process more streamlined and simpler.

  183.  Are you happy that you have done enough tests to ensure that the system does not come crashing down in the year 2000?
  (Mr Wood)  We are pretty confident of that. After all, we had two runs at it in 1990 and 1995.

  184.  The system will stand up at midnight 2000?
  (Mr Wood)  We confidently expect that.

  185.  What provision has been made in the estimates for 1998-99 for the cost of the revaluation and how much has been allocated for the maintenance of the council tax base?
  (Mr Wood)  The estimates for 1998-99 for council tax maintenance is £20.3 million, which is slightly down on the £21.5 million in the previous year. Essentially, the demands on that side have stabilised and it is not the same sort of problem as we have on the non-domestic rate front.

Mr Flight

  186.  I turn to the question of pension and salary costs. In your estimates have you assessed the impact of the minimum wage legislation in terms of both inhouse and contracted-out costs?
  (Mr Wood)  Our view is that direct labour costs of local authorities are not likely to be greatly affected by the recent announcement on the minimum wage. The main minimum wage figure is £3.60 per hour which will apply from April 1999. That has to be set against the single status pay agreement giving rise to a minimum of £4 per hour which local authorities reached in July last. Obviously, that applies to almost all staff since it is single status. The exception is chief executives, who are certainly paid much more than £4 per hour, and craftsmen who in general are paid more than £4 per hour. It does not apply to apprentices who in any event are not covered by the minimum wage arrangements. As to the direct labour costs of local authorities, there should not therefore be any noticeable effect. It may well be a different matter as far as bought-in services are concerned. That is likely to be particularly true in areas like personal social services—carers and so on—where there is a predominance of low-paid workers. In so far as there is an effect, by and large we expect it to be concentrated on the personal social services side.

  187.  What about people like cleaners?
  (Mr Wood)  That will have an effect to an extent, but we do not believe that it will be as significant or concentrated as in the personal social services area.

  188.  But as yet there is no quantification of it?
  (Mr Wood)  No. It is a difficult matter to estimate and calculate. By definition, the costs of bought-in services are subject to negotiation and competitive bidding. Tracing a line between any estimate that one may make arising from the effect on individuals of the £3.60 limit from 1999 through to the prices that local authorities have to pay is extremely difficult.


  189.  If one is to have transparency in local government surely it is important that local people know how much the council tax may have to rise in order to pay the minimum wage in old people's homes, for instance?
  (Mr Wood)  That must depend on the success of local authorities in negotiating contracts in the round. It is not merely the wage costs that the contractors face that are important; it is also their other costs, the efficiency that they bring to it and so on.

  190.  I understand the problem but, surely, you should have grappled with it and come up with an answer?
  (Mr Wood)  We take account of this sort of problem however difficult it is to quantify in looking at the local government financial settlement. It is not only a question of the effect on council tax. The Government must take a broad view of all the factors affecting local authority costs, of which this is but one.

  191.  If you take it into account, let us have the figure.
  (Mr Wood)  We do not have a precise figure. Perhaps I may give you a feel for it. I can provide a figure to which I refuse to be kept because of all the qualifications that must be made. For example, in personal social services I would not be surprised if the effect taken in isolation was of the order of £50 million a year.

Mrs Dunwoody

  192.  But it cannot be taken in isolation, can it? Personal social services are people. If you do not have people you do not have the service. It is all very well to say that there must be efficiency savings from administration and private firms must re-negotiate the figures, but the reality is that even the worst private firms depend on people?
  (Mr Wood)  Of course.

Dr Whitehead

  193.  I am rather concerned about this being depicted as one among a number of factors. Local authorities have always been subject to concern because such a large proportion of their total outgoings relate to wage costs. Therefore, their overall costs inflate faster than the ordinary rate of inflation. Therefore, it is very germane that the effect of the minimum wage on what is a very high element of local authority costs ought to be looked at very closely?
  (Mr Wood)  Generally speaking, the proportion of total costs accounted for by labour costs in local authorities is about half. However, I do not think that that is terribly important in this context because the consequence of the single status pay agreement is such that pretty well all directly employed local authority workers will be taken out of it; ie, they are above that level. Consequently, there should be no direct effect on that half of revenue account costs which is covered by labour costs.


  194.  We are considering the vast majority of old people's homes, a substantial number of people involved in schools meals contracts, office-cleaning services and so on. You say that £50 million will cover all of that long list?
  (Mr Wood)  No. I am giving you only a broad estimate or order of magnitude in the area of personal social services where the effect is likely to be greatest because of the size of expenditure in that area on contracted-out services and because of the significance of labour costs within those services. I am not chancing my arm but giving the Sub-Committee my best view of the broad order of magnitude in the most important area. We must also put that figure very much in the context of total local government expenditure. It is a big figure to all of us but in proportion it is tiny. The gross expenditure of local authorities is £75 billion a year.

Mr Flight

  195.  No doubt next year local authorities will send out letters to ratepayers telling them why council tax has gone up. Is it not possible to ask each local authority to estimate and advise you what they believe the cost of the minimum wage will add to their costs in terms of contracted-out services?
  (Mr Wood)  We would look to them to take the responsibility of deciding whether or not they wanted to account for their expenditure decisions in that way. When it comes to it it is their decision, not the Government's.


  196.  You have a figure of £50 million for personal social services. Do you have any other indicative figure with all those qualifications?
  (Mr Wood)  No. We have made no other estimates.

Mr Flight

  197.  Turning to pension funds, in the round how much monitoring does the department undertake, and of what kind? The issues of which one is generally aware are: historic under-funding because local authorities have been permitted not to fund up to 100 per cent; the more recent ACT loss of revenue; early retirement; and the split between employer and employee contributions. The general perception is that there may be a considerable collective hole in this area?
  (Mr Wood)  You have asked a range of questions. To take them in order, we monitor local authority pension funds and schemes in six broad ways. First, each fund is subject to a triennial actuarial assessment and the results of each assessment are sent to the Secretary of State. His officials consider them with the Government Actuary's Department. Secondly, each fund is looked at by the district audit service each year. That is external audit. Thirdly, each fund has its own internal audit each year. Fourthly, the department collects data from each scheme on an annual basis. Fifthly, the department maintains very extensive informal networks with all the authorities' schemes, interested professional bodies and trade unions and others in this area. Sixthly, we are following up the recent Audit Commission report on early retirement. That contained a suggestion that there might be more regular reports by the actuaries between the three-yearly actuarial assessments. We accept that and intend to issue guidance to local authorities on these stages between triennial actuarial assessments to help in doing what the Audit Commission recommended. You also mentioned contributions. Local authority pension funds like most other funds have three sources of contributions: first, income from investments; secondly, employee contributions. The contributions made by employees are set in statutory regulations. They have been adjusted to 6 per cent for most employees from April 1998.

  198.  Is that upwards or downwards?
  (Mr Wood)  Upwards from 5 per cent.[2] There are no proposals under consideration for any further change in that contribution. The third source of contributions is the local authority employer. The level of contribution which the local authority as employer makes is the residual, ie it makes up whatever is required to be met. That contribution is not set by the authority but by the actuary. That responsibility is placed on the actuary by statutory regulations. Therefore, the authority as employer has to make whatever employer contribution is necessary to put the fund in such a position that it can meet its liabilities. The present range of contributions by local authority employers is between 5 and 12 per cent. As to your query or suggestion about there being a big hole, the monitoring arrangements that I have described are designed specifically to ensure that that does not happen. You have a real point in relation to the effect on these funds of the removal of tax allowances on advance corporation tax for UK equities. The estimate provided by the Local Government Association indicates that that will reduce the net income of the funds taken as a whole by £130 million a year. We cannot confirm that until we have the results of the current triennial actuarial assessments that are now in hand. The first results of that assessment should begin to come in by the autumn of this year (perhaps from September onwards). Those assessments will take account not only of the effect of the removal of ACT tax allowances but also all the factors that bear on the balance between the liabilities and assets of the funds. We would expect there to be offsetting factors as well as factors that point in the wrong direction, as it were. The most important factor will be the investment record of the funds and the actuaries' assessment of the income stream that will come from that investment record. We cannot take in isolation the figure to which the LGA has itself attached a tag of £130 million; we must take into account all factors that affect the income of the fund. But I emphasise that even if that £130 million appeared without any offsetting savings, because of the arrangement I have described whereby the authorities have a statutory obligation to make up the difference in the funds there is no threat whatever to the beneficiaries of these schemes.


  199.  But there could be a threat to the council taxpayer?
  (Mr Wood)  Of course. The fact that these schemes are statutorily-guaranteed funds means that, because if everything really goes wrong—I do not believe that there is any prospect of that - the guarantee lies in the fact that local authorities are taxing authorities and in the final analysis can use that power to make up their contributions to these pension funds.

2   Note by witness: Manual employee contributions had been 5 per cent, officer grades previously paid 6 per cent. Back

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