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5 Mar 2003 : Column 912—continued
Matthew Green: Has not the new formula in fact created a situation in which some councils, in order to move up to what the Government suggest they ought to be spending at formula spending share, would have to introduce large council tax rises? Bridgnorth district council, for example, set a band D rate of around £65 last year, although the assumed national council tax level is £185. The figure is used in the calculation of how much Government grant the authority receives. However, if the authority were to spend at the formula spending share—the level that the Government suggest might be appropriate—it would have to put in a 200 per cent. council tax rise. It has not done that; it has put in a 13 per cent. rise. However, this case illustrates the problem that the Government have created.
6.15 pm
Mr. Davey: My hon. Friend is exactly right, in the sense that the grant changes this year have been part of the problem. Therefore, it is not right for the Government to blame individual councils. The Government's policy of reforming the grant distribution formula has led in some cases to the large council tax increases. Ministers will say that they have protected local councils by the introduction of floors. However, we all know that those floors were not high enough for many local authorities. Those authorities faced significantly increased costs, such as the national insurance increase, above-inflation salary increases for many local authority employees and increases in insurance costs that were way above inflation. We therefore know that the floors were not sufficient.
When we take into account the effects of ring-fencing and passporting, particularly in respect of education—which is often a large part of the budgets of unitary authorities and county councils—we understand how local authorities have arrived at this position. Not only have they received insufficient grant and faced large cost increases, but they have been given no room to manoeuvre because much of the grant that they receive has been predetermined by central Government diktat. It is the fact that there is no wriggle room or ability to move the budgets round to meet communities' needs that has created the problem.
Mr. Andrew Turner: I have much sympathy for the hon. Gentleman's views, not least because my authority—as he knows, it is led by the Liberal Democrats, even though they are somewhat ashamed to admit it—increased the council tax by a small amount before the most recent local elections and subsequently increased it by massive amounts in the following two years. There is a good case for removing the power of council tax capping, but it is difficult for local authorities
to set a rate that is decided locally when they are subject to national pay bargaining and do not have discretion over whether they implement that.
Mr. Davey: The hon. Gentleman repeats a point that I was making. Local authorities face such problems even when they are given, as the Government keep saying, grant settlements that are above inflation.
The Minister must recognise that, because of what is known as the gearing effect whereby authorities raise only a small proportion of their total revenue locally, a 1 per cent. cut in the grant sometimes translates into a 5 per cent. increase in the council tax so as to replace lost revenue. That is one reason for the large increases in council tax. When the gearing effect is added to cost pressures and ring-fencing, that means that the council tax has to rise by a large amount for an authority to meet the demands on it. That is one reason why we oppose the council tax and want it abolished. The other reason is that it is such an unfair tax.
The Government should not use capping powers even though the council tax is such an unfair tax. They should introduce a policy that would cut the council tax by £100 per council tax payer and use central Government money to fund that. If capping powers were used, there would be arbitrary cuts in services such as education and social services. We do not want that. By providing money from the Treasury—our alternative Budget showed that the Government could do that in the forthcoming Budget—we could ensure that councils were able to deliver cuts in council tax and maintain services. That is surely a much better approach than going ahead with capping.
Mr. Turner: I am intrigued that the hon. Gentleman believes that the introduction of a local income tax would remove the gearing effect. Surely a local income tax would have to be supported by Government grant in some authorities to a lesser extent than in others. How would that remove the gearing effect?
Mr. Davey: The hon. Gentleman is right to pick me up on that. A local income tax gives us the potential to get rid of the gearing effect. Income tax is fairer than council tax. A local income tax would allow us to cut national income tax and increase local income tax penny for penny, so reducing the grant and the gearing effect. It is a mechanism by which we could reduce the gearing effect, although obviously not immediately. Council tax does not provide us with that potential. That is the problem. In the balance of funding review, the Government are trying to discover whether they can put more demands on the council tax, but because the tax is so unfair, it cannot bear that weight. So the gearing effect will never be abolished or even reduced while we have such an unfair tax. By replacing it with a fair tax, we have the chance radically to reform local government finance.
In most other western democracies, local government finance is not the bugbear that it is in Britain. The prime reason for that is that many of them have a fair local income tax. Their local authorities are able to raise more of their revenue locally and are accountable to the local
electorate. We should follow that model. People have been debating it for many years and it is about time our Government faced up to it.
Mr. Turner: I have listened with care to the hon. Gentleman's explanation, but surely a 1p reduction in income tax would reduce the money that the Government receive and they would then reduce the local government grant. A 1p increase in income tax imposed by the hon. Gentleman's local authority would generate far more money than a 1p increase in income tax imposed by my local authority, because people in his area have much higher incomes. How would that reduce the gearing effect?
Mr. Davey: The hon. Gentleman is right to make that point. We want to increase the revenue that is raised locally from 25 per cent. to 70 or 75 per cent. That would reduce the gearing effect hugely, but we would always need an equalisation grant—a redistribution grant—for the reasons that he outlines. We would not want poor authorities not to have resources because they have a lower income tax base. Similar aspects of the grant system have existed before. However, by having a fair tax, such as a local income tax instead of council tax, we would enable that shift to be achieved over time—
Mr. Deputy Speaker: Order. I have been generous enough in allowing the debate to be shaped this way. I remind the House that we are discussing a new clause on capping powers.
Mr. Davey: You are right, Mr. Deputy Speaker.
Only time will tell whether the Government will use capping powers this year. I hope that Ministers will tell us that they have decided not to use them. I also hope that the Minister will go further and tell us that, with cross-party support, capping will end altogether. We should take one step towards reviving local democracy and improving local accountability. Let us build on that in the next stage by reforming the local government finance system entirely.
Mr. Clifton-Brown: The debate has been interesting and I listened with care. I fully accept that Conservative Governments in the 1980s used capping powers against some of the most profligate authorities—mostly Labour controlled—that were wasting taxpayers' money outrageously. There was, and is, another problem—in some authorities, the majority of council tax payers do not pay the full amount of council tax, so they have an interest in their council providing ever more subsidised services. One could argue that those who pay the council tax in full need the protection of capping. On the other hand, the Conservatives strongly support the principle of devolving as much power as possible to the lowest possible local level. Provided that the ratio of the highest to the lowest band of 3:1 is maintained so that council tax cannot be unfairly skewed to the top band or two, the Government have plenty of powers to force poorly performing authorities to restore their services to a reasonable and cost-effective level. Many more powers, for example, have been given to the Secretary of State in the Bill.
We have complained about the Bill's centralising tendency, but one consequence is that the Secretary of State has many more powers to deal with councils that
overstep the mark, waste money and provide poor services to local people. The Government have powers, including one involving the Audit Commission, over the comprehensive performance assessment and star rating that have been introduced, and ultimately they can send in officials to run council functions or, indeed, the council in cases of grossly incompetent management. Such powers have been exercised over Walsall council. On the other hand, it will be interesting to see what the Government will do about one of the top-performing councils—Wandsworth. It would be nonsense if a top-rated council in the Government's new comprehensive performance assessment and star rating were capped because it tried to maintain local services.While we fully support the Liberals' aspiration and aim of getting rid of capping, it is difficult to see how they can do so under the Government's unfair and skewed mechanism for funding local authorities. We are keeping an open mind, and I must tell the Liberal Democrat spokesman that although I have considerable sympathy with his new clause, regrettably I cannot support it tonight as we need to consider the matter in greater detail. With those few remarks, I wait with interest to hear what the Minister has to say.
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