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Miss Julie Kirkbride (Bromsgrove): I am loth to interrupt my hon. Friend as he is making a fantastic case for Worcestershire and I hope that the Minister has been listening. May I add another fact to all the relevant facts that my hon. Friend has given? In Bromsgrove, I feel acutely the problems relating to the funding gap between schools. Last year, the gap between Bromsgrove schools and those in Birmingham was £560 per head per year; the figure is now £720.

Mr. Luff: My hon. Friend is right. The gap is growing yearly in both absolute and relative terms. That cannot continue indefinitely; the process must be ended, as I am sure the Minister will agree. Indeed, I am a practical man, so I have a suggestion to make. I am running out of time, and as I want to hear the Minister's response I shall offer three short-term solutions.

First, we should phase out the area cost adjustment and consider the health service model to which I referred. Secondly, we should end resource equalisation, which certainly cannot be justified for Worcestershire. Thirdly, at least this year—and possibly in future years—we should increase per pupil funding in cash, not percentage, terms. We should start to narrow the gap to which my hon. Friend referred and give every school in the country, say, £100 per pupil, rather than 3, 4 or 5 per cent.

To meet service delivery obligations, the county's budget has to go up by 5.9 per cent.—about £25 million. If central Government grants to local authorities rise in

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line with those obligations and with Government expenditure forecasts, all of which are published by the Chancellor, the county could keep its council tax increase precept at only—only—6.5 per cent., which is still too high, but half this year's rise of nearly 13 per cent. If the Government give us any less than they have hinted—say, 4.5 per cent.—council tax will rise by 8.6 per cent., or services will have to be cut by about £3.3 million.

But, worse than that, the Department for Education and Skills insists that all the increases in formula spending share are added to school budgets, so any shortfall in total grant for the county will fall exclusively on the other services. County social services, in particular, will be put under pressure, as demographic trends are against us with an ageing population in the county, and the road repair programme might also have to be slashed. Roads in Worcestershire have improved dramatically in recent years, but we do not want that progress to be curtailed.

I have made some practical suggestions for a way forward, but I conclude with a key message: the buck for any increase in council tax above 6.5 per cent. for Worcestershire or any cut in services stops with the Government, and the Minister has it in his power to prevent that from happening.

7.16 pm

The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Phil Hope): I congratulate the hon. Member for Mid-Worcestershire (Mr. Luff) on securing this debate about council tax increases in Worcestershire. He has been busy writing letters just lately, and he has obviously been drawn away from other business—pressing discussions—but he has made good use of the time in making what I can describe as a very sound leadership bid this evening.

The Government have high aspirations for local government. We are continuing to match those aspirations with proper investment, as demonstrated by this year's generous local government finance settlement. However, council tax continues to engender debate throughout the country—including Worcestershire—and has taken on a significant profile this year after some high increases. I shall return to that issue shortly, but before doing so, I want to put the debate into a wider context.

It is worthwhile reminding hon. Members of the good increases in grant that we have been able to provide local authorities generally. This year's settlement provides an overall increase in general grant of 5.9 per cent. It has allowed us, for the first time ever, to ensure that all local authorities receive a grant increase that is at least above the rate of inflation. It has enabled us to continue the considerable investment that we have made in local government since we took office. That investment involves a 25 per cent. real-terms increase in grant since 1997. That compares starkly with the 7 per cent. real-terms cut in grant that councils experienced in the last four years of the previous Government.

Some local authorities have expressed concern at the pressures that they face this year. I understand those pressures and I am aware that many councils still face difficult decisions. However, we have increased total Government grant, including special and specific grants,

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by £3.8 billion. That is an 8 per cent. increase. That increase takes account of the work that we undertook with local government during the spending review to identify the pressures that they would face in the coming years. The additional £3.8 billion includes funding for the effects of inflation on local authority budgets, the 1 percentage point increase in national insurance contributions and recent pay awards.

Authorities in Worcestershire have benefited from that extra money. Worcestershire county council has received a grant increase of £15.5 million or 6 per cent., which is above the average for county councils. Two district councils received grant increase at the 12.5 per cent. ceiling that we set for such authorities, and one district council benefited from our guarantee of a grant increase at least above the rate of inflation. Indeed, the hon. Gentleman made generous reference in his contribution to some of the real-terms increases for education and in the number of police officers that have resulted from that increased funding.

It is, however, for local authorities in Worcestershire to decide how much council tax their people should pay. We do not tell local authorities what level of council tax they should set. We do not tell them what they should spend the money on. Such decisions are for individual local authorities, but local authorities are answerable to their local electorates about the council tax. We believe that they should take into consideration the views of local taxpayers on local authority spending and how much council tax they would be willing to pay.

This year, we have given all councils above-inflation increases in grant for the first time ever. The average increase is 5.9 per cent.—Worcestershire county council received a grant increase of 6 per cent. and West Mercia police received an increase of 3 per cent. In addition to the cash, we have given local authorities more freedoms and more flexibilities. In return, we expect all councils to behave responsibly and not to impose excessive increases on their council tax payers.

Mr. Luff: As I understand it, education costs rose this year by some 8 per cent., so although a 6 per cent. increase appears generous, it is below the rate of inflation for that part of local authority expenditure.

Phil Hope: I understand the hon. Gentleman's point, but I said earlier that we took into account in the spending review, in negotiations with local government, such cost pressures, including the 1 per cent. national insurance contribution increase and pay increases.

The average council tax increase in England this year for a band D property was 12.9 per cent. The increase in Wychavon was 12 per cent., and Worcester city council increased its council tax by 12 per cent. Knowing that we would be debating the hon. Gentleman's concerns this evening, I visited his website, on which he has already put elements of his speech. His comment in it that

is not the case. Band D council tax is lower in Wychavon and Worcester than it is in Birmingham.

Mr. Luff indicated dissent.

Phil Hope: The hon. Gentleman indicates from sedentary position that it is not. Perhaps he would like to write to me later. I assure him, however, that I have been given sound advice.

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We are therefore extremely disappointed that despite the generous grants that we have given to local authorities, some local authorities have chosen to set large increases, which we recognise is causing hardship to the most vulnerable members of society. The hon. Gentleman mentioned pensioners in particular. To ensure that pensioners on lower incomes are not unfairly affected by council tax rises, we are encouraging take-up of council tax benefit and housing benefit as part of our roll-out of the pension credit. We have changed the benefit rules so that even pensioners who are not eligible for the minimum income guarantee may benefit from council tax benefit and housing benefit. Indeed, if we take into account above-inflation rises in the basic state pension, free television licences for over-75s, the winter fuel payment and the pension credit, on average pensioner households will be more than £1,250 a year better-off in real terms, which is around £24 extra a week. The poorest third of pensioners will have gained an average of £1,600 a year since 1997. Therefore, while I recognise his point, there are some important points to be made about the extra support that we are giving to pensioners.

One issue to which the hon. Gentleman did not refer was the question of capping as a solution to the problems. As the Minister for Local Government, Regional Governance and Fire made clear on 15 September, we have decided not to take action about council tax increases this year. However—I share the hon. Gentleman's view on this—the current trend in year-on-year increases in council tax is simply not sustainable. We will look very carefully at all the council tax rises next year, and we will also look at the trend in the increases over more than one year. If necessary, we will use our targeted capping powers in 2004–05. If necessary, in exceptional circumstances, we will use our powers to cap authorities categorised as "excellent" or "good" in the current and future comprehensive performance assessments.

The hon. Gentleman did, however, raise the more fundamental question of gearing, and the problems that that creates in terms of the ratio between the amount that the Government give to local government and the amount that can be raised through local council tax. He makes a very good point. I draw to his attention the fact that the Government have established the balance of funding review to look specifically at that problem. The review is looking at issues relating to the current balance of funding between council tax and Government grant, and at a range of options for change in the light of that analysis. The final report of the review will set out the pros and cons of various options rather than making recommendations. I emphasise that the review is about the balance of funding, not about increasing the overall tax burden. The balance of control between local government and central Government, and the amount of money that local authorities receive, are distinct issues that are outside the scope of the review.

We have had more than 200 responses, and we had a meeting on 21 October. As I mentioned websites earlier, I must also mention the Office of the Deputy Prime Minister's website—I am the Minister with responsibility for e-government, so this is an opportunity to raise the value of electronic technology in increasing participation. The findings, the work that is being done, the papers that are being commissioned

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and the research that is being produced and analysed are on the Office of the Deputy Prime Minister website for all to see because we recognise, in a non-political way, the difficulty of the existing system. Part of the reason why there is a problem with the current gearing ratio dates back perhaps to the poll tax, as the hon. Gentleman generously recognised, and perhaps before that. Some £4.8 billion of central Government money had to go to local government to compensate for the poll tax fiasco, and that money had to be taken from a massive increase in value added tax, as I am sure that he remembers.

The hon. Gentleman raised other issues, and specifically the area cost adjustment. Worcestershire county council believes that the area cost adjustment impacts on the council tax that it must set. As he said, I met a large delegation from the area that made powerful points in favour of its case.

Let me explain the situation a little further. The area cost adjustment is the element of the funding formula that directs extra resources to local authorities with higher wage and rates costs. We calculate the ACA using the best available evidence on wage and business rates costs. The hon. Gentleman suggests simply abolishing the ACA but that would have a huge impact in different parts of the country and would make it difficult for local authorities to cope with problems of higher wage and rates costs. We made major improvements to the way in which the ACA is calculated this year. We previously used simple average wages to calculate it for crude concentric circles radiating from London and throughout the south-east. That method took no account of the way in which wage pressures varied in each ACA area and, as he realises, provided no extra funding for authorities outside the south-east of England with high wage costs. We now calculate the ACA at a much finer geography, which allows us to reflect local wage pressures better.

One of the most frequently raised questions in the ACA debate is about geography, by which I mean about the authorities that receive an adjustment and where boundary lines are drawn. Some authorities, such as Worcestershire, have complained strongly about being grouped into their pre-reorganisation counties for the calculation of the ACA. Worcestershire also complains that the geography of the ACA does not reflect the part that it plays in the much larger west midlands labour market. However, it is fair to say that the new ACA geography is a vast improvement on the old system. Until this year, councils outside south-east England did

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not receive an ACA, no matter how high their wage pressures, and authorities in the south-east were all treated the same, despite the wide range of pressures.

When calculating the ACA, we now look at wage pressures throughout England and Wales. Outside London and its fringe, we calculate the ACA for every pre-reorganisation county. We have split the counties neighbouring London into fringe and non-fringe areas, which reflects higher wage pressures. In that way, we have extended the coverage of the ACA beyond the artificial confines of the south-east to areas such as Cambridge, the west midlands and Greater Manchester, the wage pressures of which previously went unrecognised.

I know that Worcestershire would like us to calculate an ACA value for it alone—the hon. Gentleman did not talk about that but I have been pressed on it—rather than combining the area with Herefordshire. However, we had to make a judgment on geography. If we had treated Worcestershire as an ACA area in its own right for this year's settlement, the area would not have had sufficiently high labour costs to lift it out of the lower limit floor mechanism and its ACA would have remained unchanged.

We have reformed the system to influence not only the areas that get cost adjustment but how the top-up is calculated. We use detailed information from the whole labour market and new earnings survey data as the basis of the calculation because they are the largest sources of information on wage levels throughout the UK and contain the information that we need on each person who takes part in the survey.

We have heard suggestions from Worcestershire that we should use the labour force survey as the basis of our calculations, but that would mean that we could not calculate the ACA with such fine geography. It was also suggested that the ACA should be based on who lives in a county rather than who works there. However, I am clear that the best way to assess the extra labour costs faced by local authorities is to base that on what local employers are actually paying. Having examined Worcestershire's case closely, I know that as it benefits from the lower limit threshold in the ACA, it has received an increase of £800,000 in the formula spending share for its social services formula alone, which it would not receive if that was not the case.

The hon. Gentleman mentioned resource equalisation. Resource equalisation is about fairness—

The motion having been made after Seven o'clock, and the debate having continued for half an hour, Mr. Speaker adjourned the House without Question put, pursuant to the Standing Order.

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