Local Government Bill

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Mr. Desmond Swayne (New Forest, West): The explanatory notes, at paragraph 116, say:

    ''The details of future transition schemes in England—the maximum annual increases allowed in bills and whether they are to be funded by the phasing of decreases or through what in effect amounts to a supplement on the multiplier—will be decided in the light of the outcome of each revaluation''.

That means that the Government accept that the optimum scheme that would be applied as a consequence of the clause cannot be decided until we see how revaluation takes place. If they accept that they cannot know the best scheme in advance, why are they foreclosing on the Exchequer's opportunity to contribute?

As the hon. Member for Kingston and Surbiton (Mr. Davey) said, the Under-Secretary is tying the hands of future Secretaries of State, which they might regret in the light of the experience that the explanatory notes recognise is unpredictable. Will the Under-Secretary say why he rejected the conclusions of the Transport, Local Government and the Regions Committee, which suggested that the proposals on self-funding should be abandoned?

Mr. Leslie: I welcome the necessity of debating the wider context of the amendment. The clause guarantees ratepayers that a transition scheme will accompany any future revaluation while the Local Government Finance Act 1988 simply confers a power to establish a scheme. It does not impose a duty to do so, and businesses and the Confederation of British Industry have stressed the necessity of transitional schemes accompanying future revaluations, which we accept. The details of a future scheme as well as the maximum annual increases and decreases in bills will be decided in the run-up to a revaluation when its impact on individual rateable values is known.

As stated in the White Paper, any future transitional scheme must be self-financing. Several hon. Members asked how we can be so certain about the issue. There is no reason why the taxpayer, as opposed to the ratepayer, should meet the cost of

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transitional relief. The principle is the same as that discussed in relation to the small business rate relief scheme, and the self-financing principle is important to ensure that the taxpayer is not stumping up a cross-subsidy.

The clause requires the total rate yield in any year to be unaffected by a transitional scheme, which is important. It is designed to answer questions such as, ''How can we be so certain that we will be able to cope in difficult times?'' The clause will give transitional schemes greater flexibility in several respects: first, when changes are phased in, we could offset a subsidy to those stepping up to a higher level with a contribution from those due to pay a lower bill; secondly, we could dampen the impact of increases or allow a quicker realisation of decreases in bills by a subsidy paid for by an increase on the multiplier; or, thirdly, we could combine those approaches. We want sufficient flexibility to ensure that the scheme is fair and equitable and fits the circumstances.

Mr. Davey: Is the Minister saying that the Government would have the flexibility to change the design of the transitional scheme from one financial year to the next or would the design be decided at the beginning of the five-year period and be followed throughout?

Mr. Leslie: We would set out the transitional scheme at the time of revaluation and follow it through. It would be sensible to ensure that the scheme is phased out before a subsequent revaluation. That is the best approach. I accept that it would be worrying to have one transitional scheme followed by another. I hope that that satisfies the hon. Gentleman.

Mr. Davey: I am grateful for the Minister's clarification, but it therefore follows that the transitional scheme would not give the Government flexibility. They would decide how it is to operate at the beginning of the five-year period and the scheme's design would remain, whatever the circumstances in year three, four or five.

Mr. Leslie: We want to be clear about how the phasing arrangements work. If rents on which revaluation is judged fluctuate, that does not necessarily mean that the rates bill will follow the direction of the rent. If the market in general increases, it does not mean that everyone's rates bill will increase, as the yield commitment also exists and provides a measure of protection. It is not simply a case of reflecting the total rise in market values in rental terms.

It will be possible to adjust the transitional relief scheme should exceptional circumstances arise within the five-year time frame, but we intend to make the objective clear at the outset so that people know how we expect to phase in the transitional schemes. The ability to make a change to compensate for unforeseen circumstances remains.

My hon. Friend the Member for South Ribble suggests that we should have the capability to balance the transitional relief system over a five-year period rather than in each year. I understand his arguments—his concern is that businesses should not face bills that increase too steeply—but in any operation of the transitional relief scheme we will balance and phase

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over a certain period. Our point of disagreement is that we believe that a scheme should be self-financing within each financial year. A five-year scheme would be more complex to operate than a one-year scheme because we would not have that symmetry.

Mr. Borrow: I recognise that it may be a problem for the Office of the Deputy Prime Minister to get Treasury approval for the fact that, in one or two of the five years, Treasury funding might be needed to meet the ups and downs of a transitional scheme. If we put it in statute that in each financial year a transitional scheme will be self-financing, how will we come up with a suitable scheme in the six months between October, when the rating list is published, and April, when it comes into effect? It is quite an ambitious task to devise a scheme that will end up with a nil gain in that financial year and where the pluses and minuses properly balance, particularly as a significant number of properties—we talked about 5 per cent.—may undergo a reduction in their rating assessment as a result of appeals. Those appeals might not be heard in the first year of the rating list, as they could be backdated. Even if the transitional relief system were in balance on 31 March 2006, the knock-on effect of the rating appeals might upset that.

The Chairman: I remind hon. Members that they can make speeches at the appropriate time.

Mr. Leslie: I understand my hon. Friend's need to give a full explanation of that particularly complex point. I appreciate the difficulty in doing that. He again makes a fair point. While debating the previous clause, we discussed our capability to make a small adjustment to the multiplier to correct for erosion and to make any adjustments needed to the calculation of the estimates of the yield that we expect, thus ensuring that we have symmetry to balance those issues. The extra flexibility that the clause gives us does not simply enable a transitional scheme to mirror those increases that offset decreases, as it can also have a dampening effect through the subsidies paid for by the general increase on the multiplier. That can help to ease the situation.

I do not believe that the general taxpayer should be brought into that system to subsidise the ratepayer in such a way, particularly on the five-year scheme. If we did not achieve balance and have a self-financing system, we would effectively be looking to the general taxpayer to stump up a loan to cover those rate bills that are perhaps due net for those first years of a transition scheme. It would not be fair for the general taxpayer to give that loan in that way. We also believe that a one-year system is more understandable and intelligible than a five-year system, which is another reason why we cannot accept the amendment. I ask my hon. Friend to withdraw it.

The hon. Member for Cotswold asked whether the principle of self-financing in each year is wise and whether it will remove discretion. Avoiding subsidy by the taxpayer is an important principle. Yield is a direct reflection not just of market values, but of rateable values and the multiplier, which can differ in direction

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from the wider market. Those are not necessarily affected by wider issues in the overall economy.

The hon. Gentleman said that the downward phasing of British Energy was unfair, but without downward phasing it will be difficult, if not impossible, to pay for upward phasing to protect those who have seen their bills increase due to the change in rateable value. I am unclear as to how he would pay for upward phasing without a downward phasing arrangement. British Energy is gaining significantly from the changes to its rates bill. If we did not have downward phasing, other businesses would be paying more to support it. Therefore, I do not believe in the change that he suggests.

I hope that I have answered most of the questions and that my hon. Friend withdraws his amendment.

9.30 am

Mr. Clifton-Brown: The Under-Secretary skirted around the problem, but he did not give us the answer to which the hon. Member for South Ribble is entitled as a result of tabling the amendment. Can I try again, Mr. Griffiths, as the issue is complicated? I quote from Tony Travers of the London School of Economics who gave evidence to the Select Committee:

    ''Based on past experience there must be a risk that the businesses and other non-domestic ratepayers who should be achieving or having a lower bill and gaining out of the reform will find that they are not getting their full gain because they are paying towards the protection of losers. That could well lead to resentment which I think would put pressure on the Government to step in and then at some point simply pay them all the money that they are entitled to, and that is what they feel they will want''.

There is a dichotomy here: on the one hand small businesses and those having their rates reduced as a result of rating revaluation want payment immediately; on the other hand the Government are saying that the system should be made self-financing in any particular year. That is the point made by the hon. Member for South Ribble.

The clause is removing the Government's flexibility to phase in the increase over the five-year rating cycle. Although practitioners do not like it, businesses like to have certainty so that they can plan. Under this clause they will have what I call lumpy payments, because successful businesses having their rates increased will have a bigger hit in the first year to pay for transitional relief. Non-domestic rates should go up roughly in line with the retail prices index, but businesses will find under this system that in the first year of the revaluation cycle they are paying the RPI plus the amount to pay for the overall pot of the transitional phasing relief.

There will be a slightly lesser effect in the second year because transitional relief will have been paid, but there will still be erosion from businesses that appeal to have their rates reduced. That also has to pay for the overall pot in year two. In years three, four and five businesses will probably find that their increases go up in line with the RPI. I press the Under-Secretary on what he means by ''damping'' and on whether the clause will enable him to ensure that businesses have equal increases over the five-year ratings cycle, which they want so that they can plan their cash flow.

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