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10.14 pm

The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Phil Hope): I congratulate my hon. Friend the Member for Nottingham, North (Mr. Allen) on securing this evening's debate and thank him for his kind remarks at the beginning. He managed cleverly to refer to President Brezhnev, and Chairman Mao indirectly, in the same contribution, even though they had opposing philosophies—although the citizens of their two countries may not feel that way.

This is a good time to discuss this important subject, which the Government take seriously, and with which I am closely involved, not least as a member of the steering group that is looking at the balance of funding. I listened with great interest to my hon. Friend's views and suggestions on how the local government system should operate, and it may help the House if I recap on the background to the many issues that he raised.

My hon. Friend is concerned with local government's constitutional standing, electoral turnout, the need for political and financial independence and the case for a

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local income tax. Any of those might be considered a suitable subject for an Adjournment debate in its own right, and he is to be congratulated on bringing so many important issues together in one short debate.

I should like to start with localism, which is at the core of my hon. Friend's proposals. That is a term that is used increasingly commonly in many different contexts, and rightly so: it is a central theme in the Government's thinking, and underpinned much of what we said in our White Paper and the new financial freedoms in the Local Government Act 2003.

What does localism mean? Like many well used phrases, it is, I suspect, open to a range of different interpretations. Presumably, it is the opposite of centralism and command politics, the sins that my hon. Friend described earlier. To do him credit, he proposed a truly radical meaning that would entirely break with the history of local government and the current constitution of this country. His localism would require constitutionally independent local government, backed by a new inspection regime, a new British Bill of Rights, a local income tax, and a menu of other tax-raising powers. I hope that I have not understated the radical nature of his approach.

The Government have their own powerful vision here—one in which strengthened and efficient councils are free to deliver what their voters demand. But we also need to have the power to intervene where they are clearly not doing so. Our vision recognises the expectations of the public. When asked their opinion, many of the public are often in favour of devolution in principle. It seems common sense that councils should be left alone to get on with things in the way that my hon. Friend described, but others seem to trust their local councils less than they do Parliament and Whitehall, and that was shown, for example, by our focus group research on public attitudes to the balance of funding. If the public are asked different questions, they tend to be hostile to what the press like to call the postcode lottery. If we are to advocate the localist cause, we have to be prepared to build public understanding that devolution of decision making involves greater diversity of provision.

The public can also be slightly less devolutionist when things go wrong. They are quick to point the finger at central Government and ask us to step in. For example, in response to a highly publicised social services case, or evidence of educational under achievement, the tendency is to insist that the Government must do something to remedy the problem. There are expectations that the Government should ensure certain minimum standards, and that means that there must be a limit to local discretion. Society simply will not accept standards of provision falling below certain norms in any area, and, frankly, neither will we.

Now we hear the term new localism or, in different contexts, civil renewal, suggesting that we should perhaps look at a radically new concept of devolution to the town hall and beyond. I should be clear that I support giving people a strong say in their localities in respect of services, and in other issues, such as liveability, that affect their everyday lives. That is about getting better services because they can better reflect local needs and priorities, and about getting people involved. I echo my hon. Friend's sentiments in his remarks towards the end of his speech, because effective

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local leadership is vital to achieving that. Thriving communities and strong democratic leadership go hand in hand. He and I both know from our constituency experience that neighbourhoods have complex interrelated problems, services are delivered by multiple agencies and there are limits to the capacity of any community to address all issues.

That is why we see a vital role for the council as community leader and facilitator, and we have started to give councils the ability to play that role. In 2000, we gave councils a power to promote the well-being of their areas, allowing them to respond to a wide range of local issues. This year, the Local Government Act 2003 gave local authorities more freedoms that will help them to respond to local priorities and needs. Financial freedoms and the freedom to respond to businesses and communities are crucial to making credible an agenda of responsiveness. In a different context, which we have been debating today, we are ensuring that the planning system—one of the issues about which local people get most concerned—is more responsive to the community.

Those issues are the context for the new localism, but we recognise that it does not stop at the town hall. There are already models of empowering communities, such as neighbourhood management schemes, which I am sure my hon. Friend has in his area, and quality parishes. We are looking at those options and others across services and Departments. He will have seen that, in the big conversation, of which his contribution is a part, we have asked for views on whether we should give neighbourhoods more direct power over public spaces and community safety, with the power to raise small sums of money. We want a real debate on those issues, and his contribution has been an important part of that.

I should add a word on the European context, to which my hon. Friend also referred. In their approach to the Convention on the Future of Europe and now towards the intergovernmental conference in drawing up a constitutional treaty for the European Union, the UK Government have throughout been a leading advocate both of ensuring that subsidiarity is properly enforced and of strengthening the role of national Parliaments in Europe. We also welcomed the recognition that the Convention gave to the role of regional and local government. We are continuing to support those proposals in the IGC.

I should like now to move on to the finance issues that my hon. Friend raised. First, I refer him to the recent provisional grant settlement for local authorities. I know that that does not quite go to the philosophical root of his arguments, but I should like to preface my later remarks with some comments on the reality of what is happening now. As he will know, the Government have increased the grant to local government by some 29 per cent. in real terms since 1997, taking account of the provisional settlement for 2004–05. That settlement is the seventh successive settlement to give an above-inflation increase to councils—in this case no less than 6.5 per cent.

More money is going into local government, but my hon. Friend asks for more financial freedoms for local government. We have already moved in that direction, as can be seen in our commitment to reverse the trend on the ring-fencing of grants to local authorities. I am

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pleased to say that, in the recent grant settlement, we reduced the ring-fenced grant from 13.3 to 11.1 per cent. of the total grant.

The Local Government Act 2003 is also about giving councils more independence and flexibility, including financially, and paves the way for even greater freedoms for councils to improve their services. It includes powers to trade, charge for discretionary services and retain income from some fines and penalties, and gives incentives for local government to work with local businesses through the business improvement districts and growth incentives schemes. It also provides for authorities, rather than the Government, to decide how much they need to borrow.

I welcome my hon. Friend's comments on the balanced budget duty. The duty to set a balanced revenue budget has long been a fundamental part of the local government financial framework. From next April, the 2003 Act will strengthen current rules even further.

I am also pleased that my hon. Friend favours removing central control from local borrowing. As he knows, that is exactly what will happen next April, when the new prudential capital finance system comes into force. Again, the framework has been provided in the Local Government Act 2003. For the first time, local authorities will be free to borrow to fund capital expenditure without Government consent, provided that they can afford to service the debt without extra Government support.

Let me move on to my hon. Friend's specific suggestions on what taxes local government should be able to raise and to the broader-brushed canvas that he described. In brief, I understand that he is proposing a local income tax, relocalisation of the business rates and other local revenue sources such as a sales tax. His voice is certainly not the first to make those suggestions. All of them are among the areas for further consideration raised by respondents to the consultation on our balance of funding review, which has invited expert evidence on all those issues in the next few months.

It is possible that, despite recent discussions of council tax rises, some hon. Members are not familiar with the balance of funding review, although I am sure that my hon. Friend is. The Government proposed in their 2001 White Paper to set up a high-level working group to address an issue repeatedly raised by local authorities and the Local Government Association. They argued that the fact that local authorities raised only 25 per cent. of their own funding on average, and relied on central Government grant for the rest, was bad for local democracy. They also argued that it caused the problem of gearing, by which an authority needs to raise its council tax bill by an average of 4 per cent. to raise its budget by just 1 per cent.

The review has met several times under the chairmanship of my right hon. Friend the Minister for Local Government, Regional Governance and Fire. It has discussed the principles of a successful local government finance system, commissioned independent research—all of which is now available on the Office of the Deputy Prime Minister's website, so it is transparent and available for everyone to become engaged with—and held a public consultation. It is now discussing possible reform options. In the context of this debate, I want to emphasise two of its findings so far.

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First, the research shows that much of the public are not clear where accountability for local government services lies or where the money comes from. What matters to them is not where local authorities get their money, but that services are efficiently delivered. There seems to be no sign of a direct link between the balance of funding and local election turnout—that was a surprise to many of us. Secondly, our consultation results show that there are many concerns about aspects of the local government finance system, particularly gearing and the impact of council tax rises on taxpayers with fixed incomes. However, there was no clear or simple view of what needs to be done. There are no easy fixes or quick wins and we do not want a knee-jerk reaction. That is why we reject the simplistic, uncosted notions proposed by the Liberal Democrats, and why the official Opposition have so far remained silent on the matter. We need to think the issues through fully if we want, as I do, a system that is fair and widely accepted.

Let me look at my hon. Friend's proposal for a local income tax. The balance of funding review consultation showed support in some quarters for replacing or supplementing council tax with a local income tax, or at least considering the case for one. However, we already gain most of our tax revenue from a national income tax, so we would need to be very sure of the case for having a local income tax, too. I should also point out that the Prime Minister has made it clear that the Government do not favour replacing council tax with local income tax. However, we are certainly prepared in the review to listen to reasoned arguments, and this is one of four issues on which we are asking expert organisations—in this case, the Chartered Institute of Public Finance and Accountancy—to provide further evidence on the pros and cons. That is vital in the case of local income tax, because there are many different ways in which it could work. My hon. Friend proposes assigning a fixed proportion of national income tax to local government. That would, as he suggested, provide security, but it would hardly give councils greater freedom because they would have no control over the rate. I can see that it would be easier to administer than a system where councils set the rate, but I am not sure how it would increase local democracy.

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