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Mr. Davey: If the hon. Gentleman were right, he would be right to criticise me, but unfortunately he is
completely wrong. The whole point of a local income tax is that it would build a local tax base into the grant formula, so distribution would be automatic—there would not be more intervention.The Government must look at the problem more closely. The Audit Commission, in its report on council tax rises last year, stated:
- "The review that the Local Government Minister is chairing on the future funding of local government needs to address the fundamental flaws in the local tax system".
Last Thursday, we held a ridiculously short debate on the local government grant settlement, which touched on some of those problems.
Sarah Teather (Brent, East) (LD): On the grant settlement, does my hon. Friend agree that it is hypocritical to discuss capping council tax or complain about rises in council tax when the Government grant settlement forces a particular council tax outcome? The Government provide a grant based on the difference between what they think local government should spend and the assumed national council tax level. In the case of Brent, council tax must therefore rise by 8.7 per cent. to reach the assumed national council tax level. Brent effectively has two options: it can either set an inflation-busting council tax or it can cut central services that the Government think that it should provide.
Mr. Davey: My hon. Friend has explained in detail how the council tax system is failing. The Audit Commission says that there are perverse effects where central Government try to insert their tentacles into all aspects of local authority budgets, preventing local authorities from making sensible decisions and pushing them into silly ones. That is why the Government's capping solution is simply not the answer.
Mr. Parmjit Dhanda (Gloucester) (Lab): The other side of the coin in respect of the argument made by the hon. Member for Brent, East (Sarah Teather) involves authorities such as Liberal Democrat Cheltenham, which is close to my constituency. Last year's settlement, which included capital, was about 12.5 per cent.; the hon. Gentleman discusses the gearing effect, but Liberal Democrat local authorities such as Cheltenham multiply it by putting council tax up by 13.9 per cent.
Mr. Davey: The hon. Gentleman fails to mention the rules, restrictions, ring-fencing and passporting that force councils to take decisions, many of which they do not want to take. That is the problem.
Mr. Adrian Sanders (Torbay) (LD): When the Government claim a 5.9 per cent. increase in their
contribution to local government expenditure, it applies only to 75 per cent. of that expenditure and is therefore worth less than that percentage rise. Furthermore, when a local authority sets its budget, it must deal with a public sector inflation rate of around 7 per cent.
Mr. Davey: My hon. Friend is right, and the situation is worse than he suggests because the 5.9 per cent. increase does not apply to national non-domestic rates. The flawed system needs reform.
Mr. Borrow: Will the hon. Gentleman give way?
Mr. Davey: No, I will not give way again because I want to make progress.
The system is flawed and a problem for the Government is coming down the track. In 2007, several million properties will change council tax band. Some people will enjoy a windfall tax cut; others will see their council tax bills suddenly jump as their houses are re-banded upwards by one or even two bands. It is difficult to know the balance both between losers and gainers and between regions, but initial analysis by the New Policy Institute on the Office of the Deputy Prime Minister website gives us some hints. For example, in London most homes now in band C will go up at least one band and face a tax hike of 15 per cent. on top of annual council tax rises. Those households will, in the main, be on low or modest incomes and contain pensioners and public sector workers—band C homes in London are not mansions.
A no-reform option from the balance of funding review will sentence such families to a massive hike in a grossly unfair tax, with nothing to show for it just after the next election, which may be the point that Ministers are grappling with. Maybe they think it convenient that the revaluation will occur after the next election. However, I warn the Minister that if the Government cannot promise reform before or at the next election, I hope that they will have the honesty to mention that prospective tax rise in their manifesto, because if they do not do so I promise him that others will. The balance of funding review is a huge opportunity for local government and local taxpayers if Ministers have the courage to take it.
Ministers know where this party stands on the balance of funding because we have made submissions and published our detailed proposals. Indeed, we have set up a website containing those plans and even answered the questions from the Minister for Local Government, Regional Governance and Fire on our policy. We urge Ministers to consider our policy seriously, and we are prepared to get round the table and discuss it with them. I hope that Ministers in the ODPM can persuade the Prime Minister to get round the table.
Mrs. Lorna Fitzsimons (Rochdale) (Lab): It is not good enough for the hon. Gentleman to say that the details are on a website. This is a debate that his party asked for on the Floor of the House. I should like to know which of my constituents will have to pay more tax, when the hon. Gentleman says that other people will have to pay less. Who?
Mr. Davey: It is very rich for Labour Members and Conservative Members to complain that our party is not
publishing its detailed policy. We have published it. It has been widely reported. We are very happy to put it to the balance of funding review. The vast majority of the hon. Lady's constituents would pay less tax under local income tax.I want the hon. Lady and her hon. Friends on the Front Bench to persuade the Prime Minister of the virtues of local income tax, and I suggest a strategy: tell him that they have a local income tax in the United States. That might just tip the balance. Tell the Prime Minister that they do not have it in France, but they have it in countries as diverse and wealthy as Japan, Switzerland and Sweden.
A local income tax is a policy whose time has come. I commend the motion to the House.
5 pm
The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Phil Hope): I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:
- "welcomes the current work of the Balance of Funding review of how local government in England is funded; notes that the review is receiving evidence on a number of possible reform options suggested in public consultation; awaits with interest the report of the review in summer 2004; and urges local authorities to set budgets for 2004–05 which deliver value for local taxpayers."
Unlike the Liberal Democrats, the Government take this issue very seriously. It is currently the subject of our balance of funding review. I listened with great interest to the speech of the hon. Member for Kingston and Surbiton (Mr. Davey) and his attacks on the Conservative party. It was most interesting to hear all of that, but we are here to debate the serious issues facing the country today.
I have one preliminary point. The hon. Gentleman might have chosen a better day for today's debate, since the Minister for Local Government, Regional Governance and Fire and I are both involved today in the Committee on the Fire and Rescue Services Bill. My right hon. Friend sends his apologies for being unable to be here for the start of the debate, as he is still in Committee. Dedicated and talented though he is, he cannot be in two places at the same time.
It may be helpful if I start by briefly setting out some background. First, I refer hon. Members to the recent generous grant settlement for local authorities in England. This is the essential context of the issues facing the local government finance system and the reality of what is happening now.
Last Thursday, my right hon. Friend put before the House proposals confirming that the total of formula grant would be £46.1 billion in 2004–05, an increase of 5.5 per cent. compared with 2003–04. On top of that, specific grants take the overall increase to no less than 7.3 per cent.
Of course, it is not a one-off increase. It is part of a programme of sustained growth in investment in the vital public services delivered by local government.
Overall Government funding to local authorities is up by 30 per cent. in real terms over the past seven years. That is in stark contrast to the previous four years, when year-on-year cuts were the norm—a 7 per cent. real-terms cut over that period.Conservative Members may wish to forget their responsibility for the realities of life in that era, when real-terms cuts were the order of the day. However, those involved in local government, including some of my hon. Friends and me, do not have such short memories. They know the change that has occurred. They know that in 2004–05, for the second year running, all local authorities receive a real-terms increase in formula grant on a like-for-like basis.
As the hon. Member for Kingston and Surbiton said only last week,
- "it is a generous settlement . . . the settlement is far more generous than anything ever proposed by the Conservatives." —[Official Report, 5 February 2004; Vol. 417, c. 990.]
I am pleased to say that in recent grant settlement we have removed ring-fencing from some £750 million of specific grants, and thus reduced the ring-fenced grant from over 13.3 per cent. to about 11 per cent. of the total grant. That is part of our commitment to reverse the trend on the ring-fencing of grants to local authorities.
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