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Mr. Davey: No, I want to press on and make some progress.
The balance of funding review is important to today's debate. If local councils raised none of their own finance, which is another option, it would create huge accountability problems, and local democracy would be severely undermined. If 100 per cent. of council funding came from central Government, as some hon. Members argue, it would mark the end of meaningful local democracy. If we reject the extremes of raising all funding locally or of raising all funding nationally, where should the balance lie?
On average, a council currently raises 25 per cent. of its budget locally and gets 75 per cent. of its income from central Government. Many hon. Members believe that the balance of funding is wrong and that it must be addressed urgently—I hope that the Government address the matter in the review. However, we do not know whether they think that the balance of funding is a major problem, and part of the review's remit is to decide whether the 75:25 split is a problem.
The first message that I want to get over to the Government in this debate is that the balance of funding causes serious problems. The Minister should not listen to those who argue that the current balance of funding is an advantage—some Conservative Members advance that argument—or to those who argue that the problems can be fixed without altering the balance of funding. Specifically, the current balance of funding causes three serious problems that cannot be brushed aside. The first
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problem is the well-known gearing effect, which relates to the second problem, accountability. The third problem, which is often ignored, is the effect on the health of local democracy and local government that comes from the imbalance in funding.
The gearing effect is perhaps the most alarming problem for council tax payers because, as the Audit Commission reported last December, it is a major contributor to some high council tax rises. At its most simple, the gearing effect means that for every 1 per cent. increase in a council's budget, on average that council must increase council tax by 4 per cent. Average council tax rises in 2003–04 were 12.9 per cent., but councils actually increased spending over and above what the Government said that they should spend by an average of only 1.9 per cent. However, the gearing effect translated those increases into an average council tax rise of 7.6 per cent., which completely distorted the picture. That issue directly results from the balance of funding.
Mr. Anthony Steen (Totnes) (Con): The important point is not who pays 75 per cent. and who pays 25 per cent, but how much the individual pays—apart from the Liberal Democrats, nobody cares how the calculation is worked out. The Liberal Democrats have increased council tax in Torbay by 10.1 per cent., but they blame everyone else. The problem is that too many laws made in this place go down to local authorities, which have to carry them out but cannot afford to do so. If we passed fewer laws here, council tax would not be so high. If the Liberal Democrats got their way, people would pay more but would not get better services, so I do not understand what the hon. Gentleman is talking about.
Mr. Davey: I am not surprised. I agree that we pass too many laws in this place and that the burdens that we place on councils are too heavy. The idea that that is the complete explanation for council tax rises, however, is nonsense. If the hon. Member for Totnes (Mr. Steen) listens, he will learn that the Audit Commission, not the Liberal Democrats, blames the gearing effect, which I am discussing, for some high council tax rises.
There are three possible solutions to the gearing effect. First, revenue raised locally could be increased by, for example, re-localising business rates, and I shall return to that approach because we favour it. A second solution is to cut local government responsibilities and centralise a major spending area such as education. We understand that No. 10 Downing street has considered that solution, but I was glad to hear reports from the Minister for Local and Regional Government that that will not happen, and I hope that he will reconfirm that the Government are not examining the centralisation of a major spending area such as education.
A third solution—a technical change to the grant system—is touted in the Government review. Rather than grant allocations being fixed at the time of the local government grant settlement, the idea is that the allocations become variable, which happened in the 1970s and part of the 1980s. Broadly speaking, the solution works like this: if a council raises its budget by, for example, 3 per cent., its council tax should go up by
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only 3 per cent., and any difference required because of the gearing effect should come directly from extra central Government grants.
Mr. Andrew Turner (Isle of Wight) (Con): Higher taxes.
Mr. Davey: I urge the hon. Gentleman to listen, because the proposal is not ours. The proposal has been put to the balance of funding review and I am trying to knock it down because it is a bad idea. It would allow variable increases in grant, which could dispose of the gearing problem in one move, but it would create its own problems. For a start, it would lead to huge uncertainties, which is a problem that the Conservative Government experienced when it tried to operate such a system in the early 1980s, because final grant allocations for a specific year would not be decided for months, even years.
Above all, variable grant allocations would create perverse incentives. Much of the money for a new project or dollop of spending—indeed, any marginal increase in a council's budget—would effectively come from central Government, which would lead to higher tax bills overall.
Many councils would perceive an advantage in setting higher council tax as it could be argued to the electorate that that would mean extra central Government subvention of two, three, four or even five times the amount for which the council tax payer was being asked. I therefore hope that while that technical solution might appear preferable and neat, the Government will reject it. I believe that that will be the case, given the nods and shaking of heads from the Front Bench. I welcome that.
The Minister for Local and Regional Government (Mr. Nick Raynsford): Let me put the hon. Gentleman out of his agony. I assure him that we considered the matter approximately a year ago and it held no attraction for, and found no support from, the balance of funding review team. He is tilting at a false windmill.
Mr. Paul Tyler (North Cornwall) (LD): One down, two to go.
Mr. Davey: My hon. Friend is right and I am glad about it. The purpose of the debate is to try to tease out the Government's position on balance of funding. It is important for those who will vote in the June elections.
Another problem with the imbalance of funding is that it distorts local accountability. Changes in the local council tax bill often have little or nothing to do with councillors' decisions. Of course, they do in some cases, but far too often they do not. Council tax rises are sometimes caused by factors that are completely out of the local council's control.
Mr. Swire:
I am grateful for the hon. Gentleman's clarification and I am sure that he will reach the relevant points because he is on a voyage of discovery, not least after the Liberal Democrats won Brent, East with £100 vouchers, which have been scrapped. Does it remain Liberal Democrat policy that regional assemblies, were they established, would have tax-raising powers? Would
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they be in addition to the extra powers about which he is talking? If so, would not that add further distortion to the inequalities about which he is so worried?
Mr. Davey: The key point is that we would begin by getting rid of the council tax. There would therefore be no council tax precept, which the Government oppose for regional assemblies. Unless and until regional assemblies were elected, there would be no question of their having tax-raising powers. Unless and until central Government funds were given to local assemblies and national income tax was cut pound for pound, there could be no question of giving income-tax-raising powers to regional assemblies.
Mr. Davey: I want to make some progress. I was talking about accountability in local government. I thought that I was generous in answering the question of the hon. Member for East Devon (Mr. Swire), which had nothing to do with that.
I was trying to argue that small changes that have nothing to do with councillors can affect the council tax. A small change in the amount of grant from central Government can make a major difference. A small change in a council's cost base because of central Government targets could cause a major change. A small change in the demand pressure, for example, in social services could lead to a major change in council tax. Any such changes are magnified four times because of the gearing effect that we have already discussed. That means that accountability is utterly distorted.
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