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Mr. John Hayes (South Holland and The Deepings) (Con): I suppose that some people—the hon. Gentleman may be one, but he has not made that clear thus far—believe that there should be a closer relationship between what people pay and the services that they get. That is perfectly proper. However, a local income tax would relate not to what people get, the quality of the services or their cost, but to their income. How does he square that with Liberal Democrat policy on hypothecating tax, which is mentioned many times in manifestos and elsewhere? Would we have regional taxes, local taxes and hypothecated national taxes?

Mr. Davey: I am not sure what the hon. Gentleman meant by his last point, but I am glad that he mentioned services and local taxes. Some people claim that local taxpayers should pay only for local services. People have in mind emptying the waste bins and clearing parks and streets. They forget that most local residents, I am pleased to say, do not use many services that local government provides—for example, social services and child protection. Does the hon. Gentleman suggest that because local residents do not use child protection services, those services should not be financed? Many services fall into that category. For example, pensioners do not use the schools. Does that mean that they should not contribute to them? That is nonsense and I am glad that the hon. Gentleman has given me a chance to put the theory to bed.

Dr. Alan Whitehead (Southampton, Test) (Lab): Does the hon. Gentleman accept that his proposals for local
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income tax could increase gearing in several local authorities on the ground of the need for greater equalisation because of the differences in tax take in different parts of the country? Indeed, CIPFA said that the ratios in several local authorities would be greater. Does he accept that the proposals in his document and end-of-year reorganisation fall into the precise trap into which he suggests that the proposals in the review for ending gearing through technical changes fall? People would not know how much they were paying at the end of the year.

Mr. Davey: The hon. Gentleman is wrong on both points. On the first point, CIPFA assumed that the central Government grant would remain the same as a portion of the council's budget on average. However, local income tax creates a foundation for decentralising power to cut national income tax and reduce some central Government subventions. It enables national income tax to be cut penny for penny as local income tax increases. That reduces the gearing effect—that is the experience in many other countries.

Let me deal with the second point about the end-of-year collection mechanism, which is only one of two possible mechanisms for administering local income tax. That would enhance local accountability as people could see rebates or extra charges at the end of they year, before the local elections. The hon. Gentleman is therefore wrong on both counts.

Several hon. Members rose—

Mr. Davey: I need to make some headway. I have given way several times and it is time for me to have a chance to get on with my speech.

I am trying to focus on the way in which the local voter holds the council to account in any meaningful way when the council tax bill may have nothing to do with councillors' actions. The Office of the Deputy Prime Minister's website on the balance of funding review shows that some people do not believe that accountability is a problem. They argue that the current balance of funding and the associated gearing effect enhances local accountability and they are trying to persuade Ministers not to worry about it. They believe that the gearing effect magnifies the changes to council tax and thus acts as a weapon to control council spending. They argue that all one needs is what is called marginal accountability so that marginal changes in the council's budget are properly signalled and, indeed, exaggerated through changes in a tax bill. That effect was introduced by the previous Conservative Government when they nationalised the business rate. I do not know whether it was deliberate or whether it happened by accident or coincidence, but it has greatly worsened the problem for local government.

Mr. Mark Francois (Rayleigh) (Con): I am sure that the hon. Gentleman knows that, since its inception in the 1990s, the Liberal Democrats have run Rayleigh town council. They increased the precept by 22 per cent. this year. When they had a chance to defend their record, only a handful of councillors stood for re-election and when nominations closed last week the Conservatives took 17 of the 23 seats unopposed. There will be no marginal
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accountability in Rayleigh town council or any marginal seats because all the Liberal Democrats have run away. Why is that?

Mr. Davey: It was wishful thinking that the hon. Gentleman would talk about marginal accountability. It is a complex notion so perhaps I should have guessed that he would not deal with it.

Marginal accountability is dangerous nonsense. For it to work, all local government spending would have to be fixed and under easy control so that councils were genuinely responsible for the marginal changes in their budgets. Yet we know that council budgets are not like that, because so many services are demand-led and cannot be predicted. Demand pressures for services such as special educational needs and care for the elderly are massive in some areas and explain by themselves most, if not all, of some councils' tax rises. Such real-life demand pressures totally destroy the theoretical notion of marginal accountability.

Just as damaging is the implicit assumption that councils should be held financially to account for changes to the budget only at the margins, for new services. For proper accountability, councillors and voters should ask questions about existing services and the way in which the budget is spent on them, not only on new projects.

Hugh Bayley (City of York) (Lab): Will the hon. Gentleman give way?

Mr. Davey: No, I shall not.

I simply ask Ministers to reflect on how they would feel if the notion of marginal accountability applied to them. I agree with the Minister that accountability can be a tricky notion to pin down. In its fullest sense, it requires voters to have large amounts of information, which, with the best will in the world, we cannot expect them to have.

Despite those problems, I am convinced that the Layfield notion of accountability—what the committee called "average accountability"—is the right way forward. That approach gets closest to the committee's ideal that whoever was responsible for spending the money should also be responsible for raising it, so that that amount of money was subject to democratic control. Subject to the constraint of equalisation, that is the approach that the Liberal Democrats take. We believe that the balance of funding problem is a serious one which undermines accountability and that it can be fixed only by serious devolution of financial power.

Mr. Adrian Sanders (Torbay) (LD): Is it not the case that those in high house-price areas—where the central Government grant is related to the tax base—which are also low-income areas will always be chasing a gap between what the Government give them and what local people can afford to pay? The council tax will always disadvantage such areas.

Mr. Davey: My hon. Friend is right. That is part of the problem with the gearing effect and with the whole system of local government finance.

When councils have to rely so much on central Government funding, it is deeply corrosive for the local democratic system. This corrosion might be seen in lower turnouts, or in the esteem in which councils are held and
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the status of those councils. A system that relies on central subsidy is always going to breed dependency. It feeds a political culture in which the voters, the press and the councils too often look to central Government for solutions. We need councils to take greater responsibility. We need people to go into local government, both as officers and as councillors, because they believe that they can make a significant difference to their community. We want a more powerful, vibrant local democracy that can innovate in the public services and make major long-term decisions. However, the current imbalance in funding is one of the major obstacles to that vision. Councils inevitably spend huge amounts of time analysing in detail the grant formula distributions and lobbying MPs. We have debates in the House which are effectively zero sum games. We need to end that dependency in order to move forward and to reinvigorate local government.

There is a flipside to this argument. When so much local government money comes from central Government, central Government start to regard the grant money as their money. Ministers in all the Whitehall Departments with an interest in local government seem to have an allergic reaction to seeing grants going to local councils from their global budgets. They want to micro-manage all that money. If we are to grasp the localist agenda and stop Whitehall Ministers and civil servants second-guessing local authorities in any policy area that we care to mention, it is best that most of the money spent by councils does not come from Whitehall in the first place.

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