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I have deliberately spent some time talking about why the balance of funding review is important and why it has real and serious problems to tackle. This is a key factor behind high council tax and behind the decade of above-inflation council tax rises that we have just seen. The review is critical because we need to improve accountability.
I want to end by outlining our solutions for the balance of funding review. Let me start by describing the number of taxes that councils have. It is wrong to expect councils to rely purely on one source of revenue. That is why we advocate, in addition to reforming the local personal tax system, the denationalisation of business rates, coupled with their reform. It was a huge mistake when the Conservative Government nationalised business rates, and that decision alone has already made a difficult problem much worse. Giving councils a second source of revenue would quickly make a huge difference. After all, that was one of Labour's election promises before 1997.
I should make it clear that, in denationalising business rates, we want to reform them too. We want to give an allowance, so that small businesses would have an allowance similar to the personal allowance in the income tax system. We want to base rateable values not on the property but on the land. That would have two big benefits for businesses. First, it would ensure that the tax base was widened, so that land that had been zoned for commercial use but had not yet been built on would be brought into the tax base, thus reducing the bills for existing small business rate payers. It would also end the perverse incentives against developing such land.
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I know that the Minister is toying with that idea. We have seen reports in the press on whether the Government are going to go ahead with it. Concern has been expressed in No. 10 Downing street and in parts of government that this reform would be controversial, but I urge the Government to grasp it for three reasons. First, with the reforms that I have outlined, I believe that the proposal could be sold to business. Secondly, there is an argument for keeping one central control over localised business rates, which would be to ensure that any rise in the business rates would be no higher than a rise in the local personal tax. That would ensure that business rates rose by no more than personal taxes and possibly, if councils wanted, by less. The third reason why denationalising business rates is important is that the voice of business could be heard again. Many businesses criticise the Tories' nationalisation of business rates because it means that they have been excluded from many of the councils' discussions on important local issues.
The second part of our solution is a radical reduction in central Government interference. We may have some common ground with the Conservatives on this. We want to see ring-fencing and passporting brought to an end, and to ensure that when responsibilities are passed down to local government, they are fully funded and the money actually goes with the responsibilities. We want to see the Government's very timid agenda on freedoms and flexibilities for local councils massively expanded, so that we can reduce the level of regulation and inspection not just for a few councils but for all of them. This sort of policy would have major benefits for councils. It would restore control of their costs and flexibility over local priorities.
Our final proposal is the most radical, the most controversial and the most well known. It is the proposal to scrap council tax and replace it with a local income tax. Many of the arguments on this were rehearsed on 10 February when we last debated these issues, but I want to add one major point, linking local income tax with the balance of funding review. The key issue is that if we can extend the personal tax baseand make it a fair tax baseit will be able to take more weight. If we chose a local income tax, the national tax collected by the same authoritythe Inland Revenuecould be reduced penny for penny so that the overall tax burden did not increase.
The key problem with council tax is that it cannot bear the weight that the balance of funding review would want it to do in order to get rid of the problems that I have outlined. The council tax is already an unfair tax. The idea of doubling itor of increasing it even by 10 per cent., or whatever the Conservatives' proposal of the week might bewould exaggerate the unfairness of it
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even more. I do not believe that council tax is the way to go. Local income tax could bear the weight because it would be based on fairness.
The balance of funding review offers an historic opportunity for the Government to end the decades of feuding between councils and central Government over local government finance. It will give them an opportunity to decentralise financial power in our over-centralised country and to strengthen and revive local democracy. Above all, it will provide an opportunity to get rid of Britain's most unfair taxthe council tax. I hope that the Government are up to this challenge and that they listen to the voters on June 10. I commend the motion to the House.
"welcomes the Government support for local government with its 30 per cent. real terms increase in grant since 1997; notes that the average increase in council tax in 200405 is the lowest for nine years; supports the Government's proposals to take action against a number of authorities which have set excessive budgets and council tax increases in 200405; and looks forward to the report of the Balance of Funding Review of how local government in England is funded which is due in summer 2004."
I welcome the opportunity to debate this important and complex subject. The Government take this issue very seriously, and it is currently the subject of our balance of funding review. I listened with great interestand, I have to say, growing incredulityto the speech by the hon. Member for Kingston and Surbiton (Mr. Davey). Rarely has a political party shot itself so convincingly not just in the foot, but in the arms, legs and head as well. I have never thought of the hon. Gentleman as an ancient mariner, but I have to say that he has truly hung an albatross of enormous proportions round his party's neck in the form of its proposal for a local income tax.
More of that anon, but first, I would like to set out some background. The hon. Gentleman's motion curiously refers to "grant reduction". I am not sure where he has been for the past seven years. Under this Government, local authorities have not been facing year-on-year grant reductions. That was certainly their experience in the early and mid-1990s when the Conservatives were in power, but this Government have been significantly increasing the levels of grant paid to local authorities. The latest settlement, for 200405, involves a total formula grant of £46.1 billion, an increase of 5.5 per cent. compared with 200304.
On top of that, specific grants take the overall increase to 7.3 per cent. That is not a one-off increase but part of a programme of sustained growth in investment in the vital public services delivered by local government. In 200405, for the second year running, all local authorities received a real-terms increase in formula grant on a like-for-like basis. Overall, Government funding to English 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 norma 7 per cent. real-terms funding cut over the last four years of the Conservative Government.
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It is sometimes argued that the grant increases are not sufficient to match new demands that are placed on local authorities, and that they are forced to spend money on Government priorities by ring-fencing, but both concerns are being addressed. We operate a "new burdens" doctrine, which requires any new obligations on local government to be matched by appropriate funding from the responsible Department. Furthermore, in the recent grant settlement, we have removed ring-fencing from some £750 million of specific grants. We have thus reduced the ring-fenced grant from over 13.3 per cent. to around 11 per cent., and on current plans, ring-fencing will be less than 10 per cent. by 200506. For authorities categorised as excellent, we have gone even further by removing virtually all ring-fencing, except for those grants intended for schools.
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