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Mr. Raynsford: The hon. Gentleman is digging an even deeper hole, and I must counsel him not to pursue that point. I shall come later to some interesting comments taken from his website about the CIPFA report. For now, however, let me tell him that the passage that he has cited in fact highlights one of the problems implicit in his proposals, which is that the regional yield of a local income tax would be much higher in London and the south-east, so disproportionate increases in taxation would be likely there unless the grant distribution was changed. I would be interested to know whether the hon. Gentleman proposes to change that distribution, which would involve a significant change in the distribution of resources.

Mr. David Drew (Stroud) (Lab/Co-op): Part of the problem with local income tax, as with the poll tax, is non-payment, and one assumes that people would be very clever in trying to avoid tax. One of the biggest difficulties is that any assumption of tax take must build in losses that might result if people chose not to pay or were able not to pay. Does my right hon. Friend agree?

Mr. Raynsford: My hon. Friend makes a very good point, to which I shall come in a moment. I should like first to discuss the purposes of the review before turning to the Liberal Democrat proposals.

As our 2001 White Paper "Strong Local Leadership—Quality Public Services" recognised, many local authorities are concerned about the balance of funding and the proportion of local spending financed from central as against local sources. Nationalisation of the business rate in 1990 shifted the balance of funding so that the proportion raised locally was reduced from about 50 per cent. to 25 per cent. National taxes, including the business rate, now account for about 75 per cent. of local government revenue. Although the average proportion raised locally is about 25 per cent., the figure varies widely across England. For example, in Newham, one of the more deprived parts of London, it is about 11 per cent., whereas in Chiltern, a more affluent area in the south-east, the figure is at the upper end, at around 60 per cent. My hon. Friend the Member for Southampton, Test (Dr. Whitehead) was absolutely right to highlight the fact that in many deprived areas, because the wealth of an area is more varied in terms of income tax receipts than in terms of property valuations, the problem would intensify, and those areas would require even more Government subsidy if a local income tax came in. I am sorry that the hon. Member for Kingston and Surbiton did not understand my hon. Friend's sensible point.

In general, deprived areas with high needs and a low council tax base receive much more central grant than more affluent ones. The equalisation of needs and resources aims to ensure that all areas receive sufficient resources to deliver services to acceptable standards. Whatever their individual balance of funding, however, many councils argue that they cannot be properly accountable to their taxpayers if they have to rely heavily on central grant funding. They also criticise the
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impact of the balance of funding on gearing, which was a point made by the hon. Member for Kingston and Surbiton. In the 2001 White Paper, the Government stated their view that there was no quick or easy way of securing a major shift in the balance of funding. We did, however, agree to set up a high-level working group to look at all aspects of the issue and to consider reform options. The balance of funding review started work in April 2003, and it aims to report in the summer. Our target is July, and I hope that, before the House rises for the recess we can report to the House on the options that the review sets out. I chair the review's steering group, which comprises representatives of local government—several from the Local Government Association—central Government, business, the unions and other experts. The review group has met several times. It has discussed the principles of a successful local government finance system, held a consultation and commissioned independent research, all of which is publicly available. It has examined a number of possible reform options.

The review is looking at four main reform options, which were suggested in response to public consultation: re-localisation of business rates; introduction of a local income tax; reform of council tax; and a mixed option of smaller taxes or charges. I should emphasise that the fact that the review is hearing evidence on those different options is not an indication that the Government favour any one of them.

I will start with council tax. Many consultation responses said that there were serious problems with council tax, but most suggested that it should be reformed rather than abolished. As recent work by the New Policy Institute points out, the tax has been widely accepted until recently. Almost all countries have a local tax on domestic property. Council tax has advantages: it is well established and relatively easy to understand, its yield is predictable, and it is easy to collect, as houses do not move. Indeed in 2002–03 local authorities in England collected more than 96 per cent of the council tax due within the financial year.

Of course, one major change is already planned. Under the Local Government Act 2003, there is a statutory requirement for a revaluation of domestic property in 2007, based on 2005 property values. Revaluation is not designed to raise more tax overall; the 2001 local government White Paper made it clear that its overall impact will be neutral. As the New Policy Institute showed, however, revaluation will have different effects across the country in line with house price rises, and we will consider carefully how best to manage that. One option would be the introduction of regional banding.

We will consider the case for change to the existing bands, although we would need carefully to examine the impact of any changes. As the NPI made clear, improvements can also be made to council tax benefit, which makes an important contribution to the financial security of many people on low incomes but does not reach as many people as it should because of relatively low take-up. There is real scope for improving take-up, and my colleagues at the Department for Work and Pensions are making changes to address that.

Mr. Edward Davey: May I return the Minister to the point on revaluation? He criticised local income tax by arguing that there would be a larger local income tax
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base in such regions as London and the south-east. Does he think that his comparison with the council tax base would change after revaluation? Does he admit that many households in London and the south-east will see large increases in their council tax bills as a result of revaluation, particularly those in London who live in band C properties?

Mr. Raynsford: There are two separate issues there. I have made it clear that we accept that there will be variations, depending on the relative increases in house prices since 1991. It is completely unrealistic to go on indefinitely with a tax system based on 1991 values, so revaluation must come. That is why we are considering the possibility of regional banding as one way to address the issue that the hon. Gentleman raises.

The issue that I was highlighting is a different matter, and the hon. Gentleman may not fully have understood that. There is a wider gap between the highest and lowest levels of people's incomes, as assessed for income tax, than there is between property values, and that would create a different issue if a local income tax were introduced. I shall not push the point further since the penny has, I hope, now dropped for the hon. Gentleman.

Re-localisation of the business rates—a return to the pre-1990 system—is not something that the Government have favoured, but there is strong demand for it from many in local government. Most consultation responses from councils argued that re-localisation would help to resolve the balance of funding problem and encourage better partnerships with local businesses. The business community has stated, however, that it would strongly oppose re-localisation. There are also major disparities between areas in their business rate yield, so equalisation would be needed, which would reduce the link between resources raised and what would be available locally.

The review's discussion of business rates threw up another issue. The LGA presentation made the interesting point that when business rates were nationalised, they met about 29 per cent. of local government funding, whereas they now pay for only 22 per cent. That is because rises in the business rates multiplier are capped by law at the level of inflation. Some may argue that it is not fair that business contributions to local funding are capped while domestic taxpayers' council tax bills are not. Is there, then, a case for reconsidering how the cap is set? Well, there are two sides to the story. Business organisations have warned that any changes to the cap would be very sensitive and could damage the UK business tax picture and perhaps endanger businesses' comparative advantage internationally. The balance of funding review is looking carefully at the issue, considering the pros and cons of any changes.

Next I shall say a word about local income tax. The review consultation showed support in some quarters for that, or at least for considering the case for it, as most people admit that the proposal is inherently complex and needs much more work. CIPFA, which presented a paper to the review, highlighted a number of difficult issues, such as set-up costs, costs to business and the
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treatment of investment income. It would not be an easy option. It is technically complex and challenging, with much of the devil in the detail.

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