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Mr. Peter Pike (Burnley) (Lab): I was a member of the Committee that considered the Local Government Finance Act 1992, which introduced the current system of local government taxation. At that time, we pointed out that the biggest single problem was the gearing
 
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factor, which causes massive council tax increases. Will the hon. Gentleman admit that that is a serious flaw in the current system?

Mr. Hammond: The hon. Gentleman should know about massive council tax rises, as during this Government's period in office his local authority has increased council tax by 60 per cent.

Let us analyse the Minister's statement on capping. He said that the floors and ceilings imposed in this year's settlement ensured that all local authorities received an increase above the retail price increase: a minimum of 3 per cent. for shire districts and 4 per cent. for social services and education authorities. However, the combination of the operation of the ceiling limiting the increase for areas of population growth such as Telford and Wrekin, which is one of the Minister's capping victims; the passporting of education spending above formula spending share; and the effects of transitional phasing of changes in the grant distribution introduced in 2003–04 meant that many authorities would face the need for above-inflation council tax increases, even if it were true that 3 per cent. and 4 per cent. respectively represented a real measure of local government inflation—but it does not. As the Minister well knows, local government inflationary pressures are significantly higher than the increases in the retail price index, and the negative effects of many Government policy decisions are magnified because of the nature of the services that local government delivers and the type of work force who are employed to do so.

The Audit Commission's report into the causes of high council tax increases in 2003–04 estimates that local authorities collectively face some £2.3 billion of national cost pressures in respect of existing services. That is more than half the total increase in local authority spending. The Local Government Association estimates that local government inflation is running at between 4 and 6 per cent. Some authorities—for example, Kent, which recently made a submission to the Treasury in support of its position—argue that local pressures effectively leave them with higher still rates of inflation.

We accept, of course, that there is no typical local authority, because each one faces a different mix of local cost pressures on top of national ones. Leaving local variations aside, however, it is simply disingenuous for central Government to ignore the real local government inflation rate, and it is frankly misleading to describe a 3 per cent. grant increase as above inflation in any way that is meaningful to local government.

Mr. Raynsford: I have been listening to the hon. Gentleman with considerable interest. Will he explain to the House how his policy, as set out by the shadow Chancellor, to freeze expenditure on all but two defined public services—thereby freezing at inflation the vast majority of local authority expenditure—can be reconciled with his argument?

Mr. Hammond: As the Minister knows, school spending—[Interruption.] The Minister dismisses that with a wave of the hand, but it happens to represent 40 per cent. of local government spending, which is a fairly large slice, and we have made it explicitly clear that it will be increased. Beyond that, as the Minister knows,
 
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the overall total for all services across all departments will be frozen for a period while we try to plug the fiscal black hole that we will have inherited from this Labour Government—[Interruption.] The Minister is waving his hands again. He appears not to have read what his colleague the Chancellor said in his Budget speech—that he could make 2.5 per cent. efficiency savings by cutting 40,000 jobs. The Secretary of State for Health has identified substantial savings that he can make in his Department's budget. Surely the Minister is not suggesting that during an initial two-year period we cannot identify waste and bureaucracy that can deliver the savings that need to be made.

Mr. Patrick McLoughlin (West Derbyshire) (Con): Did my hon. Friend notice that last week, when the Secretary of State for Health announced that he would be able to cut bureaucracy, he said that he intended to do so by disestablishing about five groups that have been set up since 1997?

Mr. Hammond: My hon. Friend is absolutely right. Having spent valuable weeks of my life in Standing Committee establishing the National Care Standards Commission, I was dismayed to see that the Government are ripping up that legislation, which is only a few years old, in order to introduce yet more different tiers and types of bureaucracy.

Mr. Edward Davey (Kingston and Surbiton) (LD): The hon. Gentleman has confirmed that the Conservatives plan to cut local government expenditure by £2.5 billion. If he is trying to claim that those cuts will be achieved through reduced waste and bureaucracy, when will he identify that waste and bureaucracy? Will it be before the election?

Mr. Hammond: First, the hon. Gentleman needs to listen more carefully. I was careful to re-emphasise that my right hon. Friend the shadow Chancellor said that he will freeze spending on other departmental totals in aggregate. I realise that Labour Members do not find it convenient to acknowledge that. Nothing has been said about local government grant spending. Where the savings will be made to achieve that depends to a large extent on the work that the James review is undertaking on the scope for savings on waste and bureaucracy in government. The Government's parallel review is also examining that.

Roger Casale (Wimbledon) (Lab): Will the hon. Gentleman give way?

Mr. Hammond: I must make a little progress but I shall come back to the hon. Gentleman.

Central Government are responsible for many of the cost pressures on local government. Employers' national insurance increases have added £280 million a year to the pay bill. Labour's pension tax has hit local authority pension funds by an annual figure, which is now close to £250 million. The need to make good the hit on those funds has compounded the pressure on local authorities, which are already facing additional
 
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contributions as a result of the previous revaluation, and will probably be confronted with even higher contributions through the next revaluation.

Mr. John Redwood (Wokingham) (Con): Has my hon. Friend noticed that Liberal Democrat councils are the worst offenders, shoving up council tax much faster even than Labour, let alone prudent Conservative councils? Is it not a bit rich that they now want a rip-off local income tax—a Liberal Democrat hand in your pocket—to pay for their spendthrift ways? Will he condemn that and say just how much it will cost us?

Mr. Hammond: My right hon. Friend is right. I condemn it absolutely and have already said that the Liberal Democrat local income tax proposal would impose a tax burden of an extra £693 a year on the average working family.

Mr. Nigel Evans (Ribble Valley) (Con): Will my hon. Friend give way?

Mr. Hammond: I must make a little more progress.

Public sector pay settlements have run significantly ahead of RPI and thus represent a pressure over and above that included in the RPI figure. The most graphic example is last year's teachers' pay settlement at 2.9 per cent., leaving employers with a £60 million unfunded shortfall over and above the spending for which the Government had budgeted. Local authorities also have to face the cost of the pay evaluation exercise and work force reform in schools.

Let me run through the list of cost pressures that local government faces in delivering existing services. Losses due to the changes in the system of rent allowances and housing benefits, although capped, continue to represent a significant hit on some shire district councils. At every level, local government faces a wave of litigation costs. The Commission for Architecture and the Built Environment has calculated that local authorities face bogus or excessive claims of £117 million per annum above the cost of legitimate claims. Before someone asks, I have no idea why the Commission for Architecture and the Built Environment is putting the figures together.

Manchester's litigation budget is bigger than that for repairing broken paving slabs—the cause of many claims. Bradford city council has had to set aside £5 million for the potential cost of meeting a retrospective claim for equal pay, which is being brought on a no win, no fee basis. Doubtless other local authorities will be watching that case with some trepidation.

The Home Secretary has bailed out the Criminal Records Bureau, which has already piled costs on to local authorities through its spectacular inefficiency, with a massive 142 per cent. increase in fees. That is an additional burden of £15 million on local government. Personal social services costs are escalating out of control. Care of the elderly and looked-after children are both demand-led services, the demand for which is soaring, and which central Government consistently underestimate in setting notional budgets.

Unit costs are spiralling. We warned the Government that the Care Standards Act 2000 would have a disastrous effect on the availability of care places and
 
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their cost unless funding were increased significantly. It has devastated the sector. Rising staff costs, soaring property values and the imposition of new standards and inspection regimes have caused many care home operators to exit the market, squeezing supply and leading to rising costs for local authority purchases.

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