Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 440-459)


18 MAY 2004

  Q440 Mr O'Brien: Is that not what the Regional Development Agency is there for, to improve the—

  Mr Shakeshaft: That is exactly what we are there for, Mr O'Brien. We start from a very low base and the biggest single determinant of new business stocks is the business stock, so starting a new business in the North East is more difficult than it is anywhere else because of the low levels of business and low competitive environment. In addition to that, on the other side of the coin, one of the main problems of the regional economy is the low participation rates. In employment, of a working population of potentially 1.1 million, 25% is outside of the participation rate and equates to about 240,000 people.

  Q441 Mr O'Brien: Do the Chamber find that?

  Mr Sugden: In most parts, yes. We see, amongst our membership, a lower level of companies in the North East of England than you would expect to see with comparable Chambers in other parts of the country, and we do know that there are a number of challenges that our members face, certainly issues around infrastructure and the remoteness of the North East of England and its connectivity to some more prosperous markets. Similarly there are emerging issues, which are becoming more apparent as the North East becomes more economically confident, around skills and skills development, which are frequently a real challenge for many of our members.

  Q442 Mr O'Brien: Are there particular reasons why the North East is worse than some of the others? I know you have referred to skills and some of the earlier problems that you had to face but the North East has the same opportunities as many other regions.

  Mr James: We have a long tradition of larger industries. Over the last 20 years we have made significant changes. The North East economy is growing. Our start-up rates are lower than we would like. They are half the national average. There are growing new sectors, like, for example, the conference business and tourism, which are growing very well.

  Q443 Mr O'Brien: My first question was: Does the system of local government finance and organisation have any impact upon the development? Could I put to you now: Does the current system of local government finance or local authorities back from allocating resources for economic development in the region? If it does, what can be done to change that situation?

  Mr James: In the North East at the moment there is a big debate with regard to business support and the number of players in business support. Amongst those are local authorities. It is more of a question to us in the North East who would be most appropriate to carry out that work, and that debate goes on at the moment. There is a review of business support. Whether local authorities are best to do that, they are best in many respects with regard to industrial property, etcetera, because they can make things happen, but in terms of other issues there are perhaps other people better placed to do the work.

  Q444 Mr O'Brien: The Regional Development Agency allocates resources to local government regions to help develop the urban regeneration which in turn would bring forward private finance to generate jobs and job opportunities. What is happening in the North East with that? What is the return on the investment?

  Mr Shakeshaft: The return on investment, in broad terms, I would go back to your earlier question about enterprise development. The rates of new company starts in recent times have risen. From a very low point five years ago, when the agency was set up, there is a turnaround in a number of indicators in industrial development terms, but some of the problems remain intractable, largely due to a lack of a long-term entrepreneurial culture.

  Mr James: There is massive investment in the North East, which has been inspired by significant PFIs in the fire services with local schools, which is acting really as a generator of jobs in the constructions industry. My colleagues alluded to the skill problems which are going to come from that, but that is done. Local authorities are the people actually inspiring the work. There is other work going on like the Sage Gateshead, which has been inspired by local authorities' leadership, and that is where they play a crucial role: in getting capital projects off the ground.

  Q445 Mr O'Brien: What is the relationship between your organisations and the local authorities?

  Mr James: Our relationship, as the Chamber of Commerce, is frank, honest, open and a policy of constructive engagement.

  Mr Shakeshaft: Ours is robust and manifold, but largely through the single-pot resources, so roughly 75% of the headroom in finances at the moment goes to local partnerships which are largely represented by the local authorities.

  Q446 Mr O'Brien: At the present time, the Government is looking at the balance of funding for local authorities, the gearing system. Do you consider that the relationship with your organisations and local authorities would be greater if they had greater control over their spending levels; that is if the raising of the money by local authorities to spend on economic regeneration, would that be a better relationship with your organisation?

  Mr James: Frankly, no. I can remember before, when local rates were localised and it brought a great deal of acrimony. Businesses now have had a substantial period of time with the national non-domestic rate. It has enabled jobs and growth to happen in the North East. For a number of years after the nationalisation of the business rate, Newcastle struggled actually to come to terms and put right the damage that occurred before, with businesses moving to other areas where the business rates were lower. So I think the national rate system is robust: it is not broken; we should not fix it. The equalisation seems to work very well and I think that is a very robust basis on which to continue.

  Q447 Mr O'Brien: It is broken because it is not working in the North East. For almost a decade now this system of national non-domestic rate being applied, the North East is still suffering with development, as you have told us, and regeneration. So it is not working, is it?

  Mr James: I think that North East economy is growing. It is a tender plant. We need to engage in new business disciplines in which we have not engaged before. We need new sets of skills. Some of our jobs are vulnerable to overseas outsourcing. Some of the jobs we have are as competitive as any other jobs. Our customers want more for less. We need a stable environment in which to create jobs and wealth and the national non-domestic rate gives companies the certainty to plan for the future and enables them to compete in the market place.

  Q448 Sir Paul Beresford: In the private sector, survival dictates, to some degree at least, that you become efficient. It does not really apply to local authorities, does it? I am opening the door. Do you think your local authorities could cut their taxation if they got their act together better?

  Mr James: If there was a closer relationship between council tax and the national inflation rate (RPA) I think there would be a much better relationship all round.

  Q449 Sir Paul Beresford: So they could cut their costs and produce the same.

  Mr James: I think there may be scope for cuts.

  Q450 Mr O'Brien: On that point, before a local authority levels any tax there is consultation in the Chamber on that issue. Have you raised this issue with the local authorities?

  Mr James: We raise it every year.

  Q451 Mr O'Brien: What is their response?

  Mr James: The response is quite understandable. Quite frankly, we are dealing with a local council tax but there are so many ring-fences and passports and other constraints that local authorities now really have responsibility for very little of their budget and all the responsibility for raising the extra revenues that are required. In some cases, passports for education require an authority to passport more than they actually get in national government grant. As a Chamber we would like to see an end to that and a more fair system where local authorities were not so constrained because in being constrained the process that is imposed on them by government is actually part of the problem.

  Q452 Mr O'Brien: Are your members prepared to continue to develop the skills that you are requiring?

  Mr James: We are prepared to work with local government to improve skills at any time.

  Q453 Mr O'Brien: Are there schemes being run by the businesses or the enterprises in the North East to develop skills?

  Mr Sugden: Absolutely. Most businesses invest a good deal of their turnover and profit in terms of developing their workforce and additional skills. We are hearing from our business members that they value the stability that the current business rate system brings, but they are not blind to the fact that there are additional expectations placed upon local government without a contributing increase in resources. That is of concern, but, at the same time, the value they place upon the current national scheme in terms of an ability to plan and a positive relationship with local government, because it is not one that is soured at the funding round every 12 months, is one that is really quite highly prized.

  Mr Shakeshaft: Could I point to a more fundamental problem in terms of local authority financing on the North East of England. That is for the past 10 years at least, and I think longer, we have been haemorrhaging population from the region in net terms to the rest of the economy. The result of that is that a large proportion of people who are eligible to be in the workforce remain outside it for all sorts of reasons, incapacity benefit and a number of other things. What that has done is create a much greater pressure on local authority financing than in providing services particularly in relation to education and social services, and what that has meant in turn is that any attempt to raise additional revenue through rates requires much higher levels of rate increase, so that whatever system comes about for local authority finance has to take into account somewhere that we are starting from a much lower base in the north east than almost anywhere else in the country. That is not special pleading; it is not to make the case that we cannot solve our own problems, but the recognition that we are low in terms of company base and therefore opportunities for employment and that we have a large proportion of inactive people and generally lower educational standards means that we have a lot more catching up to do.

  Q454 Christine Russell: Can I return you to the fairness agenda? Do you accept that since 1990 businesses have got off very lightly compared to domestic taxpayers? In county Durham over the last three years there has been a 30% increase in council tax, but what your members have contributed has been pegged to inflation. Is that really fair?

  Mr James: Yes, I think it is, because that environment has enabled our businesses in the north east to create more jobs and wealth to enable others to pay council tax. I think it is perfectly fair.

  Q455 Christine Russell: Do you think the levels of business rates as opposed to council tax rates are that important?

  Mr James: Yes, I do, especially for smaller companies where it makes up a larger proportion of their overall costs.

  Q456 Christine Russell: But what if the business rates were relocalised, if you like, but any increase in them was pegged to the increase in council tax? In other words, local authorities could not fleece businesses more than their local residents? There was a linkage between increases in council tax and increases in business factors.

  Mr Sugden: There are a number of reasons why the current system is attractive to businesses. It is not simply that it is pegged to inflation and council tax is not; it is a national scheme. It enables businesses, both local and national, to plan their investment and their cost base over a five year period. It is fair in the sense of being between authorities. There is not a competitive element between localities which, depending on how prosperous the economy is, can quite easily destabilise the cost base and the abilities of some businesses depending on where they are located.

  Q457 Christine Russell: What about regional variations? What about if there was an acceptance that you have more of a struggle in the north east than perhaps the south east?

  Mr James: We benefit from equalisation, which is a national non domestic rate pool. I think the north east, as people in this area will tell you, benefit greatly from busier areas elsewhere, and that has enabled us to have a very stable environment for business which has allowed the north east business stock to grow, albeit at a slower rate than elsewhere.

  Q458 Christine Russell: What about the arguments put up by those in favour of relocalising the business rates that say, "Ah, well, if they were relocalised, the local authority would be more accountable to local businesses". How do you answer that one?

  Mr James: I remember the situation before business rates were made national, and I do not think there was any consultation. There can be no taxation without representation and clearly, when you have that situation, all you end up with is acrimony, and local authorities and businesses not working together.

  Q459 Christine Russell: And was this previous existence in the north east too?

  Mr James: It was in the north east.

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