Examination of Witnesses (Questions 440-459)
MR PHIL
SHAKESHAFT, MR
TIM JAMES
AND MR
ANDREW SUGDEN
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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