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

Examination of Witnesses (Questions 651-659)


23 JUNE 2004

  Q651 Chairman: May I welcome you to the final session of our inquiry into local government revenue and ask you to identify yourself for the record?

John Healey: I am John Healey. I am the Economic Secretary to the Treasury.

  Q652 Chairman: Do you want to say anything by way of introduction, or are you happy to go straight to questions?

  John Healey: May I just make three or four brief points to set the context? First, to say that from the Treasury's point of view we very much welcome the Committee's inquiry into the balance of funding and revenue raising between central and local government. In many ways you are in good company. You are well aware of the balance of funding review which the government set up, a review group for government not by government, but really with an unprecedented breadth and depth of expertise in it. May I say that we look forward to the contribution and the conclusions of that review, just as we do of this Committee's report? The first thing to say from the Treasury point of view is this. When considering taxation and spending issues, whether those are central government or local government, the Treasury's first and foremost priority is the maintenance of a strong and stable economy. That underpins absolutely every other decision we take. That is why we set out the principles and objectives for fiscal policy so clearly in the code and why we have set the two tough fiscal rules to guide the spending and investment decisions we made right across government. The second thing to say is that whilst our first priority is safeguarding that economic stability, it is entirely consistent to see a greater devolution and decentralisation and to see that as part and parcel of reforming public services. Not only is it entirely consistent, in fact it is critical, because if we are going to see more effective and responsive public services, and indeed in parts of economic policy management, it is important those decisions are increasingly taken at a regional and local level. Next to say, perhaps rather uncharacteristically or certainly counter to the general perception of the Treasury, since 1997 the Treasury has played not just an important, but in many ways a driving role, in many of the most significant decentralisations which we have seen over the last seven years. We were instrumental not just in helping to set up the regional development agencies, but increasing their budgets and giving them full flexibility and a single funding pot. We have been heavily involved, particularly with the Office of the Deputy Prime Minister, in developing greater freedoms and flexibilities for local authorities and the introduction of the prudential borrowing regime is really a radical example of just such an approach. Next, we play a part, as the rest of government does, in the development of our second generation of local public service agreements. Finally, I am a member of the balance of funding review group. I suppose the one thing which the work over the recent months has done is to reinforce the view I started with, first of all that this is a huge and highly complex area, which both they and you are inquiring into, but, secondly, this is a hugely important area as well.

  Q653 Mr Clelland: It is a highly complex area. One of the simplistic arguments is how much money should be raised centrally by the Treasury and how much money should be raised by local authorities. How far is the Treasury willing to go in allowing local authorities to raise their own finances and how much more power would you give local authorities to raise and set their own taxes?

  John Healey: The short answer to that is that there is no fixed figure, there is no fixed principle, beyond the first priority to safeguard our ability to manage the economy and public finances soundly. As I said in my opening remarks, some of the arguments for seeing greater decentralisation and devolution can be entirely consistent with that. As long as they are consistent with that, then the Treasury in principle is unlikely to have a problem.

  Q654 Mr Clelland: You say that the Treasury obviously has to control national expenditure, but you also mentioned in your opening statement the importance of local decision-making. At the moment the gearing, the balance of funding is very heavily weighted towards the centre. We have heard calls for the balance either to be shifted to 50:50 or 75:25 in favour of local authorities. If it were to move to those kinds of figures, it would mean local authorities raising anything from £40 billion to £60 billion a year. Would that be acceptable as part of the Treasury's wider fiscal policy?

  John Healey: Those arguments, unsurprisingly, have been put to the balance of funding review. Two things have been clear there. The idea that you set a fixed target figure is not a sensible approach. Secondly, in fact the arguments very rapidly move beyond what many start out with as a principled argument, that as a matter of theology or principle we should be shifting to a greater percentage of revenue raised locally, to one of asking how any possible mechanism for achieving a shift in the balance of funding would actually work in practice. It is only when you start to look at how potential measures and mechanisms may work in practice, that you are able to make a judgment then about whether such moves are feasible and desirable.

  Q655 Mr Clelland: Is it felt to be hugely revolutionary for the Treasury to move from currently, putting it simply, 95% taxes raised centrally and only 5% locally, to a 50:50 ratio which would only mean moving that to 90% nationally and 10% locally? It is not a massive shift, is it?

  John Healey: I started by saying that one thing my work on the review group had confirmed was quite how complex this area is. The review group set some useful criteria to guide its work. At the top of its set of criteria, in order to assess the pros and cons of any particular suggestion was, of course, because that was its remit, to look at the degree to which it shifted the balance of funding and revenue raising between local and national government. It also, quite rightly, set a number of other important principles: the degree to which it had an impact and increased local accountability, the degree to which it was progressive and fair, the degree to which it was buoyant, in other words that the revenues rose in line with the general expansion of the economy, the level to which it was predictable, which is an important matter to local government and also the degree to which it was collectable and easy to administer. Once you start getting into a consideration of those important principles, alongside your single starting point of the balance of funding and revenue-raising, then you start to get into some quite complex trade-offs. What we found on the review group was that the work which has been done by that group was a very important start; it has been useful. However, in many of the most contentious areas what is most clear is that there is a lot more work to be done in order to be able to assess whether or not, let alone how, reform could be brought into the area.

  Q656 Sir Paul Beresford: What proportion of public expenditure is local government expenditure and how would you feel if there were a shift of that, changing responsibilities, an increase? To what degree would you allow an increase?

  John Healey: If you look at the figures for 1997, you will see that the proportion of central government support, certainly the amount of central government support to local authorities, has gone up very considerably.

  Q657 Sir Paul Beresford: I was not saying that.

  John Healey: The point is that there has been a real terms increase of 30% since 1997 and that is a reflection of the important role we see that local authorities have in some of the very important services they have to carry out.

  Q658 Sir Paul Beresford: What proportion is local government expenditure of public expenditure and how much freedom would you allow for that to move upwards as a proportion?

  John Healey: The current outturns from the previous year, projects for future years, are all set out in the budget documentation each year. The principle is less about what would be a numerical proportion. The principal concern the Treasury would have would be the degree to which the overall balance of public expenditure, made up of central and local, did not breach either the fiscal rules we set or put in jeopardy our ability to manage the economy. That is consistently the yardstick we would come back to, to apply to any potential proposals which were put to us.

  Q659 Sir Paul Beresford: So ultimately a lid has to be put on that from your point of view.

  John Healey: Ultimately there has to be some control of public spending, central and local and if we do not have some control of public spending, then we run severe risks with the economy, we run the risk of seeing our public finances run out of control. We have learned from bitter experience in the past the wider impact that can have and the one thing you will see and hear from the Chancellor is that above all he will not put in jeopardy the stability and the steady growth we have managed to establish in the economy over the last seven years.

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