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
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
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.