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

Examination of Witnesses (Questions 660-679)


23 JUNE 2004

  Q660 Mr Betts: I suppose we are all initially bound to be a little sceptical of any Treasury minister who says he is not actually that concerned about giving up the right to determine an extra amount of taxation and he would be quite happy to see taxation locally double from its present level and your officials before said there were no insuperable problems to that as far as the Treasury were concerned. I think what you are really saying to us is that while you are quite happy in principle for local authorities to raise double the amount they raise now in terms of local taxation, you would then want to see control by some other mechanism, maybe the increased use of capping of expenditure or maybe some particular restrictions on how far local authorities can increase their taxation each year. Those sorts of controls are brought in, so in the end the Treasury wants to control local authorities by other means.

  John Healey: First of all, in terms of the Treasury's credentials here, if you look at what we have introduced as the potential borrowing regime, this overturns what is almost a century of centralised control, where local government, as you well know, had to go to central government to ask permission to borrow for capital investment. That is not the case now. It is now carried out at the initiative of local government in reference to a professional code, the code which governs this.

  Q661 Sir Paul Beresford: Except that the revenue side of it is controlled.

  John Healey: No, because it is local authorities which are in the position to judge whether they can prudently borrow against a number, not just the central government grant, of potential, reliable funding streams. It is all set out in the code. It gives the local authorities first of all a good deal more freedom to borrow; secondly, the discretion to make those decisions locally. In the end, however—and this perhaps links to your point, Mr Betts—because of our ultimate concern and responsibility for the management of public finances and the economy, we do have the power to set a limit on the overall borrowing by local authorities. Now, we have not chosen to exercise that, we have not judged that we needed to, but it is right that it is there in reserve.

  Q662 Mr Betts: You have not really answered the question. I asked about revenue controls. If you are going to give up the ability to control a certain amount of taxation because the ability to raise extra money gets passed from the centre to local authorities, will the Treasury then want to see controls over that in terms of limiting the right of local authorities to raise their tax levels in any one year, or will they want to see increased use of expenditure controls, capping, to make sure they have the means to control the overall resources local authorities have available and their expenditure for the sake of the national economic perspective?

  John Healey: Our principal concern would be to ensure that any alteration in the balance of funding sources did not and could not put in jeopardy our ability to manage the economy properly. This would have to be a fact we considered in the course of analysing any potential option.

  Q663 Mr Betts: It is how you are going to do that which is of interest to the Committee. How are you going to do that?

  John Healey: How we would do it, if it were necessary, would be designed to suit the purposes of the particular change which was brought in. I have explained the sort of mechanism we have there in the new borrowing regime and as part of that, perhaps this gives you a specific example of how you link local to the national fiscal rules, in order to help ensure we meet our golden rule, local authorities are only allowed to borrow, just like central government, for capital spending, under the new prudential borrowing regime.

  Q664 Mr Betts: We are talking about revenue here.

  John Healey: I am trying to give you a precise example. Rather than talk in hypotheticals, which you are encouraging me to do here, what I am trying to do is give you an example of something which would be put in place where we have given the greater degree of, yes, constrained discretion but nevertheless discretion and devolved decision-making to local authorities. However, in order to safeguard the ability to control public finances and fiscal position we have the ability either to set rules which help safeguard that, or a default power if we choose to use it. On the revenue side, were there a question of any reform potentially jeopardising the same concern for managing the public finances and the economy effectively, then one of the things we would have to consider in considering any option for change would be how we ensure that similar safeguards in that area might be brought in as part of the reform. In a sense it is self-evident.

  Q665 Chris Mole: I think it would be helpful if I were to bring to the Committee's attention the fact that I have a non-pecuniary interest as a Vice-President of the Local Government Association. The LGA has set out a wide range of new local taxes, which you will be aware of as a member of the balance of funding review group, to supplement local authority income. What would be the Treasury's policy on taking into account what local authorities might additionally raise when calculating the volume of central government grant? Would every additional pound raised by local government reduce central government grant by a pound?

  John Healey: At this stage we are being entirely speculative, but in general terms rather than in precise terms, if local government had a substantial source of new revenue, then it would need to be taken account of in spending reviews and local authorities would probably need less central grant from national government as a result of the overall balance of funding that it was drawing upon.

  Q666 Chris Mole: How much discretion is the Treasury prepared to allow local authorities to raise funds which will provide additional spending power? Is there a level at which the volume of taxes raised locally begins to affect national concern? If there is, what is it?

  John Healey: There are two things here. The first is an important general point. There is no automatic assumption in Treasury that the current balance of funding and revenue raising is correct. That is why we are playing a part in the balance of funding review. The second is that having set up that review, it is sensible for government to wait for its conclusions and then consider very carefully the sort of assessment that the expertise on that group has been able to make and consider at that point whether any of the options which have been analysed by that group may hold out the possibility for future reform, which it may therefore be sensible to consider further.

  Q667 Chris Mole: You are obviously aware that that basket of additional taxes includes things like potential tourist taxes, congestion charges, sales taxes, localisation of the VAT, a whole range of things. Are there any of those which the Treasury would oppose absolutely in principle?

  John Healey: You are right that a range of suggestions was put during the consultation and the balance of funding review. When the balance of funding review group looked at the proposals, one thing was clear, that none of them would make a significant contribution to altering the balance of funding between local and national. That was the first and principal conclusion to be drawn from that range of options; they are all relatively small scale. That means in principle therefore that any case for any of those changes would need to be made in terms of its policy merits and the contribution it could make to other objectives which we might have as a government. It would not, in the context of your inquiry here, or of the balance of funding review group's work, make a significant contribution to any shift there. To that extent, in many ways the balance of funding review group quite early on put them to one side.

  Q668 Chris Mole: Does that imply then that you would not be concerned that any of those proposals would have a particular distorting effect on the national economy?

  John Healey: As Treasury, we would assess any proposals for measures like that on their merits. The likely scale of those sorts of measures would not give us cause for concern in terms of the overall fiscal arithmetic.

  Q669 Chris Mole: So you would be happy for a significant number of local authorities to have a local sales tax or a tourist bed tax.

  John Healey: That is a different question and indeed I am sure the European Commission might have something to say about local authorities having a local sales tax power as well. No, my point here is that none is likely to make any significant contribution to altering the balance of funding, none is likely to have a significant impact on the overall fiscal figures; few of them have any powerful and immediate merits and all have pros and cons which in other policy terms would need to be considered.

  Q670 Sir Paul Beresford: Given your balance of funding review experience, and it must be quite an interesting experience, would 25% raised locally by whatever means be about right? A bit lower, a bit higher? Just give us a guideline.

  John Healey: Twenty-five per cent is really the aggregate figure at present.

  Q671 Sir Paul Beresford: So is that about right?

  John Healey: As this Committee knows better than anyone, it hides a very wide range which is often glossed over and brings with it, its own considerations and issues. Anything from Westminster, Wandsworth, Newham or Tower Hamlets raises only about 10% of what they spend from their council tax base. Chiltern raises 60%. Your 25% figure is a statement of the current situation, as I made clear earlier on.

  Q672 Sir Paul Beresford: So is it about right or a bit low?

  John Healey: That is the figure. We make no automatic assumption that that is the right figure or that it is one we should hold to.

  Q673 Christine Russell: May I move on and ask you about the housing market? Have the Treasury carried out any assessment at all of what the potential impact could be on house prices if the council tax as we know it were abolished?

  John Healey: The short answer is no. If we were to be interested in such a move, then we might consider making such an analysis. As the Chancellor has made clear, he sees a property tax as a fair form of tax as part of the overall tax system and the council tax is the principal form of property tax which we have in this country. We have stamp duty of course, but that is essentially a tax on property transactions and, in terms of scale, very much smaller than council tax.

  Q674 Christine Russell: As the Chancellor thinks a property tax is a good idea and as virtually every other country in Europe has a property tax, if the council tax were abolished, would you then conjure up a new form of property tax, perhaps a variation, an extension of stamp duty for instance?

  John Healey: It is quite difficult to answer a question based on a premise which I do not accept in the first place, but you are right that with the exception of Sweden, every other Western European country has some form of property tax. To move away from it would make us quite exceptional.

  Q675 Christine Russell: Do you have any concerns? We have some evidence that if council tax were to be abolished, that could result in higher house prices, particularly in areas of the country where prices are already going through the roof. Are you aware of that? Do you think the argument that that could be a risk would hold water?

  John Healey: As you probably know, the Barker review did look in theory at the connection between a property tax and house prices and demand and the New Policy Institute also submitted some evidence, particularly in the context of potential council tax revaluation, of the link to house prices and the impact on the housing market. Both those studies are relevant to the general questions which the Committee is considering.

  Q676 Mr O'Brien: Two of the issues which influence local government administration and finance are grants and gearing; they are two of the real problems which have to be faced. Paper 14 for the balance of funding review from CIPFA (the Chartered Institute of Public Finance and Accountancy) suggests that there should be a top-up grant as well as a core grant to help ease the effects of gearing. Has the Treasury any practical objections to the proposals? The proposals seem to benefit all parties, although the level of local authority spending would not be as certain as in the current system. Do the Treasury have any views or objections to the proposals?

  John Healey: If you study the CIPFA paper, and certainly it will be clear when the balance of funding review reports, there are several problems with that approach. The first is that it creates a degree of uncertainty across the piece, in that the amount of additional grants which central government needs to provide would be uncertain because there would be two rounds of grant making: the first round of grant and then the top-up grant which would depend on what budget the local authorities had set. The second is that there would be an incentive within that sort of system for local authorities perhaps to set higher budgets, because of course they would have a reduced responsibility, a reduced amount of the revenue which they would have to raise locally if they set a higher budget. The third concern really plays into the points which Mr Betts made. If one had a system like that, then the only real way for government in the end to exercise the degree of control on the total which I have tried to explain from the start we do have a legitimate interest in, in terms of the Treasury, would be through some form of fairly crude capping of local authorities' budgets. In a sense, we have been there before.

  Q677 Sir Paul Beresford: So you mean that from every point of view having gearing concentrates the minds of those setting the council tax.

  John Healey: No, I am pointing out the problems which are inherent in the particular set of proposals and analyses from CIPFA which Mr O'Brien mentioned. For that reason the funding review group set those proposals to one side and concentrated its attention, after receiving that paper, more on some of the other options which were being analysed.

  Q678 Mr O'Brien: Some members in this room realise or have had the experience that from the 1960s to the 1980s we had a similar system of grants and it worked. It worked better than the system we have at the present time. If it worked then, why are we saying that it will not work now?

  John Healey: You asked me about the CIPFA proposals. I really do not want to repeat myself, but it creates a degree of uncertainty in being able to forecast and plan for big expenditure, that is true at central and local government level. Secondly, it risks creating an incentive for local authorities to build up their budgets, knowing that central government will automatically in some way have to pick up the tab. Thirdly, that suggests a dynamic in which central government would have to consider how you might in extremis control that. The risk is—and this was a view which emerged from the balance of funding group, that one might have to look at some form of crude capping, which we would not be keen to do.

  Q679 Chris Mole: Did GREA not have a negative grant slope in it which was a very strong disincentive to doing just what you have described? Is that not what is in the CIPFA proposal? Does it differ from how GREA worked before 1990?

  John Healey: The way the CIPFA proposals would work would be first of all that all authorities would be allocated their core grant by central government. Secondly, they would then set their budgets taking that into account. Thirdly, there would be a second round of grant giving, where there would be a second top-up allocation of central government funding, to ensure any shortfall between the two, between the first round of core funding from the government and the budget which local authorities wanted to set, would be met equally by any rise in council tax and any increase in central government top-up grant. In many ways the potential flaws of that system are pretty clear.

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