Examination of Witnesses (Questions 660-679)
JOHN HEALEY
MP
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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