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

Examination of Witnesses (Questions 760-779)


23 JUNE 2004

  Q760 Mr O'Brien: There is a lot of anxiety there at the present time. One of the reasons is that the idea in the first instance was that the period between revaluations should be every five years and it has become every ten years. Is the process to be overhauled so that we do not face this situation in the future?

  Mr Raynsford: I was not part of the government which introduced the council tax, as you will understand, so I was not party to the discussions. I see no evidence that the idea was that there would be revaluation every five years; certainly the legislation did not provide for it. There was provision for revaluation of business rates every five years as part of the normal process, but we found the situation of a council tax which had been based on 1991 values with no timetable for revaluation. Our conclusion was that it was probably appropriate to have a ten-yearly cycle of revaluations. It is a much bigger exercise than the business rate revaluation and in order to ensure that the Valuation Office can cope with the work, we felt that a ten-year cycle was probably appropriate and phasing it so that it did not coincide with the business rate revaluation. That is what we have decided and that is what we have put in place. I accept that the relatively long period of time, 16 years, which will have elapsed between the first valuation and the revaluation is the cause of some anxiety. Can I say that if people are worried that because of a large increase in their property value since 1991 they are likely to be faced with a large increase in council tax, the crucial message which we can all help to get across to our constituents at the present time is that there is no inherent consequence that will lead to increases in people's council tax liability if their property has increased in value by the same average as applies across the country as a whole. It is only where the property increases are significantly higher than the national average that there would be a potential liability for a higher level of council tax. Conversely, if property values have gone up by less than the national average, people in bands other than Band A might well be able to look forward to a reduction. Clearing some of the mythology, that people believe that because property values have increased they are all going to face increases in council tax, is quite an important challenge and that is something all of us can help do.

  Q761 Chris Mole: So there will be a reduced increase rather than a reduction.

  Mr Raynsford: It depends on the circumstances. If people are living in properties which have increased by less than the average increase in values between 1991 and the point of revaluation, then they could well qualify for a reduced banding and therefore a reduction in their council tax.

  Q762 Mr O'Brien: Are you advising them that what your department is looking at is a ten-year cycle of revaluations.

  Mr Raynsford: Yes.

  Q763 Mr O'Brien: Concerns which have been expressed have been because there have been reports that the uplift to the tax base could be about 15%. Obviously people are concerned when they are facing a 15% increase in the tax base and it depends how the taxes are levied. Finally, on the balance of funding review, will the decisions taken by your department on balance of funding be available in time to ensure that any recommendations are included in the revaluation programme?

  Mr Raynsford: May I say firstly on the balance of funding review itself that this is a report to government and it will need to be considered by government? It is not going to make specific recommendations, it will set out options and undoubtedly there will be a wish to ensure that any appropriate conclusions should be drawn from that in time to influence the process of the revaluation which is due to begin next year. As far as the question you asked on the increase in the tax base is concerned, the purpose of revaluation is simply to revalue individual properties, to create a more up-to-date basis for the council tax. The actual levels of council tax will be determined by the bandings. As I have already indicated, we have powers to change bandings and that was one of the issues which was raised in the balance of funding review. I should make clear that the overall impact will be neutral. There is no intention that this should increase the overall level of funding which local authorities derive from the council tax. What it will do is provide a more up-to-date basis for the relative value attaching to individual properties and therefore ensure a more up-to-date banding framework. As you will appreciate, if there were to be changes to the banding, that would affect the outcomes and clearly it would be inappropriate to say anything more before decisions have been taken.

  Q764 Mr O'Brien: I come back to my first question. What are you doing to reassure people, the public, that the effects of revaluation will be as you have just pointed out now, negative more than vast increases.

  Mr Raynsford: No, I did not say the effects will be negative. I said the effects should be neutral overall because it is not our intention that this should raise additional revenues for local authorities. For individuals the impact on their personal liability for council tax will vary depending on whether the value of their property has increased or decreased in relation to the average across the country as a whole. That is something we will not know until revaluation has been carried out and it would be premature to try to convey messages to individuals about the likely impact on them at this stage. What we can do, as I suggested, is to try to ensure that people are made aware of the fact that because property values generally have gone up by a very significant amount since 1991, this does not lead on, as some people assumed that it will, to much larger council tax demands, because the overall increase, the average increase across the country as a whole, will simply mean that the valuations on average are raised by that amount. A property which was in Band D in 1991 and has increased in value by the average amount over the intervening period will remain in Band D. So there will be no necessary consequence at all, assuming the local authority does not increase its council tax demands.

  Q765 Chris Mole: If that leads to regional redistribution of the tax base will you change equalisation to compensate for that?

  Mr Raynsford: The whole issue of regional banding was introduced by the New Policy Institute on the premise that there might be quite marked variations between regions in the impact of changes in values since 1991. I did say earlier in my evidence that during the first decade, post 1991, there was a disproportionate increase in the southern parts of the country compared with the north, but more recently that has not been the case and we do have to wait until we are nearer to the point of valuation before a more considered judgment can be reached as to what the impact will be on different regions.

  Q766 Mr Sanders: Is not the problem here, and you alluded to it earlier, the council tax system, that it is not related to ability to pay? If you are in an area where you are disadvantaged by a council tax system which is related to an area's tax base and you have enjoyed—or some may say suffered—from above average house price rises since 1991 and you have low incomes, then this revaluation is just going to pile on the agony in those areas which at the moment have the people with the most difficulty actually paying the council tax? I just think that this revaluation exercise, when it becomes known, will turn the protests into mega-protests.

  Mr Raynsford: Only if people are misinformed about the implications. As I have made clear already, if someone is living in a property which has increased in value by no more than the average across the country in the intervening period since 1991—

  Q767 Mr Sanders: I am talking about people who at the moment are in part of the country where property prices are well above the national average, incomes are well below the national average, that impacts on the amount of grant which the Council gets because government assumes it has a tax base. That will simply get worse under revaluation for that area.

  Mr Raynsford: No, no, because if those properties were already above the average for the country as a whole in 1991, there is no reason at all for any change. It is the relativities between 1991 and the date of revaluation which is the critical issue, not whether property values are above or below the national average at the present time.

  Q768 Chairman: Surely the problem is going to be that people who bought a house in the 1960s and are now pensioners are going to see the property theoretically being worth a lot more, therefore their area's valuations are going to go up, so they are going to have considerably increased tax bills as a result of that.

  Mr Raynsford: I do not follow that. If the property was bought in the 1960s and if it was above the national average value in 1991 and it remains above the national average value by the same proportion in 2005, there will be no change.

  Q769 Mr Sanders: There are some parts of the country, particularly the South West, which were above the national average in 1991, but even further above the national average now. So they are clearly going to jump up a band.

  Mr Raynsford: That is precisely why the New Policy Institute suggested that the issue of regional variations in banding should be considered as part of the approach to revaluation because that would be a mechanism to offset such an effect.

  Q770 Mr Sanders: Regional variations across an entire region will completely ignore property hot spots in certain parts of that region and it is the property hot spots where you see the biggest protests against the council tax at the moment.

  Mr Raynsford: I am not sure what the logic of that is.

  Q771 Mr Sanders: Because the property hot spots which have the higher property prices are in areas which have lower incomes and usually fixed incomes for pensioners.

  Mr Raynsford: If you are saying that in areas which were the property hot spots in 1991 are where there are particular protests, then there would be logic in your question, but the fact that there may be very high property values currently in those areas will not be a necessary reason for any particular problems at the present time because the council tax is based on 1991 values, not 2004 values.

  Q772 Mr Sanders: Has the government undertaken or commissioned any work into the technical issues which would have to be determined before the non-domestic rate could be returned to local control—such as, for example, how the grant equalisation arrangement might operate? If you have done the work, what were the main findings?

  Mr Raynsford: The balance of funding review, as I have stressed, is not a government review, it is a review being carried out with the participation of government, with the participation of local government, with the participation of many others and it is making a series of option appraisals which will then be spelled out in its report. It will then be for government to decide how to respond and there will unquestionably be need for further technical work to be done on a range of issues which are highlighted by the review. I do not want in any way to hide from that. It would be wrong to get the impression that government has been beavering away looking at particular options as part of the balance of funding review. It has not.

  Q773 Mr Sanders: Has it considered how it might allay any concerns of the business community were non-domestic rates to be given back to local control?

  Mr Raynsford: It is a known fact that business has expressed concerns and apprehension about the implications of relocalisation of business rates and clearly one of the issues which the Local Government Association highlighted in its evidence was the need for reassurance and issues have been discussed around ways in which that reassurance might be given. I do not want to say more at the moment, because, as I have stressed, the balance of funding review itself is due to report within the next month, I hope, and all will be clear at that point.

  Q774 Mr Sanders: There has been research which has indicated that the actual business rate is not a key factor in where a business would locate. Therefore, it is perhaps a concern which is unjustified on the part of the business community. Does that chime with any view that you may have about the return of business rates to local control?

  Mr Raynsford: I am not an expert on the factors which lead businesses to choose to locate in a particular area, but I should be astonished if the level of the business rate itself was the main determinant. It nevertheless could well be a factor that many businesses would take into account and also it could be a factor in businesses deciding whether they wish to remain in an area or might choose to relocate. I certainly would not dismiss it as an issue. It is an issue, but we want to keep it in proportion.

  Q775 Mr Betts: Do you think it is reasonable that the amount of resources businesses contribute towards local authority expenditure should fall as a percentage of our total expenditure year on year?

  Mr Raynsford: You in this Committee and we in the review have noted the relative movement in terms of the contribution towards local government funding of the business community on the one side, where the proportion of local authority funding met by business has declined over the last 13 years and the proportion met by the domestic council tax payer has increased. That was a significant finding. You can draw your own conclusions as to whether we will comment on that in our report.

  Q776 Chris Mole: Last month the Prime Minister told the NAHT that after this year's spending review school budgets will cover three years and be based on the school rather than the financial year. What effect do you think this will have on the rest of the local government finance system?

  Mr Raynsford: This was a general wish and it is not limited either to schools or to local government, to try to move towards greater financial certainty. The institution of the spending review programme with three-year indications of funding is part of that process. Schools are interested in having greater certainty for a few years ahead and my colleagues in DfES, with whom we have worked very closely in the course of the last year to try to ensure that we squared the circle of how you gave reassurance to schools about their future funding while at the same time not imposing unreasonable straitjackets on local authorities, are keen to pursue this and we are in very constructive discussions with them.

  Q777 Chris Mole: So you think that the predictability and stability of three-year budgets across local government would be helpful.

  Mr Raynsford: It would be helpful. I do not want to minimise the difficulties, because there are problems, particularly in areas where there are fluctuations in either pupil numbers or in other demographic trends which impact on the cost of delivering local authority service. If you lock people in to particular levels of funding for a three-year period, without the scope to vary to take account of significant rises in cost pressures, driven by demographics which are entirely outside the authority's or the school's control, you could be creating a different problem. There are issues there which need to be addressed, but the concept and the principle of a greater degree of certainty, so that people can plan ahead, whether it is at the school level or the local authority level, must be right.

  Q778 Chris Mole: Do you think it would have felt more like stability over the last three years if we had not had the formula funding distribution changes?

  Mr Raynsford: Undoubtedly, but nevertheless there are many in local government who felt that the formula funding review was long overdue and the member sitting immediately to your left was one of the foremost advocates for that review and government had to take a view on this. We felt the right response was to conduct this review of the grant distribution formula and then to say, having taken the decision, that there would be a three-year freeze, so that authorities would have a period of time with stability and certainty.

  Q779 Mr O'Brien: In the basket of suggestions for additional funding for local services local income tax has been one which has been analysed quite often by different organisations; a simplified local income tax that would be set only by single and upper tier authorities. Does the government have any objections in principle to such a system where an individual's local income tax payments are netted off the national income tax payments? Has this been discussed with your colleagues in Treasury?

  Mr Raynsford: I cannot comment on that, because, as I have already indicated, the balance of funding review is not a government review, it is a report which will go to government and government will itself need then to form a view. It is certainly the case that the evidence given to the review by CIPFA pointed quite forcefully to the disadvantage of a local income tax allowing wide variations across a large number of authorities in the rates charged, because there would be consequent administrative complications and pointed quite forcefully in favour of a relatively restricted scope for variation, limited both in the number of different levels of tax which might apply and limited in terms of the number of authorities which might be able to set that. That is one of the factors which obviously have to be taken into account in consideration of this option.

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