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

Examination of Witnesses (Questions 780-799)


23 JUNE 2004

  Q780 Mr O'Brien: Do you consider then that the matter just referred to there is the reason why you consider the system of local income tax and council tax running side by side would be difficult to operate?

  Mr Raynsford: No, it is rather the opposite. The evidence which was submitted by CIPFA indicated firstly that the complexity of trying to operate a local income tax in which every local authority in the country would be able to set its own rate and there would therefore be an enormous variety in the number of different rates of local income tax, was a significant obstacle. They then suggested that in the event of a local income tax being introduced as a supplement to council tax rather than an alternative to council tax, then there might be merit in exploring a scheme which was much more limited in terms of the number of different levels which might be set and indeed the number of authorities which might set different levels. That was the logic of their analysis and obviously the Committee has looked at and considered that.

  Q781 Mr Betts: In 2001 the government white paper concluded that the balance of control was more important than the balance of funding. Has the government changed its view on that now?

  Mr Raynsford: Certainly in the course of the review we have considered the significance of the balance of funding itself as an issue and also we are very conscious of the issue of the balance of control. People take different views on this and I certainly would not want to argue that one was inherently more important than another. It does vary from authority to authority. If you are an authority where the balance of funding is currently 50:50 between central and local sources because that is the current pattern and there are authorities which are in that position, then the balance of funding may appear to be less important than the balance of control. That may not be the case if you are in an authority where the balance of funding is 1:4 or, in a more extreme case, 1:10. There are authorities where 90% revenue comes from central government and only 10% is raised locally. On mature reflection, after having gone through 15 months of the review and looked at these issues in great detail, I would say that both the balance of funding and the balance of control are important. There is no single overriding view that one is more important than the other.

  Q782 Mr Betts: The Audit Commission in their evidence said that ring-fencing and passporting " . . . do not promote efficient and effective resource allocation at a local level". Do you accept that? While the government have clearly committed themselves to reducing the amount of ring-fencing and figures show a reduction of £750 million in this financial year, nevertheless at the same time there was an increase of £1.2 billion in the amount of education funding which they were asked to passport on to their schools.

  Mr Raynsford: Let us take those two issues in turn. In terms of the Audit Commission's general proposition I do not disagree with the general thrust that we should be seeking to reduce unnecessary ring-fencing, but I could not agree the comment in those bald terms without qualification. As I think I have said in evidence to this Committee before, when you are introducing changed arrangements on highly sensitive services such as supporting people, involving very considerable flows of revenue which are there to help some of the most vulnerable people in our society, if there were no ring-fence at all when that was introduced, real fears were expressed by many of those responsible for those services that this could have a catastrophic consequence on the recipients of the service, if an individual local authority chose not to use the resource for that purpose at all. Therefore we have always said that there may be a case for ring-fencing, particularly as a transitional measure where you are making significant changes and you want to give reassurance that there will be continuity of services of that nature. I would not say that ring-fencing was inherently wrong. It does have the adverse effect the Audit Commission have expressed and we have been seeking, as you rightly highlighted, to reduce it and we have been reasonably successful in getting the trend downwards and we intend to go on. Our objective is to get it below 10% in the next year. On the issue of education funding, there has been a continuing and generally constructive discussion between our department and the Department for Education and Skills about how we balance the two not easily reconciled objectives of ensuring that the money which has been earmarked by parliament for education gets through to the schools, while at the same time not imposing unreasonable restrictions on local authorities. The passporting mechanism has been the mechanism which has been adopted and in the supplementary evidence which we submitted to you, we identified the increased passporting expectation in any individual year as part of the overall ring-fence, because there is an expectation that that money will pass on. As you will understand, there is a need to balance these conflicting pressures to ensure that schools have certainty, a point that Chris Mole was highlighting in earlier discussions about three-year forward planning. They want to have greater certainty; government wants to see schools able to operate with greater certainty. Equally, we want local government to have a greater degree of certainty, but also the discretion to be able to order their finances in a way which is to the benefit of their residents and to allow efficient administration. These are not easy balances to strike. We are working very hard at it. We have a good working relationship with our colleagues in the Department for Education and Skills and there has been huge progress in the last year. The evidence of the settlement in 2004-05, which has resulted in the overwhelming majority of schools' funding going through to schools, is that there is a much more positive atmosphere in schools which feel they are getting the resources they expected. Equally, local government has generally felt a more constructive relationship because there has been an involvement and an understanding of their concerns and their anxieties which they voiced about the 2003-04 settlement.

  Q783 Mr Betts: In talking about the reduction in ring-fencing and the target of less than 10% of revenue funding, that would still be twice the level in 1997. Is it the government's intention to press on and try to get back to that level?

  Mr Raynsford: Our commitment is for the current spending review period which expires in 2005-06, but I have already indicated that it is not our wish to eliminate ring-fencing, because ring-fencing may well have an absolutely crucial role in giving certainty and stability when changes such as the Supporting People programme take place. Equally, it can have a role in kick-starting new initiatives, where getting money to new projects would not otherwise perhaps happen if there were no degree of ring-fencing. I believe ring-fencing does have a role to play. Off the top of my head I would not like to pluck out a figure, but it is right for us to continue to drive down the level of ring-fencing, provided that can be done in a way which is compatible with improving the standards of service. The one other factor you have to bear in mind is that since 1997, there has been a very considerable improvement in a number of local services which have benefited from ring-fenced funding. I think of services such as Sure Start, where huge impacts have been achieved at a local level in terms of services for very vulnerable people in deprived communities and that benefit is something which also has to be borne in mind when we think about the consequences of ring-fenced funding in the years since 1997.

  Q784 Mr Betts: Coming on to other methods of control, one final method which is available to you to control authorities is capping. To what extent has that issue been considered as part of your discussions in the balance of funding review?

  Mr Raynsford: It has not.

  Q785 Mr Betts: In terms of the issue about local authorities having the ability to raise more of their funding at local level, we were speaking earlier to your colleague John Healey from the Treasury about the Treasury's concerns about the overall impact of any increase in taxation or increase in spending at local level on the national economic position. Would there be any view about taking on extra powers of control, perhaps the ability to control the level at which local authorities put their tax up each year, if more of the tax raising powers were shifted to them?

  Mr Raynsford: I should really explain that when the balance of spending review was set up it was made quite clear at the outset that we were not talking about the quantum or the overall level of funding for local government, we were talking about the balance between different sources. Therefore any consideration about what might or might not be a reasonable level of spending by local government as a whole or by individual local authorities was not part of the discussions.

  Q786 Mr Betts: That is not quite what I am trying to get at. If local authorities have the ability to determine their own funding to a greater degree, maybe they keep the council tax and get the business rate, maybe they keep the council tax and get some ability to raise local income tax, then with more of the GDP of the nation being in control of local authorities in terms of their ability to raise tax, does that not lead to a position where government might want to put some further controls and restrictions on local authorities, maybe the ability to cap their tax raising powers as well as capping their budgets?

  Mr Raynsford: That has not been part of the discussion and my understanding is that my colleagues in Treasury do not in principle object to a change in the balance of funding which would increase the proportion of revenue raised locally as against the proportion raised centrally. The view we have taken all the way through is that as well as the general issue about the balance of funding, one does need to look very closely at the individual changes proposed. Certainly some of those could only be introduced with very considerable safeguards. It is recognised that the business community are nervous about changes to the business rates and possible relocalisation could only be accomplished if it were to be considered as a serious option with significant safeguards. Yes, there will be a need when we come as government to consider the options spelled out in the balance of funding review to see whether any safeguards might be required to be associated with that. It is certainly not part of our agenda to try to impose further controls on local government. Our agenda is one of trying to give local government greater freedom and flexibility. That has been our agenda since we published the white paper in 2001. Our aim is to try to encourage greater local responsibility for decision-making and local accountability and that has been part of the debate within our review team.

  Q787 Mr Betts: Do the announcements about the potential capping of certain local authorities this year fit happily with that statement?

  Mr Raynsford: I think it does because the objective of the balance of funding review is to try to secure a more sustainable, fairer system of local government finance in the long term. It is not about the actual level of revenue of any individual local authority and decisions on that. I believe that the capping regime is necessary, sadly. We have not used it for many years; we did in our first year in government; we have not since then until this year. I am afraid the very large increases in council tax which occurred in 2003 made it inevitable that there would be capping this year. I hope it will not be necessary in future if local authorities do heed the lesson and moderate the council tax increases in the coming year.

  Q788 Chris Mole: The Audit Commission have recently made some comments which included "The current artificial distinction between fees, charges, direct grants, which are included in councils' net budgets, and central government grant and non-domestic rates, which are excluded, does not promote accountability". Does that imply that government needs to be more transparent about the basis for funding decisions? Do you think that is a fair criticism?

  Mr Raynsford: I have to say I have not seen that particular paper to which you refer and I should like to look at it, because this is complicated territory and I really would like to consider it in more detail before giving a view.

  Q789 Chris Mole: More generally then, do you think it is technically possible to provide more public information about the basis of funding decisions, for example the assumptions about spending pressures associated with new obligations or estimated cost increases for existing services?

  Mr Raynsford: We do operate the new burdens principle. I police it as best I can. I am well supported by the Treasury who support it. Our objective is to ensure that if additional burdens are placed on local government then an appropriate financial allowance is made in the spending review and that has been very much part of the work going on in the current spending review. This is something which involves the local government association. We do involve them in it and I believe that is an entirely appropriate and constructive way of going about it. I would not like to say whether we could be more transparent than that. I am certainly keen that we should try to ensure that principle, the new burden principle, is operated properly, fairly and vigorously and it is certainly my objective to do that.

  Q790 Chris Mole: Do you think that information is adequately publicly available to improve what has tended to be a somewhat polarised debate between central and local government about the generosity or otherwise of the annual grant settlement?

  Mr Raynsford: I could not possibly say it is adequately publicly available, because a lot of it is very arcane and involves lengthy and detailed discussions between technical experts and central and local government about the impact of particular new burdens. A lot of that would be very, very complex indeed to try to get into the public domain. That is why I said that I do try to police this in a pretty rigorous way, but we do involve the Local Government Association as part of those discussions and I am committed to continuing that.

  Q791 Chris Mole: Would public information which was signed off by both yourself and the chair of the LGA be persuasive?

  Mr Raynsford: Again, I would not want to comment specifically on that without looking at any proposals in a bit more detail.

  Q792 Mr O'Brien: May I raise a matter which we have raised with you before and with SIGOMA, that is the question of gearing and the fact that the grants are primarily there to try to introduce equalisation? Should grant also fully remove inequalities caused by different gearing ratios between local authorities?

  Mr Raynsford: Unfortunately it cannot, because the more grant is given to an individual authority in order to compensate it for the disadvantages it suffers, the greater the gearing effect. Currently, for example, a highly deprived authority such as Newham—I know it is not a SIGOMA member, but it is a very deprived area—only meets 10% of its spending from its own locally raised resources; 90% comes from government grant. Even if we were to change the balance of funding by 100% and change the gearing ratio by that amount nationally from 25:75 to 50:50, a huge change, even if we were to do that in Newham, the likely consequence, everything else being the same, would only be to change the gearing from 10:90 to 20:80 and they would still be subject to a very significant gearing effect. I am afraid to say that gearing is here to stay, if we are to have equalisation. The degree of gearing, yes, we can change and that can be altered if the balance of funding changes, but if it is our objective—and I believe it is our objective—to ensure that more deprived areas do receive compensating grant from government to help them meet their responsibilities, then there will always be a greater contribution from government sources in such areas and that is likely to have the gearing effect we have discussed.

  Q793 Mr O'Brien: Are you saying that equalisation is not a possibility?

  Mr Raynsford: No, equalisation is a possibility; equalisation is absolutely part of our agenda.

  Q794 Mr O'Brien: You have just said you would always have gearing.

  Mr Raynsford: Yes. Gearing is a consequence of equalisation, because gearing is the consequence of an authority receiving a significant proportion of its funds from central government.

  Q795 Mr O'Brien: Arising out of the 2001 White Paper, the government said that gearing will encourage local authorities to look for ways of increasing their spending power by driving down costs, rather than pushing up taxes. Do you still hold that view that it is a pressure on local authorities?

  Mr Raynsford: No; there are two different views about gearing.

  Q796 Mr O'Brien: Indeed there are.

  Mr Raynsford: On the one side there is the view that this is an imposition which creates unreasonable pressure on the council tax because authorities have to increase council tax disproportionately because of the gearing effect. The other point of view is that this is a good financial discipline which ensures that councils think very carefully and hard.

  Q797 Chairman: Some councils do think very hard, that is the difficulty, is it not?

  Mr Raynsford: Yes.

  Q798 Mr Betts: Given that there is this problem with gearing because of equalisation and the need to help poorer authorities, I understand the balance of funding review have received a paper from CIPFA proposing a core grant and a top-up grant where government grant would then increase at the margins alongside the extra funding which the local authority raised through local taxation which would deal with the gearing issue. Does the government have a view about that? It takes us back to a similar system in the 1960s and 1970s which operated then and there was a lot of concern at the time.

  Mr Raynsford: Yes, indeed and the concern was, and remains the same, that this is in a sense a perverse incentive to increase your spending. If your spending increases are matched by increases in grant, the more you spend the more grant you get. This has exactly the opposite effect to gearing: this provides an incentive to spend more. This may not be in the best interests of economy and efficiency and reductions in council tax demands.

  Q799 Mr Betts: So we can take it that that will not appear as one of the likely outcomes of the balance of funding review.

  Mr Raynsford: I should also have stressed that the balance of funding review is not a government review and you asked me what the government's view was on this. All I can say is that you will need to look at the balance of funding review to see whether this idea is taken any further or not.

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