Examination of Witnesses (Questions 780-799)
MR NICK
RAYNSFORD MP
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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