|
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 402-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Committee
Tuesday 27 April 2004 MR PETER KENWAY, MR GUY PALMER, MR DAN CORRY AND MR NICHOLAS BOLES PROFESSOR GLEN BRAMLEY and PROFESSOR TONY TRAVERS MR RAY SHOSTAK, MR ANDREW LEWIS, MS LINDSAY BELL, MR ANDREW ALLBERRY and MR ROBERT DAVIES Evidence heard in Public Questions 1 - 180
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Committee on Tuesday 27 April 2004 Members present Andrew Bennett, in the Chair Sir Paul Beresford Mr Clive Betts Mr Graham Brady Mr David Clelland Mr John Cummings Chris Mole Mr Bill O'Brien Christine Russell Mr Adrian Sanders ________________ Memoranda submitted by New Local Government Network and Policy Exchange Examination of Witnesses Witnesses: Mr Peter Kenway, Director, and Mr Guy Palmer, Director, New Policy Institute; Mr Nicholas Boles, Director, Policy Exchange; and Mr Dan Corry, Director, New Local Government Network, examined. Q1 Chairman: Can I welcome you to the first session in the Committee's inquiry into local government revenue. Can I point out that the evidence we got in on time has been published and is available from the Stationery Office or you can read it on the Committee's website. Can I ask you, gentlemen, to introduce yourselves for the record? Mr Boles: Nicholas Boles. I am the Director of the Policy Exchange. Mr Corry: Dan Corry, Director of the New Local Government Network. Mr Kenway: Peter Kenway, one of the directors of the New Policy Institute. Mr Palmer: I am Guy Palmer, the other one! Chairman: Do any of you want to say anything by way of introduction or are you happy for us to go straight to questions? No. If you agree with each other please keep quiet, but if you disagree then catch my eye as quickly as possible. Bill O'Brien? Q2 Mr O'Brien: One of the important factors of this review is the question of local accountability and this matter has been around for a long time, Layfield referred to it. Do you agree with the Layfield hypothesis that increasing the proportion of expenditure financed by global taxes is the best way to increase the local accountability of local government? Mr Corry: I think there are two elements. I think you can get a long way in turning local government back into local government instead of local administration by stopping all the controls on the way local government spends its money, a kind of single pot approach. I think that is an important element and one should not lose sight of it. It is not all just about how much is funded locally. We could have 75 per cent funded locally but the government having so many targets and so many controls that local government still was local administration, it is important to bear that in mind at that side of the agenda. While you have a large proportion of the money and the overwhelming proportion coming from the central state, even if it wills the desire to let local government spend it more as it wants it will always feel unable to, it will always want to control because it feels answerable for the way the money is spent. Unless you change the proportion you will not get real local government. Politics at national level and politics at local level to some extent should be asking the electorate about their trade-offs between paying more tax and more public services and our current system does not let that question be asked very well at local level and therefore you do not really have local government. Mr Kenway: I do not think you can answer the question about whether you agree with the Layfield hypothesis or not without looking at the structure of the local tax that is being used to raise the money locally and in some senses that is the means by which accountability is achieved. As you know, the council tax is a very regressive tax and that means that the burden falls disproportionately not on the very lowest incomes because of council tax benefit but on the group who suffer most, which are the low paid in work. This has two effects as far as accountability is concerned. The first is that I do not see how families for whom council tax may be higher than income tax, which is indeed the case for families working at £5 an hour, can ever realistically be expected to be in favour of an increase in council tax. I do not see how they can exercise a democratic choice, they are not in a position to do so. Secondly, and related to that, local authorities themselves recognise that problem and feel under pressure. Progressive local authorities feel under pressure to keep the council tax down to protect their low income council tax payers. It does not seem to me that, with council tax structured as it is, there is very much scope for accountability at the moment whatever the proportion. Q3 Chairman: Does everybody agree that it is a very regressive tax for that group of people? I need something a little bit more than nods because the shorthand writers find nods difficult to put down. Can I count it as four nods? Mr Boles: Everything is relative, is it not? It is relatively regressive relative to many of the alternatives we might all band about of alternative forms of local taxation. It has clearly got progressive elements within it. Wealth is not as important as income in certain circumstances. If you live in a much more valuable house you do have an asset against which you could, in theory, although we all know the markets make it difficult, borrow to generate an income stream. There are progressive elements within a council tax, but clearly it is more regressive than some alternatives, certainly focusing on income. What is the problem is the fact that it is on its own and it is being asked to do all the work and that is what makes it regressive, it is the strain that we put on it, not in and of itself. If it was there alongside some other forms of taxation which might be more traditionally progressive on an income basis then I think council tax would cease to be regressive in an egregious way. Q4 Sir Paul Beresford: Local authority costs have gone up enormously over the last ten years. Mr Corry, how much do you think the strictures and inspections and so forth that he touched on have affected that? The general fund has gone up by over 70 per cent in the last ten years. If there was a move towards more local taxation in whatever form that local taxation would have to rise quite dramatically without necessarily any compensation from central taxation. Would that be a good move? Mr Corry: I think there are a few things confused there. I do not think most people are talking about changing the aggregate level of taxation that most people are paying, we are taking about the distribution between what is raised nationally and then distributed locally and what is actually raised and spent locally. I think there are savings to be had if the Government pulls away from its command and control approach to local authorities. I think it has created a lot of waste, some of which will probably be pushed out of the system through the Gershwin review. There are services which local authorities, even if they had complete freedom to do whatever they want, would still want to produce and there are things that the central state will still ask them to do. I do not see some sort of massive chain which now means that we need to raise less in aggregate. Q5 Mr O'Brien: The question was about unlawful accountability and we accept that the poorer authorities would be the ones that would suffer most whatever system we put in place, particularly local taxes. We have to try and suss out what the best approach is for local accountability and what percentage of revenue should be raised from local taxes. Gearing is one of the worst effects on local government. What are your views on that situation? What percentage do you think should be raised from local taxes if we are going to have local accountability? Mr Corry: Two things are relevant there. You are absolutely right, in the current system the gearing is unfair, it makes it impossible for local authorities and I think the evidence to the Balance of Funding Review suggests it does not discipline local authorities to be more efficient. The other issue is equalisation. People argue you have got to have a very high percentage of money coming from the centre to make sure that poorer authorities do okay. As I understand it the work that has been done suggests you do need to have a certain amount of central money, but it is not nearly as much as we have at the moment. You can go quite a long way and still hit both the things you want to. Q6 Mr O'Brien: Are you suggesting it should be 50:50? Mr Corry: I do not like plucking numbers out of the air. Q7 Mr O'Brien: We are here to obtain information from the experts and you are saying you are not prepared to give us an indication. Mr Corry: I am certainly not prepared to pluck numbers out of the air. It all depends on the balance of funding, on the kind of taxes you are using, on the strings that central government is putting on the way local government spends its money. It is a whole combination of those things as to whether I would say I now feel I have got local government rather than local administration. Q8 Mr O'Brien: In your evidence you suggest that elected regional assemblies could have some role in policing local taxation in the regions. Mr Corry: Elected regional assemblies are quite an interesting and new player on the scene. If you were going to give local authorities more freedom in the way that they raise their share of the money, which is something that we suggested, one of the ideas is perhaps the regional assembly in some way playing some role in making the sure the system --- Q9 Mr O'Brien: They could provide the cap. Mr Corry: It would not necessarily be the cap. In our submission we say that we think there should be lots more subsidiarity in the way that local authorities raise their proportion so they can choose a bit more their taxes, but there should be limits on that. Q10 Mr O'Brien: So the level would be the cap? Mr Corry: Not necessarily the cap. Q11 Mr O'Brien: So why would you apply a limit? Mr Corry: For instance it may be that although one wants to give local authorities quite a lot of freedom to raise money, you would not want them to use a sales tax if you felt it was very regressive. You could either leave the policing of that to central government or you could have regional variations of how that is done. Mr Boles: You asked for numbers. We are about to publish our proposals. We are doing a big project with Tony Travers who I know is advising you on your deliberations. I think you need to start with some benchmark numbers because otherwise none of us knows where we are, none of us knows what the principles driving our reform are. Our suggestion is that all authorities - and no doubt there may be two exceptions but there should not be more than that - should be raising at least 50 per cent of their expenditure through a locally determined taxation, and we can get into the question of whether council tax is really locally determined or not and many should be raising more than 75 per cent and it should all be compatible with some broad equalisations. I look at the fact that Westminster, which must surely on any of our measures be one of the richest areas in the country, is not raising more than a minority of its expenditure through local taxation. Surely it should be possible to take equalisation to the point where Westminster is funding 100 per cent of its expenditure through its own raised taxes and you have still got all of your capacity to equalise people who are poorer than the average because Westminster is clearly right at the top. I think you can aim for some quite brave figures and if you do not we will end up in exactly this spiral that we have been in for 40 years or more. Mr Palmer: It is not right to equate the proportion of money that is raised locally with the degree of accountability. It seems to me that the whole issue of how you achieve local accountability is quite a complex question. As Peter was arguing, it depends on the shape of the tax and who is paying it and what you mean by accountability. It is easier to achieve accountability whereby you get people to vote against taxes and money being spent than it is to achieve accountability the other way, particularly if you have more money raised locally. Q12 Mr Clelland: Do you think the regional government or a devolved government ought to have a role in the distribution of central funds to local government? Mr Corry: There is a case for that. Something we published by Professor Ian McClean did suggest that in some way what central government might want to do was decide its allocation across the regions and then, if there were elected regional bodies, let them decide the allocation across the local authorities and his suggestion was also that that should be an independent body. So the elected bodies would give the criteria on which that should be done, but then it should be up to some sort of independent Monetary Policy Committee-type body to take the constant lobbying and politics at the micro level out of the system. In my experience there is less of that than people think, but they do think there is an awful lot. These are ideas that if we had elected regional assemblies become possible and I guess that is what we wanted to throw into your thoughts. Q13 Chris Mole: To what extent do the formula spending assumptions of central government drive actual increases in council tax, aside from the factors that Sir Paul was referring to such as the demands for improved services by central government? To what extent have those increases been assumed in the Red Book in the first place? Is that not a factor that should be completely removed if there is to be any accountability at a local level? Mr Corry: The Treasury make an assumption about what council tax will go up by and they have to do that for the macro-economic forecasts and public finance forecasts. You are talking to ODPM people later and they will tell you, but I am not aware that then determines the way that you run the formula. Of course, it is very embarrassing if things are coming out completely differently and you keep an eye on them. I do not think it is done in that way. It is simply that the Treasury have to make assumptions and unfortunately they have to make the assumptions quite a long time before you get down to the nitty-gritty of what is available and what the formula is churning out. Q14 Mr O'Brien: Mr Palmer, did I hear you say that local accountability is not the important factor? Mr Palmer: No, I said I did not think there was a simple equation between local accountability and the amount of money that was raised locally. Q15 Mr O'Brien: Surely the people who are providing services locally and the quality of those services depend on what resources are available to them. Surely the people locally should be the ones that decide what the level should be for their communities. Would you agree with that? Mr Palmer: I would agree with that. My worry is that the assumption that is made is that by simply increasing the amount of money that is raised locally will result in substantial increased local accountability, whereas I think the equation is more complex than that. I am worried about adopting too simple an answer to the accountability question, not that it is not important, I think it is absolutely central. Mr Kenway: I agree with my colleague. The point I would stress is that I think the thing one is looking for is clarity, which is not easy to achieve, but when I think back to last year and the business around the shortage of funding to schools, who was to blame? Was it the school, was it the local authority or was it central government? We were asked this question. We are experts and I do not know the answer. The real issue is where you go if you are unhappy with an outcome. Q16 Mr O'Brien: You would take away this question of gearing if the balance was right and so the problem that you raise about education would not be apparent. This is the problem we have at the present time, we have ring-fencing, which means that Government policies are going to be carried out by local authorities and we also have the question of gearing, so local authorities cannot raise money in line with what is required. Mr Corry: I think you will always have an accountability problem while the centre does give money to local government and I think it always will because local authorities will always say, "It was not our fault. You did not give us enough money," and the Government will say, "Nonsense. You have been inefficient." Q17 Mr Sanders: Where central government has a policy priority for a service such as education which is delivered by local authorities, how can central government ensure that the resources which are earmarked to deliver its spending priorities reach their objectives locally? Mr Corry: At the moment we have a system where essentially supposedly local government has some freedom on these issues but in practice it has very little. Government worries that in working out the allocation to LEAs it takes deprivation into account, but it then feels that LEAs, in making their distribution to schools, weakens the impact of that assessment. So there are issues about how LEAs distribute money to the schools. To some extent the way I would like us to go in general is by giving far more local government outcome targets, but where central government feels it has a right and wants to give national minimum standards or even higher standards than that it should be giving outcome targets to the local authority, making its own assessment of how much money in total they need and basically holding them to account for that rather than the ring-fenced approach and the inspection process and all the rest of it. If you were the education Secretary of State and you were giving your money to education, you would want to make sure it was all used by education, but I think a situation where some councils are being told off for not passing through enough money to education when they are exceeding Government targets is somewhat ridiculous. Mr Palmer: I think a very important question for you to consider is the role or otherwise of ring-fenced grants. They have gone up considerably since 1997. There are clearly arguments both ways. The reason they have gone up is central government trying to achieve its objectives. The down side is to do with local accountability and local decision-making. If I may take a small example. I am working in the area of homelessness at the moment and homelessness monies are essentially ring-fenced, and all the monies are basically taken up by providing support for homeless families, which means local authorities have no money to provide support for homeless people without children and because it all comes from a single ring-fenced pot these two groups are competing against each other. The local authority cannot say, "I want to spend twice as much on the homeless". Q18 Mr Sanders: Does this not go right to the heart of the problem of the Balance of Funding Review, we need to work out what local government is for first before we rearrange the deckchairs? The Balance of Funding Review ought to be called the "What the hell are we going to do about the council tax review?", which is where the impetus seems to be coming from. If a service is directed from government to government targets what is the point of local government having any say or input other than as a quango? As to the idea of accountability, when the whole direction of the grant, what you do with the grant and how the grant is assessed is determined up here there can be no accountability at the local level through a local authority, so why do we bother with this mirage of local government? Mr Boles: I rather agree with you. I think with the current system we are falling between two schools. If we think that education is always going to be an absolutely core objective of central government then probably we should move to a much more honest system whereby central government determine per pupil funding and you can have variations for different socio-economic categories and different levels of deprivation, but something that went to pupils and they said very explicitly to local authorities that they can be as explicit about whether they were going to provide anything over the top to satisfy their local goals where you think central government are not doing that is enough or you can decide not to do anything and then it would be clear. At the moment we are trying to pretend that we are giving the money to local government but then we are actually telling them how to spend it and that is nuts. Q19 Christine Russell: That was the question I was going to ask. You have given us your views. What do the rest feel? Should education expenditure come straight from the Treasury? Mr Corry: I agree with the logic that Nicholas has gone through there. In education I have some worries that if you directly fund it from Whitehall local government will say, "We are not going to bother getting involved in education," and I think that would be a big mistake because I think a lot of the difficult issues of underperforming children and schools and so on need the local authority fully involved. I worry about that, but I agree with the general point. There are some things where local government always will be acting essentially as an agent of central government and where it is we should be very clear about. Q20 Mr Betts: Is the council tax a viable and adequate source of revenue for local authorities? Mr Palmer: To quote from our paper, yes, but only if it is reformed, and our paper goes through our suggestions for reforming it. Mr Corry: What I would like to see us come out with is something where we are not stuck with a one club tax regime for local authorities. So I think we need to do a bit more than just rely on the council tax, but, equally, I do not just want to replace it with another tax which is the only tax that local authorities can use. Mr Boles: We said we would agree when we agree - I agree! Q21 Mr Betts: We have the revaluation coming up and there is some talk about possible changes to reform the council tax, one of which might be changes to the banding. Do you want to give us your suggestions for what should happen as part of the revaluation? Mr Kenway: We think you need to increase the progressivity within the tax and that the way you do that is to attend to both the bottom of the current band A and also to the top, by which we mean G and H (G is obviously a double band). In some sense the surprising conclusion that we have come to in our research is that the middle of the council tax bands B, C through to F are for the most part there, they are regular, there is a logic to them and, most importantly, although there are lots of caveats attached to the arithmetic, it does look like council tax in those bands moves more or less in line with average household incomes. There is obviously a huge variation in the incomes of people in band B or band C, but in some sense we think you can keep the heart of the tax as it is and lower the tax at the bottom, following the same proportions as you have in the middle band and increasing it at the top again following the same proportions as you have at the minute. That seems to us to be one crucial element. The other crucial element is that unless something dramatic happens to house prices in the next year you will need some form of regional variation to allow government to take account of the fact that the incomes of people living in band C in London and the South East are very much lower than the incomes of people living in band C across much of the rest of the country. We think that that is actually quite do-able. Q22 Mr Betts: Any other comments? Mr Corry: No. I think the NPI work is very good in this area. Q23 Mr Betts: I was not quite certain what you were trying to achieve with the original banding because by its very nature council tax levels in different bands will be different. Even if the average council tax for an authority is the same as the one next door, suddenly you have got a different distribution of houses between the bands, so it is quite likely that band D will be higher in a northern authority with lots of band A properties than it would be in a southern authority with lots of band G properties. Does that not counter the point you were making about the different income levels? Mr Palmer: The principle we think is important is that on average people on similar incomes in similar houses pay similar amounts of council tax no matter where they live geographically. At the moment that happens to be true. The problem with the revaluation is that it will up all the London house prices enormously and people in London will find themselves paying very much higher levels of council tax than people in other parts of the country, so it is because London house price inflation has been so high. Q24 Mr Betts: So it is almost a peculiar London problem, is it? Mr Kenway: It is London and the South. Q25 Chairman: Would it not help to correct the housing market if you had to face up to the costs? Mr Palmer: I do not think charging high amounts of tax to poor people in the South East is a good way of trying to tackle the housing problem, plus this is all to do with people living in rented housing not people who are buying houses. You impute the amount of rent that people should pay and rents in London and the South East are higher and so people pay higher amounts of council tax. Q26 Chairman: If the rents they were paying were higher and you had a higher council tax, would that not encourage a lot more people and businesses to relocate to some of the more attractive parts of Britain? Mr Kenway: As an economist I am very sceptical about ideas that appeal to economists as ways of solving economic problems. As politicians, I could not imagine you really wanting to go on the doorsteps and say, "Your council tax is going up as a means of trying to lower the house price boom in this part of the country." I think it is very doubtful. It might work and it might not. I do not think it is a practical political proposition. Mr Boles: The bedevilment of the council tax, as with the rates, is revaluation and this is also where it completely ceases to be a locally determined tax and somehow we need to find, if we are going to hang on to council tax or any other kind of property tax, which I personally believe we should, a way to get revaluations away from central government and away from this whole thing of, "There is an election coming up. What on earth are we going to do? The revaluation is going to be horrific. Let's postpone it". What will happen is that in ten years the problem grows and grows and grows and then we will have to try and sweep it under the carpet. I do not know how we do that. One of the things Dan was mentioning just before we came in was surely there is some way of doing continuous rolling revaluations, locating it in some way outside political control. I do not know what it is, but somehow we need to get it away. Q27 Christine Russell: In all the arguments and all the discussions about council tax the one factor that always seems to be overlooked is council tax benefit. Is that not a way of bringing in a system whereby a person's ability to pay can be more closely aligned with the actual council tax bill? What are your views on council tax benefit reform? Mr Corry: I think Peter has done some work on how you might reform it. I do have a slight concern and it is the classic case of the single pensioner living in the big house paying a fortune. To some extent, as an economist who does believe in some of what economists say, I want some incentives in the system to encourage that person to think about downsizing. Mr Kenway: We only really got to the bottom of council tax benefit last year when we were asked to look at it by Help the Aged. It is remarkable that council tax benefit, if you look at it in a different way, has lots of features of a local income tax. Undoubtedly it does pick up this ability to pay question. The fact that take-up is so abysmally low --- Q28 Christine Russell: Do you have a theory as to why the take-up is so abysmally low? Mr Kenway: That might be putting it too grandly, but people certainly dislike the idea of applying for relief, which is what council tax benefit is, it is very intrusive with the amount of information you have to provide. Our proposals for reform, which is a wilder idea than we usually come up with, consists --- Q29 Chairman: So you give star ratings, wilder and wilder! Mr Kenway: You do not need to have a benefit attached to a tax. People have remarked how strange it is to have a benefit to allow you relief from a tax. You could have a straight assessment on the basis of your income and your savings. You could have something much more like the way in which your income tax is assessed if you are self-employed or have to give in a tax return and I think that sending your information off to the Inland Revenue to find out how much you have to pay does have a different feel, it is a different relationship from that which you have when you are applying for a benefit, the money in some senses is moving in the opposite direction. Q30 Christine Russell: Is it because it is more anonymous, that perhaps people do not like the thought that the person at the Town Hall who is assessing the benefit could be someone who lives down their street? Mr Kenway: I think it is partly that. I think it is also that there is a difference between me asking you for money as opposed to me giving you some money where it has been properly assessed how much I must give you. Q31 Chris Mole: Is that not essentially what happens if somebody has a social care assessment and all you are doing is providing that sort of assessment for a charge rather than for a tax and the irony is that one of the big drivers for tax is the costs of social care on local government? Mr Palmer: I am not sure. We are arguing that there ought to be an assessment which says this is the net amount of council tax you have to pay, whereas at the moment there is effectively two assessments, one is the gross amount of council tax you have to pay and the other is the council tax benefit that you can reclaim off that. So it is two separate assessments and it is two separate processes and we think they can all be integrated into one and basically handled automatically in the same way that tax credits are being handled automatically. Can I raise a couple more points on take-up? I think one of the issues is that because quite a large number of people are owner-occupiers and because they often are not in constant communication with the state they do not get encouraged on an individual basis to apply for things whereas people in council housing are advised to do so. I think the second thing is that take-up is falling in council tax benefit. Given it has always been abysmally low the fact it is falling is exceptionally worrying. Q32 Chris Mole: What about the threshold level? Do you think the Government should look again at the relatively low level of threshold which means that perhaps thousands of people with very limited incomes are not entitled to claim? Mr Kenway: Our understanding is that those savings thresholds have not gone up in ten years. I think the income thresholds are now quite well set for pensioners because they are related to the levels of the pension credit. In some sense I think our concern now about council tax benefit and who is entitled to it should be directed again at the low paid in work. A worker on £5 an hour with two kids gets no council tax benefit. I think there is scope there for attention. Q33 Mr Sanders: Are this group, the low paid, where the ratio between house prices and incomes is the greatest, the ones who are going to be hit hardest by a council tax revaluation? Mr Palmer: The ones who live in high inflation areas, yes. Q34 Mr O'Brien: Do you all believe that we should continue with the tax on property? Mr Kenway: Yes. Mr Boles: Yes. Mr Corry: Yes. Q35 Mr Betts: Let us turn now to Article 9 of the European Charter of Local Self-Government which basically says that "the financial systems on which resources available to local authorities are based shall be of a sufficiently diversified and buoyant nature to enable them to keep pace as far as practically possible with the real evolution of the cost of carrying out their tasks." Do you think we are in breach of the Charter the way things stand? Mr Corry: We are probably in breach of bits of that Charter. The basic point underlying that is that the revenue available to local government at the moment is through one single rather monolithic tax which has advantages, but it is very lumpy, it comes as one big bill even if it is spread out, it does not rise with general prosperity in the economy and so it does make it very hard. I think at the very least local government needs, at the end of the Balance of Funding Review and so on, to end up with more choice and a spread of taxes. We could have a re-localisation of the business rate, some of that would spread the load and then there are a lot of other smaller taxes which we certainly think local government should be able to use, ranging from a tourist tax to a sales tax and all sorts of things. They may not want to use them, they may be impractical, there may be limits you need to put on them, but a diverse spread of tax just as central government has would certainly not only fulfil the Charter but would be much more sensible in allowing local authorities to plan and to fund the things they need to do. Q36 Sir Paul Beresford: This is going to confuse the multi-taxpayer as to who is responsible for what, what they are paying and what they are getting for what they are paying. Mr Corry: I think the local taxpayer is confused as to when there are cuts, is that due to their local authority being inefficient or central government not giving them enough money? When the council tax goes up enormously, is that a product of gearing or whatever? If a local authority had a number of taxes it would have to explain it to its local taxpayers. You could have systems where you said that certain taxes could only be brought in locally if there had been some kind of a referendum. There are all sorts of things you can do. People always get a bit confused on tax, but I do not think that would necessarily be a big problem. Mr Boles: One of the troubling things is that you could argue that the real problem is the fact that central government taxes are buoyant, that central government should be forced to go out and tell people, "We are going to raise your taxes by X per cent this year to pay for more services," rather than just floating upwards on an ever rising tide of inflation. Of course, that does not happen. I think that is where the problem for local government comes, from the lack of buoyancy. With council tax, people are not used to being asked for increases in their national taxation but they are permanently being asked for these increases in council tax and it is the contrast that means that so much opprobrium falls on the head of local government for what is something that happens every year in and out and none of us notice it. If central government actually had to send people a tax bill with £15,700 written on the bottom of it then I think that people would focus their minds rather more on what taxes they were raising and what the Government is doing with it, but at the moment only local government has to do that. What we have said is that the local taxation base should have the same level of buoyancy as the national taxation base so that there is not this huge contrast. Mr Betts: Surely there is a difference in that if central government taxes have a degree of buoyancy but central government also has the ability to borrow to fund its revenues. In a recession, when taxes are not quite so buoyant, then government simply borrows and it equalises out, but some local authorities do not have that right. Is that an issue that should be addressed, the ability of local authorities to borrow for revenue purposes to go hand-in-hand with the buoyancy issue? Q37 Chairman: To make sure the council tax only goes up in years when there are not elections. Mr Boles: Wandsworth do that anyway. Mr Kenway: I think the buoyancy point is over-done. Last year there was a great fuss about the council tax across much of England. I think it is just over two years ago that the ODPM - was it a Green or a White Paper - wrote that the tax was more or less accepted and people were happy with it and I think by and large that is true. I think people are mature enough, they know that the council tax is going to up each year. The objection is not to it going up, the objection is to it going up by an unreasonable amount. I do not think one should worry too much about this point in general. Mr Corry: Peter made an almost political point, which was that people are vaguely happy. I still think it is wrong if you want serious local government to say they have got to rely on one tax only and one tax that does not automatically rise with prosperity. We do need to give local government more freedom and so the local government can also give its citizens some choices as to which spread of taxes they want to use and that is the route to local government. Q38 Chairman: There is a suggestion that local authorities should be using a vastly different tax system where they can choose how much they want to raise and for what they want to use it, or is local government going to be allowed to decide that is a good idea, we will go and create a tax of that kind irrespective of any specific parliamentary legislation? Mr Corry: I think Parliament, given our constitutional settlement, would have to authorise the ability to choose taxes like the Congestion Charge at the moment where people can bring it in if they want to and there was legislation to allow that. I think there should be much more subsidiarity in allowing local government to decide how it is going to raise its share of the funding. Mr Palmer: It seems to me that if you are going to introduce major change (a) you have to be very clear what your principles and objectives are, and (b) you have to do it on the scale that is required. I think one of the worries with all this basket of taxes and so forth is that you introduce a myriad of what are actually very small taxes which does not achieve anything for anybody and merely confuses the issue. If you are to have multiple local taxes so that we are not in breach of our convention then you would need to introduce major new taxes. Q39 Mr Clelland: On the question of the business rate which was touched on slightly in that last question, would localising or re-localising the business rates strengthen the partnership between local government and businesses and increase accountability given the fact that businesses will argue that the current system gives them stability and in any case local authorities are not accountable to business through the electoral system? Mr Boles: I am much in favour of the re-localisation of the business rate to maximum standards. For equalisation purposes there are places, for example Westminster, where we are going to need to have some way of retaining some portion of their business rate take because otherwise they would be paying their residents a council tax benefit because they have been raising so much from business rates. I do not think that the lack of accountability argument really works because we never hear that in relation to corporation tax or the many other charges that fall on businesses. Businesses do not have votes in general elections. I think we are a fairly mature capitalist democracy now. People know that they work for businesses and their pensions are invested in the shares of businesses and so ultimately it is about people and people own businesses. There is an interesting idea being suggested as a way of perhaps allaying some of the more acute concerns of business, which is to link the rate of the increase that any local authority could apply to the business rate to the rate of increase in the council tax, so basically if you are going to put the council tax up by four per cent then you can put the business rate up by four per cent but no more. It is a restriction of freedom, no question, but if that was the price for re-localising business rates then I would be willing to pay it. Mr Kenway: I am unclear about the rights and wrongs of re-localising the business rate, but I do think it is very important to do away with this extraordinary fact that the business rate only goes up with the rate of price inflation. That could be done away with without the business rate being localised, although I think your suggestion there that it should be linked to council tax is a good one. This is not a small issue. We tried to do a calculation yesterday and it looked to us as though if the business rate had gone up in line with council tax since 1997/98 the council tax increase that we have seen since then would have been reduced overall by about a third. So in some sense if your idea had applied over that period I am not saying that would have done away with all of the political problems but it would certainly have taken the pressure off council tax. Whether or not you want to go as far as re-localising it, I certainly think it is extraordinary that we have this protection that it goes up just by RPI. Q40 Sir Paul Beresford: Mr Boles, if your suggestion was applied in the South East, because of the change in the funding formula the South East would be severely wounded, their council taxes would go up quite enormously and the business contribution centrally from the South East in places like Surrey is phenomenal compared to that that is actually used, it is an outgoing not an incoming. The businesses in those areas would be out for you with a shotgun, they just could not sustain it. Would you not agree? Mr Boles: It slightly depends on where you start. If that had been in place before the re-diversion of grant resources from the South East to elsewhere in the country then of course grants at the starting point would have been a much less important part. I completely understand your concern. This is a part of a package that takes us to a point where, frankly, sorry, we will probably be raising 80 or 90 per cent of its expenditure through locally determined resources. Therefore, a shift in the grant allocations to Surrey would actually have had a trivial effect. In the situation that we are in where authorities in the South East are heavily dependent on grants then that shift in grant formula would produce a big knock-on, but it would not if we were in the system I would like to see. Mr O'Brien: On the question of fees and charges, one local authority has suggested that perhaps the Government should bring in a statutory notice that local authorities should be allowed to charge fees of about two days of income to meet their local circumstances and to provide the quality of services that they think should be provided. Do you think that that should happen, that there should be a statutory responsibility on local authorities to enclose fees and charges to meet their local requirements? Q41 Chairman: Profits on local planning applications. Mr Corry: I think there are some places where there could be some fees and charges brought in, but I suspect they are limited. Through legislation at the moment the power of discretionary charging is coming in, but that is bringing in a new service and it is going to be revenue neutral. I am sure that there is room in some areas, it may be in planning, for a quicker service and all the rest of it, but essentially that is paying for the service rather than risking money to spend elsewhere. There are things you can do but it is not going to change in a major way the issues we have been talking about today. Q42 Mr Clelland: Mr Boles' suggestion that the business rate ought to be tied to local taxes or whatever they might be in the future is obviously in preference to the Government controlling it centrally, but might there be a role for regional government controlling business rates given their responsibilities for economic redevelopment and the economic activity of their regions? Mr Boles: I would prefer it to go as far down as possible, but I agree that that would be better than central government. Chairman: Can I thank you very much indeed for your evidence. Memoranda submitted by Professor Glen Bramley and Professor Tony Travers Examination of Witnesses Witnesses: Professor Glen Bramley, Heriot Watt University, Edinburgh, and Professor Tony Travers, London School of Economics, examined. Q43 Chairman: Can I welcome you both. Can I ask you to identify yourselves for the record, please? Professor Bramley: Professor Glen Bramley from Heriot Watt University in Edinburgh. Professor Travers: My name is Tony Travers from the London School of Economics. Chairman: Do either of you want to say anything by way of introduction? No. Christine Russell? Q44 Christine Russell: If you had the most exciting job in the land, which is designing a new system for local government, what would it be? Professor Bramley: I think you would need to take a big decision about whether central government is going to back off from the close dictation of standards in areas like education. If it is willing to leave that as a local government service then I think you have to allocate substantially more diverse robust revenue sources to the local level, and I would certainly go with the previous speakers in allocating at least half the non-domestic rate to the local government sector. I think you would have to look seriously at a local income tax as well and reform the council tax along the lines that Peter Kenway was talking about, which I think was a sensible suggestion. There are also some things to be done about equalisation arrangements which I will come back to in a moment. I do think there is another possible choice, which is to be more honest about the continuing extent of central government interest in certain key services or core services of which education is the most quantitatively important. I think that leads to what I would describe as a variable geometry financial solution where central government pays for a much higher proportion of those core services perhaps along the lines of something like the police grant which is linked to the general grant formula anyway. Then, with the remaining services which are seen as more local responsibility, you would have a balance of funding that was predominantly local but with an equalisation backdrop. Q45 Chairman: Are there any services other than education that you would put in that category? What would you put in it, police, fire, education? Anything else? Professor Bramley: I do not quite know whether fire is, possibly given its emergency planning aspect. Police is already in that category. Things like housing benefit are very much in that category, they are almost wholly specifically grant funded already. Q46 Chairman: Is not the demand for child protection basically a national demand as opposed to something that you have local discretion about? Professor Bramley: It looks a bit that way at the moment, but I do not know whether that is the best way of handling services for children. There is a strong interest in it at the moment that is somewhat artificially and media driven. Q47 Sir Paul Beresford: You touched on it, but some of the other speakers were a little more open on it and that is whenever central government pays it likes to look at it and monitor it and check it and all the rest of it. If I could quote from one of the little local district companies, this councillor says, "We have a specific support unit for best value (and CPA) that costs about £100,000 per year. A best value review lasts about a year and takes up ten percent of senior officer time when it is underway. The CPA review lasts for about a year and takes about 20 per cent of Corporate Management time and perhaps ten per cent of senior officer time when it is underway." This means enormous costs particularly if you bring into the account the knock-on effect to council tax especially bearing in mind that this is not covered in grant. Would you agree with that statement? Professor Bramley: I think I would agree with what you say. It is quite a costly process. It has become rather a central feature. I am a bit of a sceptic about the Comprehensive Performance Assessment (CPA) process. I think the Audit Commission has done valuable work over the years in looking at value for money in particular services and highlighting problems and keeping a general watching brief on things, but to run the whole system around a CPA process seems to me to be very centralist and at the end of the day it is still quite a subjective judgemental process. I am a bit of a sceptic about that and it is quite a costly thing. I am very concerned about research and intelligence and its role in local government and I think such research and intelligence resources as there are in local government have been wholly spurted into supporting processes like CPA and special initiative bidding exercises. Q48 Christine Russell: Tony, do you agree with what Professor Bramley is saying, that a wider basket of funding is necessary? Professor Travers: Absolutely. In a sense we are discussing local government finance here which is really a part of the wider constitutional settlement in the UK. Local government finance and the balance of funding is an issue which has a constitutional impact and it is not the only aspect of the British constitution that is currently under discussion, it is one of several that are under discussion and parallel. Therefore, any discussion about a better or an ideal solution to local government finance has to be seen against the backdrop as to what kind of constitutional settlement are we going to have. There are arguments that Britain has evolved into a certain kind of social democracy under governments of all parties where the public wants guaranteed national standards, where the Government is involved in acting as the guarantor of everything and there is another world where local government would have much greater freedom, where there would be much bigger diversity and one in which it would be appropriate to have a wider range of local taxes and much less Treasury control. In a sense we are discussing local government finance but it is also that bigger issue in that personally I would go for a much more localist solution and go for the freed-up constitutional balancing version of local government in which there would be a significantly larger proportion of resources raised locally from more than one local tax. Q49 Chairman: Would you also go for a much lower level of services in one place as opposed to somewhere else? Professor Travers: I would be prepared to take that risk. I am not saying that it is inevitable, Chairman, I am saying that one of the consequences of genuine local discretion and autonomy (and certainly in a system that is very different to the one we have now) there is a risk that of course the worse would be worse but the better would be better. Economists would argue that you get some dispersal from the middle but I think that is a price worth paying for a more autonomous local system. However, I concede exactly that many people in Britain might not feel that that is the right thing to do. Q50 Sir Paul Beresford: Should the government have a right to put in a ceiling? Professor Travers: A ceiling? Q51 Sir Paul Beresford: On expenditure or on taxation? Professor Travers: Absolutely not. I do not think capping is an appropriate mechanism, in part because the margin on local government spending in any year is very small in relation to the whole economy and therefore I think it is unlikely to unbalance the economy in any one year, but in terms of local accountability I think that having national government intervening to set local taxes is very damaging to the notion of accountability at the local level. Q52 Mr Cummings: Professor Bramley, you have written about a fiscal straitjacket for cities. You say: "A fiscal straightjacket has replaced fiscal stress, and cities are in a dependency relationship with government. The challenge for the future is to find ways out of this straitjacket." Could you perhaps give more detail to the Committee about this problem as you see it and can you advise the Committee of any ways in which you believe it could be resolved? Professor Bramley: When I first wrote those words we had barely escaped from the generalised capping regime that operated for most of the 1990s and so perhaps things have improved a little bit. I was contrasting Britain in a way with the situation in other countries like the United States where there are more diversified local revenues and perhaps more traditional local freedom. I think that the sort of reforms that I talked about a minute ago would go part of the way, particularly a partial re-localisation of the non-domestic property tax, and having that partially equalised but not fully equalised would give authorities an incentive because central cities particularly traditionally provided a lot of services to their whole region - specialist services, central services - and they played often a leading role in developing their regions economically because they knew they could get that money back through their property tax base and that has been taken away from them. Perhaps some of the smaller more supplementary revenue sources, the congestion charging that was mentioned earlier, possibly a tourism tax, that has been mentioned, these kinds of things might be quite significant for some of these local authorities that are trying to play a more entrepreneurial and economic development role. There are a whole lot of issues around capital funding, the use of assets, the recycling of assets, the treatment of capital receipts where central government has been quite restrictive in how those could be used. Also local authorities have not always used them in the most appropriate ways. There have been various other kinds of innovations in terms of new ways of funding capital through partnerships and PFIs and so on which can be relevant as well. It is quite a wide agenda really. Q53 Mr Cummings: Do you see this problem applying only to cities or do you see it applying to the more rural areas? Professor Bramley: In principle it is an issue that faces any local authority. When I originally wrote this we were particularly focusing on cities which have a certain sort of pattern and a relationship with a region that is quite significant usually. Q54 Chairman: Did that not have more to do with the boundaries of cities? It seems to me that Leeds is in a very different position to Manchester, for instance. Leeds dominates its conurbation whereas Manchester is now very similar in size to the other nine local authorities in Greater Manchester. Professor Bramley: It is partly down to boundaries but I suspect that there are many political, administrative and other difficulties with achieving boundary changes, and certainly achieving agreement about boundary changes and I think we would wait a long time to solve these problems through boundary changes. Also the problem is that the boundaries solution leads you towards ever larger local authorities. Our local authorities are probably already too large by international experience really on average and so I think that you have to have other mechanisms such as equalisation grants and sometimes regional arrangements and planning arrangements to deal with cross-boundary issues as well. You cannot get away from that. Q55 Mr Betts: To take you on to two hypotheses about the link between accountability and local taxation. One is probably the Layfield view that there is a direct link and what we need to do is to increase the funding of local authorities that comes from local taxation and that makes them more accountable. The other view is one that says it is what happens at the margin that matters and local people are interested in looking at how much extra they pay for either a better service or an additional service and you might call that the Blunkett philosophy of people going out and voting in a local referendum to get extra police or community wardens in return for them paying a bit of extra local taxation. How do you view those two approaches? Professor Travers: I think we have all stumbled over creating an absolute causal relationship between the proportion of resources raised by local government and accountability. The evidence that has been sent to the Committee cites both John Gibson's evidence one way suggesting that, as in the late 1980s, as the proportion of money raised locally increased then turn-outs increased. On the other hand the Balance of Funding Review commissioned Rallings and Thrasher from Plymouth University to look at the relationship in the context of the current system and found no relationship at all between the proportion raised locally if you aim off for other factors and turn-out. So are these things related? I think in the long term the what you might call "he who pays the piper calls the tune" argument where national government raises a large proportion of all taxes and then redistributes part of it through grants to local authorities leaving local authorities raising only a small proportion of their income from local taxes is likely to lead to national government feeling that it is its money that is being spent and therefore involving itself through specific grants, passporting, and a range of controls and interventions which do amount to eroding local autonomy and in that indirect way feeding through into a relationship between the proportion of money raised locally through local taxation and the amount of central involvement, and there is the question at the margin about whether the signals that are sent to local tax payers for a particular increase in spending are appropriate and at the moment that ratio is - we all know the gearing problem - one percentage point on spending leads on average to four percentage points on council tax in either direction and that is a distorted relationship. Professor Bramley: Can I follow on and give a complementary answer on that question. I agree with that. The current system is supposed to make it the case that a pound of extra expenditure costs a pound to the local domestic taxpayer and that was the argument that was put strongly in the 1986 Green Paper and the 1990 council reforms that has carried through to the present day, but its corollary, together with the nationalisation of the business rate, was this high level of gearing, and I think living under this gearing regime, albeit it has been complicated by capping some of the time, has, I think, convinced me that people are more interested in percentages and can relate better in a debate and accountability relationship to percentages than to pound for pound. I also think pound for pound is wrong because extra local services do generate benefits for a wider regional and national community and not just locally and an optimal grant system would reflect that. I also want to make a related and important technical point which is in my note, which has also been made by one of the contributors to the Balance of Funding Review, you can to some extent decouple gearing from the share of national and local taxation if you are willing to use the grant system in a way that is slightly more complicated but where grant varies with budgeted expenditure or budgeted revenue requirement rather than being a fixed item. The gearing problem is a product of fixed grants, it is the fact that the grants are fixed. If you are willing to go with a grant that is part way contingent on the budget decision of a local authority then you can create any relationship you like between a percentage increase in local taxation and a percentage increase in expenditure and at the same time you can equalise that for rich and poor authorities --- Q56 Chairman: The Treasury would never let you get away with that. Professor Bramley: That was the system from 1948 until 1989. We lived with that system for 30 or 40 years. It got a little bit too complicated in the 1980s because the DoE insisted on trying to keep recalculating grant on outturn expenditure. They could have it fixed as Stephen Freers' paper to the BoF review makes clear, on Budget day before the year starts and then it is fixed. I think it is a workable compromise and I suggest in my paper that if there is one magic bullet in all this that solves two of your problems in one go without having to introduce a new local tax, it is that. I would take that proposal very seriously. Q57 Christine Russell: Could I ask my question to Tony. It is based on something that you have put in your submission where you are actually saying that you think that greater freedom could give local authorities greater scope to actually improve and be a bit more competitive. What confidence do you have that that will actually improve services rather than building bigger and better council offices to compete with each other? Professor Travers: I think the point in the paper where I raise this issue is that we live in a society where there are few greater difficulties in terms of public services than the so-called postcode lottery. We all hear a great deal about the evils of the postcode lottery and my concern about that is if the postcode lottery is always seen as such an evil that there is not much room for local government. If in a sense every service must be the same everywhere then there is not much room for local discretion. So my hope was that if there were a more freed up system of local government finance that we would see, as in Victorian Britain, particularly in Victorian England, towns and cities competing with each other to provide better public services, which is what they did, competing the quality of provision upwards. I think we do see shadows of that today. If you look at the way in which major cities, particularly outside London, now compete with each other for economic improvement and regeneration they are highly competitive in a positive way and that I think is a model for the way in which a more competitive system - and there is quite a lot of potential in economic regeneration to be competitive - would drive standards upwards. All places will want to improve and I think that is the point I was making. Q58 Christine Russell: Do you think a part of the explanation, and it is only a partial explanation, for that could be that the CPA has enabled those high-performing authorities to have more freedoms? Is there any evidence that that is beginning to work? Professor Travers: I am not sure there is any evidence. I certainly have not done any research or and I do not know of any research that would suggest that the possibility that being an excellent authority would lead to freedoms is what makes them try to be excellent. I think they want to be excellent because they want to be excellent and all authorities want to get as far as they can up the league, as it were. So I think it is driven far more by that given also the ambiguous nature of the flexibilities - I will put it kindly - that have been offered thus far. I think being excellent is the thing that authorities want pre-eminently and that means they are competitive in this different sense. Q59 Chairman: There is a penalty in being competitive, is there not? If I take Greater Manchester, the City of Manchester provides one or two very good parks with their urban city farms in them but an awful lot of people from outside Manchester come in to take advantage of those facilities and they make no contribution to them other than perhaps a little bit coming back through the ice-cream franchises. Professor Bramley: It is an example of the point that I touched on earlier that taxes like the non-domestic rate and certain other taxes can have a wider pattern of incidence that will more fairly reflect some of those patterns of usage than council tax which just focuses on residents and properties within the area. I think it could lead to a better match between the benefits of services and the incidence of the taxation. Q60 Christine Russell: What about a change in the culture because the issue has already been raised this morning about the education expenditure where you got into this passing the buck, blaming each other, "no it is central government's fault", "no it is local government's fault". Do you think there is any evidence to support the theory that if you raise more revenue locally perhaps that "blaming each other" culture might be diminished a little bit? Professor Travers: The answer must be yes but I will explain what I mean. I mean if a local authority raised 100 per cent of its income from local tax sources - and indeed that has happened in the not-too-distant past where a small number of authorities were out of grant and did raise 100 per cent of their resources from local taxes - it would be entirely clear whose responsibility changes in local tax were from year to year. I think the terrible problems that we had in 2003-04 derived from great political argument at the national level as to whether the increases in taxes or changes in education spending levels were because of something local government had done or because of something national government had done. There was a great big argument about it and the public, understandably, was confused and we had to wait for the Audit Commission to produce its report to say broadly where the blame lay. So I think that the more money that is raised locally the nearer we get to a situation in which it would be difficult then for local authorities to blame national government for variations from year to year in their income. Q61 Christine Russell: But unless you had a system of unitary local government they would then simply blame each tier, would they not? Professor Travers: That is a separate but important issue. Where there are two tiers of local government --- Q62 Chris Mole: --- or three. Professor Bramley: --- or three. Chairman: --- Before we get any more complicated we need to move on. John Cummings? Q63 Mr Cummings: Professor Travers, could you please tell the Committee how local accountability is measured? Should local authorities be given greater responsibility for the levying and allocation of local funds when voter turn-out at the present time is so abysmally low? Professor Travers: I think the difficulty with words like "accountability" which we do all use a great deal - and I have used several words, it and others, this morning already - is that they are abstract and they are not easy to tie down with precision. I think what we mean by accountability is the idea that local electors/local people have some capacity of gaining the attention of local councillors or MPs and that those elected representatives will then have regard, not necessarily to always come to the electors' view, but will have regard to the electors' view in making decisions and that the elector will feel that that is happening and have some trust that that is happening. I think therefore in terms of this inquiry the question is will the local government finance system make it more or less likely that electors will feel that councillors are taking notice of them and then I think it does matter who is setting local taxes and we then have indirect measures as to whether the public is aware and is holding councillors to account which would include turn-out in local elections but would not only include turn-out in local elections, there are a whole array of other things such as whether individual constituents contact councillors or MPs, whether individual electors write to them and say which suggested degree of involvement they would like and there I think the evidence from MORI is that the public is, if anything, rather more involved in letter writing and going to meetings now than it was in the past so there are many ways of testing accountability and in a sense, even though it is an abstraction we are trying to ensure that the electorate feels that its elected representatives takes its views seriously and trusts them in doing so. Q64 Mr Cummings: If indeed local authorities were to be given significantly more responsibility for the raising and direction of local funds would this damage the argument for national standards? Professor Travers: It might. It would not damage the argument for national standards which, as I said earlier, I think is a powerful one. I think that we live in a society in which there are very powerful demands for national standards particularly in welfare services such as health and education. I think they get less when you move towards what you might call district council services but they are still there and if a larger proportion of income were raised locally and there were more local autonomy then I think there would be greater diversity. As I said in an earlier answer, you get some authorities performing well and others less well and that would I hope be reflected in electoral outcome. That is the way the system should work. So it would not damage accountability, I think that raising more money locally would enhance it, but the question of whether people want that is another matter. Professor Bramley: It must be right that this model of more local accountability is not compatible with a situation where central government prescribes standards for everything - the high level standards that people should be aiming for or the minimum standards. I think there has to be some retreat from that by central government if you were to go down this road. Central government will I am sure continue to prescribe minimum standards in some areas and that is why I think it is realistic to recognise that but there has to be some tradeoff there. There is bound to be some tradeoff there. Q65 Mr Cummings: Just to be absolutely sure, if local authorities were to be given significantly more responsibility for the raising and direction of local funds would this damage the argument for national standards? Professor Bramley: It is an argument that has to be weighed in the balance. You cannot have both to an absolute degree. You cannot have maximum determination of standards by central government --- Q66 Chris Mole: Is it possible to cost national standards with a transparency that allows people to understand what additionality is being bought with local taxation? Professor Bramley: To go back to the point we heard a minute or two ago and earlier about the about arguments for education funding last year, clearly it would be desirable if there were some forum that was perhaps a little bit more arm's length from central government and local government which could in a sense adjudicate on some of the issues. Essentially what you are trying to do each year is to cost what is the cost of carrying on with the existing policies and commitments and statutory commitments we have, allowing for inflation and pay settlements and pension costs and that sort of thing and then, secondly, what is the cost of some new proposed departure from that. These things ought to be capable of being largely resolved, after perhaps quite a bit of technical discussion and a bit of wrangling There is another model in my mind, another theoretical view about local government which is that it is a scapegoat, it exists and is allowed to continue to exist because it is quite convenient to blame it when things go wrong, so I think sometimes ministers in government exploit ambiguities in these areas and say they should be able do this for this much money but if this were subject to an independent audit it would turn out that perhaps they could not. Q67 Chris Mole: The Government knows exactly what it thinks it is spending per primary pupil nationally but by the time that has been mangled through resource equalisation and area cost adjustment it is a completely different figure by the time it arrives in Berkshire or somewhere. Professor Travers: In education it probably would in theory be possible to achieve the precise division of accountability that you are discussing. It would in theory at least (and we have got quite close to this) be possible to have a school by school allocation of money or at least an allocation of a formula spending share kind which is of course an allocation not of grant but an allocation of imagined resource, stylised resource, it would be possible to have that in theory down to the school level so, "Here is a figure that the Secretary of State believes your school should receive this year," and then allowing local authorities to spend more or less than that amount. It would be possible to do that. Professor Bramley: It would be possible to have it down to the pupil level? Professor Travers: Indeed yes, it would. So you could for education move in that direction to the point where you could have, "This is the amount the Secretary of State says you should have spent on you, oh pupil, or you, oh school, but the authority has decided to spend five per cent more or five per cent less and you can blame them for that margin." You could do that - just. Q68 Chairman: You could do it for schools but you could not do it for flower beds presumably? Professor Travers: It would be very difficult for some other services. Professor Bramley: Would you want to do it for flower beds? Professor Travers: Where there is a formula spending share in principle you could do it service by service by ring-fencing each service and by saying, "This is what the government says you should do," and then the authority would be free to do more or less, but it is easier in education to see the result. Chairman: I think we need to move on to local income tax. John Cummings? Q69 Mr Cummings: The supporters of local income tax cite fairness and the simplicity of its assessment and collection. Are these not powerful and compelling advantages over the council tax? Professor Bramley: I rather agree with the previous speakers that it would be a great mistake to abandon council tax because I think it is important to have a balanced tax system and it is important that property should be taxed within that. We have got enough problems with the housing market going out of control through being under-taxed as it is and to take away the last remaining property tax would be a big mistake Also I think taxes on fixed property are ideal par excellence appropriate for assignment to local government level. They are the first choice for a local tax for lots of reasons that you can easily see. I think broadly the experience of the council tax is that it has been successful, it has worked well compared with some of the predecessors and alternatives that have been considered, it has been less controversial, more workable. It has got a bit more controversial lately perhaps because it is in need of some reform. The other quite interesting point that emerged from Peter Kenway's presentation this morning and his written submission is that it is quite close to being proportional to income in many ways anyway across the bands, at least in the central part, and if the bands were extended then that could become more generalised. He alluded to a problem that it is not necessarily proportional to income across regions given what has happened to property prices. I make a suggestion in my paper that one could address that issue by doing something which I think Layfield suggested originally which is to base the equalisation on income rather than the council tax values themselves. I see a strong continuing role for council tax. I have also made the point that I think there is a role for part of the non-domestic rate to be localised. You could have income tax as well and there are precedents from some of the Northern European countries, for example, for having a locally assigned income tax. It is quite feasible. Personally I cannot believe that central government will let it go. That is just my political judgement. My guess is that it is too sensitive in the national political arena and they will not let it go and it is also the Treasury's most important revenue source. I do not think it is worth getting into the argument to move it to the local level unless you are going for a thorough localist solution. If we have still got central government dictating a lot of what is going on in education and so on I am not sure it is worth the candle. Q70 Mr Cummings: Is that the reason why central government has been reluctant to accept the analysis that a local income tax is acceptable? Professor Travers: Can I take it up. I agree with Glen's point precisely on the importance of keeping a property tax and a local property tax. I think council tax has all the characteristics that Glen has described and I think that there would be a risk that if it were removed as a local tax that the Treasury would simply take it over as a national tax so I would be very surprised if property tax went away altogether. On the question of local income tax interestingly, in a sense, we are all paying income tax or other taxes some of which is used to fund local government through the grant system. I think one of the interesting aspects of the Local Government Association's proposals published within the last six or so months is that they do find a way of trying to make clear to people that a proportion of their national income tax is being used to fund local government, that the people of Stockport are already paying for their local services, they are just doing it through the Exchequer and I think it would be appropriate to go down the route of making that more explicit but not at the cost of losing the property tax. Q71 Mr Cummings: Professor Bramley, what do you think might be the impact on deprived communities of the need for increasing economic equalisation for alternatives to council tax, such as a local income tax as you have been talking about? Professor Bramley: I have just made a suggestion --- we already have a grant system that supposedly equalises the situation of local authorities that are in rich or poor areas at the position so that if they spend equal to the FSS share as a base position, if they provide a standard level of service they should be able to fund that at a common band D council tax. I have made two suggestions about equalisation that would possibly improve on that situation One is to do with the so-called dynamic equalisation so that if they chose to spend more than that they should do so on a level playing field basis rather than an unequal basis and, secondly, I make the suggestion that possibly the basis for the equalisation should be related to income levels rather than council tax levels to get a better relationship between council tax and income levels. As far as having the non-domestic rate relocalised, yes, I think that would have to have an equalisation grant associated with it to deal with the Westminsters on the one hand compared with the places that have relatively little commercial property value at the moment on the other hand, but I was suggesting that should not be at 100 per cent so that there is still some incentive. Professor Travers: Could I just add briefly on the point of equalisation, Glen Bramley has done an enormous amount of work in the past looking at the extent to which we in Britain have by international standards ferociously complex equalisation arrangements that seek to create much greater degrees of precision than I think many other systems do. I am not sure we need to spend quite the level of time and effort - personally, I am not saying he does but personally - achieving quite that level of precision. The only thing I would challenge with what Glen said is that I am not sure that adding income into the equalisation base would of itself be a good thing because it would be more complicated to understand what was then going on. I think it would be far better to use the benefit system where appropriate to help those who are clearly in need at the margins of poverty from being overburdened by council tax. Chairman: I am getting worried about the time, I am sorry we will have to move on to Mr O'Brien. Q72 Mr O'Brien: Should not local authorities be allowed to raise additional taxes other than council tax and income tax? Professor Bramley: I would have thought in principle yes. It depends on the circumstances. There may be some circumstances in which it is possible. There is the general ultra vires authority which they have been given under certain legislation to do certain things such as congestion charging, and maybe those powers could be extended. Whether Parliament would want to give them completely open-ended powers is perhaps another matter. Q73 Mr O'Brien: Any other suggestions other than the congestion charge? Professor Travers: We have seen some inching in this direction in recent years. After all, section 106 in planning has almost become a tax and may be formalised into one. It is not an ideal one but it is moving that way. The local authority business incentive, which is a way of allowing councils in future to keep part of any growth in their business rate base, is a move in that direction. Business Improvement Districts are a slight move in the direction of locally retaining --- Q74 Mr O'Brien: --- They only apply to certain authorities. Professor Travers: They only apply to certain authorities. All I am saying the principle there are tiny cracks in the dam so I think it is possible to imagine going further. Q75 Mr O'Brien: How long will we have to wait to be able to ensure that we can do away with the gearing? What other taxes would you suggest would be favourable? Professor Bramley: I do not think either of us is suggesting that these other types of taxes are a large scale solution to the whole balance of funding problem. They are something that can develop incrementally and they may be quite helpful to certain local authorities in relation to certain types of problem they face, particularly on the capital side and the need to facilitate certain types of development, for example, transport infrastructure. Q76 Mr O'Brien: What would you say to a sales tax? Professor Travers: A sales tax would be a much bigger revenue potential and that would be part of what I would see as a major change to the way in which local government was funded, which personally I would support, but that does immediately put you into the position of what is effectively a constitutional change. Q77 Chairman: On the point you were making about income tax, in a sense we already have a sales tax because VAT went up from 15 per cent to 17 and a half per cent on the theory that that extra two and a half per cent went on to councils. The fact is that it did not but it was supposed to go on. Professor Travers: I think it is fair to say, Chairman, it is a sort of invisible hypothecated revenue. Chairman: On that note I think we had better call this session finished. Thank you very much indeed to both of you. Can we have the next set of witnesses, please. Memorandum submitted by Office of the Deputy Prime Minister Examination of Witnesses Witnesses: Mr Ray Shostak, Public Services Directorate, and Mr Andrew Lewis, Head of Tax Policy Team, HM Treasury; and Ms Lindsay Bell, Director of Local Government Finance, Mr Andrew Allberry, Head of Taxation, Valuation and General Policy Division, Local Government Finance Directorate, Mr Robert Davies, Head of Modernisation and Grant Distribution Division, Local Government Finance Directorate, Office of the Deputy Prime Minister, examined. Q78 Chairman: Can I welcome you to the third session this morning and ask you to identify yourselves for the record. Mr Allberry: Andrew Allberry from the Local Government Finance Directorate in ODPM. Mr Davies: Robert Davies, from Local Government Finance in ODPM. Ms Bell: Lindsay Bell from Local Government Finance in ODPM. Mr Shostak: Ray Shostak, Public Services Directorate in the Treasury. Mr Lewis: Andrew Lewis, Tax Policy Team in the Treasury, dealing with national tax issues. Q79 Chairman: Does anyone want to see anything by way of introduction or are you happy for us to go straight into questions? Ms Bell: We are happy to go straight to questions. Chairman: Clive Betts? Q80 Mr Betts: From the evidence the ODPM say: "The Government provides grant to supplement the money available to local authorities from council tax and redistributed business rates." Given that central government controls absolutely the level of business rates is it not a reality that council tax supplements the grant provided local authorities by the government. Have you not got it the wrong way round in the way you look at it? Ms Bell: You mean that the primary source of income is government and the council tax is supplementing that? Q81 Mr Betts: Yes? Ms Bell: In terms of the numerical balance that is clearly the case. Q82 Mr Betts: And that effectively has a particularly important role then in the way that central government controls and influences local government expenditure? Central government is very much in the driving seat, is it not, given the balance of where the funding comes from? Ms Bell: There is a difference between the balance of control and the balance of funding and I think it just might be worth going back to what the government said in the 2001 White Paper. They said that the local government finance system needs to balance the delivery of national priorities and targets with local financial freedom and responsibility and even in the areas where local government is primarily an agent of central government in delivery of particular national priorities the government recognises that local government cannot do that properly if they are over-constrained by government. The Government does recognise that it must not over-control local government but you are right in terms of the numerical balance of where the money is coming from. Q83 Mr Betts: That is absolutely key, is it not, to the whole issue of control? It is semantics to say we do not want to control too much. You control 75 per cent of what local government gets and therefore you control them. Ms Bell: I do not think that is right actually. If you give the money unhypothecated, as most of their money is, then the decisions on spending are still for local government and indeed the level at which they set their budgets is still a matter for local government. Q84 Sir Paul Beresford: Much of local government would contend that not only have you got control on the finance you have also got control on how they spend it and enormous control on checking on how they spend it. One small district authority said that they have 238 targets and 85 strategic strategies or plans at your behest, with the funding consequences or the lack of funding consequences which mean they have to find the funds for that through the council tax? Ms Bell: I am sorry, I cannot second-guess the figures you have quoted but there is no dispute that the Government realises that it has to simplify the regimes under which local government operates and indeed there are various initiatives on efficiency that we are working with local government to try and do that. Sir Paul Beresford: You have been saying that for years. Every time we call a minister the first thing a minister says is we are going to solve that problem, we are going to have another target. Q85 Chairman: Pulling faces is quite useful from your point of view but not very good for getting it on the record. Ms Bell: I realise that, I was not deliberately pulling faces. I cannot answer for the particular targets that the government are choosing to set. I cannot say any of them at the moment are not needed but the general principle of needing to simplify the grant regime is one that the Government accepts. Q86 Mr Betts: In case the Treasury think that they are here for the enjoyable experience, are the Treasury worried about the overall amount of taxation that local government raises? If there is more freedom for local government to increase its take of tax, would that be a problem in terms of the overall scheme of things and control of economic policy? Mr Shostak: Picking up on the points that have been made there, at the time of the Budget the Treasury published a review which was jointly carried out by the PMDU and the Treasury on devolved decision-making. What that was intended to do was to pick up some of the concerns that have been raised in respect of the target regime and, indeed, as part of the Balance of Funding Review we are picking up some of the concerns in respect of your last question. Inevitably, in terms of the devolved decision-making review we recognise there have been within the PSA framework in terms of our performance management regime a number of both national and indeed, as you were describing in terms of your district council, a number of developments in respect of the way in which individual authorities monitor their own performance and indeed work on their own performance supported by the national structure and the terms of the performance management regime. We have seen a reduction in national targets in terms of PSAs and that has, and will continue I suspect, to lead to a reduction in the number of targets at local level. In terms of your direct question, the Balance of Funding Review is looking at a range of issues and in terms of that whole issue of balance and will be reporting during the course of the summer. Q87 Chairman: As a matter of principle how much freedom could the Treasury let local government have? You must have some views on that principle. Mr Lewis: The remit of the Balance of Funding Review is deliberately open and the Government is encouraging a wide-ranging debate on many of these issues. An element of the remit, of course, is to ensure coherence between what we do on balance of funding and the overall macro-economic framework in which tax decisions take place as set out by the Chancellor in the fiscal rules. Provided that framework is a clear element of whatever solution is ultimately recommended from the Balance of Funding Review, really these issues are entirely appropriate to be considered in that context. It is important to remember that macroeconomic context but that is built into the remit of the Balance of Funding Review and we are playing an important part in that process. Q88 Mr Betts: That is either a very deep answer or a statement of the blindingly obvious that the Treasury are concerned about overall issues of finance. In terms of the impact of local government being able to raise more of its own revenue through local taxation are there likely to be any serious concerns from the Treasury about the impact on overall macroeconomic policy from allowing local government to raise 50 per cent of its own funding locally rather than 25 per cent as at present? Mr Lewis: There are issues to be addressed and they are being addressed in the Balance of Funding Review. Q89 Mr Betts: Can you tell us what the issues are then and how the Treasury is addressing them? Ms Bell: Can I just come in. Q90 Mr Betts: It was for the Treasury first. Can we let the Treasury have a go at it and then if you want to come in. Mr Lewis: As I say, it is an intricate part of the remit of the Balance of Funding Review to consider. Q91 Mr Betts: I know what the remit of the Balance of Funding Review is. What is your view that you are submitting to them? Mr Lewis: We are engaged in those discussions on the basis of the remit. Q92 Mr Betts: With respect, that is not an answer; what is the Treasury view? Mr Lewis: The Government has taken a number of steps recently, for example the new prudential borrowing regime for local authorities which is a new mechanism to allow decisions that take place at local level to be given greater freedom and flexibility within the overall context of the macroeconomic policy framework set by the Chancellor and that is an example of the need to explore alternative means of meeting those ends. Q93 Mr Betts: And if in any proposal the amount of revenue that local government raises for itself should be increased from 25 per cent to 50 per cent, say, does the Treasury have any concerns about the impact of such a proposal in terms of macroeconomic policy; would it want to control it in any way? Mr Lewis: I do not think it is an issue of control, it is a matter of identifying issues and discussing them through the framework of the Balance of Funding Review. Q94 Mr Betts: So the Treasury has no view? Mr Lewis: The Treasury view is these issues are important, that is why they are being discussed. Q95 Chairman: There is a central issue, is there not, of how far local government expenditure has to be part of the Treasury macroeconomic view. As far as the Treasury is concerned, if a local authority transfers its housing to a transfer company then that moves it out of the public sector and into the private sector and the Treasury no longer has a view as to how much money they should borrow. How tight is that the view that local government, if it does more than a certain amount, is going to upset the general macroeconomic situation? Mr Lewis: I cannot really add much to what I have said. I turn to colleagues for information about the overall fiscal framework for local authorities, but I think in the context of the discussions on the Balance of Funding Review, as I have said, I think these discussions need to understand the issues that arise from the need to ensure prudential limits on borrowing and they need do that within the fiscal framework for public expenditure. Q96 Chairman: Are there limits then as far as local authorities are concerned in general in terms of the Treasury? Mr Lewis: I think the local government finance framework is a matter for ODPM. Ms Bell: Can I just pick that up. Q97 Chairman: Yes, you can help out. Ms Bell: I was going to pick up a couple of specific points that struck me might be relevant to what you were asking. One is - and Nick Raynsford has already said this - that certainly in looking at any options for new taxation or changing the balance you would genuinely have to look at safeguards both for macroeconomic purposes and for individual residents so you would have to look at safeguards as well as just looking at what additional freedoms you had. The second thing is we certainly are aware that you would have to look at equalisation differently but it would still remain an important issue. So if you had areas that could raise a lot more money but did not have the same needs, you would still have to have some intervention mechanism to look at that so it would never be really simple I would say. Mr Betts: It is an interesting answer but I am not sure it is an answer to the question I asked. Q98 Mr Clelland: If and when any new taxes or charges are brought into change the balance of funding and weight it more in favour of local authorities, what account would be taken of that in calculating central government grant? Will every pound raised through the new system result in a pound reduced in government grant? Ms Bell: I genuinely could not answer that. I think there would be options year-on-year as to how the government in certain spending reviews take decisions on what spending is. I do not know, you could do it either way. Q99 Mr Clelland: It has not been discussed at all in the course of the --- Ms Bell: In terms of balance of funding, the balance of funding is what it says. You would assume that the same amount of money was the take. Q100 Mr Clelland: So the answer is yes there would be a pound-for-pound reduction. Ms Bell: That is an answer but, as I say, there are separate streams of work on what the government thinks overall public spending should be, and they would be in the spending review, so there are two different streams coming together. Q101 Mr Clelland: In all of the discussions which are going on in this is no change at all a viable option? Ms Bell: I think it is. Anywhere on the spectrum is still up for grabs. Q102 Mr Clelland: So it has not been ruled out? We have not decided that there has to be some change and the present system could just continue as it is? Ms Bell: The thing the Government has said is that it is definitely going to revalue, so the revaluation of council tax is definitely going to happen and thus there are components of this that will change anyway even if the overall system stays the same. Q103 Christine Russell: Can I ask both sets of you what is under consideration as far as council tax benefit reform is concerned, especially to tackle this thorny issue of those people in our community who are asset rich and income poor, ie mainly the older sector? Ms Bell: Proposals to look at things to change the way of looking at it not as benefits but entitlements or whatever is certainly something that can be looked at in the Balance of Funding Review and is the sort of thing you have already heard about in the Policy Institute. That is certainly something we would be very happy to look at. Meanwhile there is a lot of work going on to increase the take-up to make sure that the people who are entitled to it are getting it. We know take-up, particularly among homeowners is very low, so there is a lot of work going on with DWP about that. I think DWP separately either have or were going to put in some further advice to the Committee on this. Q104 Christine Russell: What about the Treasury? Are the Treasury looking at different ideas like permitting older people perhaps to put a charge on their property? Mr Shostak: I do not think that is currently part of the Balance of Funding Review, is it? Mr Allberry: No. Mr Shostak: I am not aware of it. That is not to say it is not happening, I am just not aware of what DWP is doing on these issues. Q105 Chairman: Nick Raynsford told the Committee that if you had a fairer system of benefits then many of the regressive aspects of the council tax would disappear, so surely it must be one of the key elements to a review that you look at having a fairer system of benefits which would then solve some of the problems which are now pressing people to look at the balance of funding? Mr Shostak: Certainly it is the case that benefits does play a part in all of this. As Lyndsay said a second ago, a great deal of work is currently going on in terms of increasing --- Q106 Christine Russell: Where is that work going on, in the Department of Work and Pensions; is that what you are saying? Ms Bell: Primarily. Q107 Chairman: How much would it cost the government if we had everybody who was entitled to claim benefits claiming them as far as the council tax was concerned? Mr Allberry: I do not know that, no, I am sorry. Q108 Chairman: But it is a significant amount, is it not? Mr Allberry: There are many hundreds of millions of pounds not claimed at the moment, as I understand it, but I do not have an exact figure. Q109 Chairman: And yet the Treasury does not seem to have a view about it? Mr Shostak: Our view is that we would want to increase the number of people who actually are claiming the benefits to which they are entitled. As I indicated, our government is working to actually achieve that objective because, as you rightly said, it matters. Q110 Christine Russell: How happy would the Treasury be if whoever is doing this research came up with the solution that perhaps raising the threshold of savings that a person can have in order to be entitled to benefit should be raised? Would the Treasury be very happy if that recommendation came forward so that instead of the present threshold which is stuck at £60,000 for ten years that was raised or even scrapped completely? Mr Lewis: I do not cover these issues directly but I would draw a distinction between changes to liability and entitlement for council tax benefit and changes to take-up. It is very important and clearly one of the main things the government can do to address some of the problems at the lower end of the distribution with council tax is to improve take-up of council tax benefit and that is where the emphasis is placed. Of course any future decisions on the structure of council tax benefit is a matter for ministers and DWP. I would add that of course the Chancellor did take an additional measure in this year's Budget to provide an extra £100 for the over 70s which he explained was an integral part of our support to help elderly people with council tax bills this year. Q111 Mr O'Brien: Can you explain if the new formula, the grant system that was introduced in 2003-04 has made the system more simple in terms of payment of grants? Ms Bell: Discussions with the Local Government Association showed that local government collectively was most concerned about the fairness of the system rather than simplicity and we took that message on board I think the system is still undeniably complex but in the presentation of it we have tried to make it more transparent by having a unit element and then a top-up element which incorporates other elements of the cost so I think the answer is it still is not simple but we have tried to make it clearer in the presentation of it. Q112 Mr O'Brien: Do the Department take into consideration the increased cost that is faced by local authorities for on-going services and the fact that the replacement cost to local authorities is much greater than what the Department considers it is? Do you take these into consideration? Ms Bell: Yes, the totals are negotiated as part of the spending reviews Individual departments look at the costs that they think will fall as a result of policies to local government, and inflation and pay and things are one element of what we look at for that. In terms of the distribution there is some distributional difference that is also taken into account between local authorities about different costs. Q113 Mr O'Brien: The Department do not take into account the inflationary costs to local government, do they? They have an assumed inflationary cost but the actual cost is much greater? Ms Bell: The quantum that eventually is decided on takes account of those things. The issue about whether the quantum is considered big enough is one I could not comment on. Q114 Mr O'Brien: This is not new, it has been with us for a long while but local government have yet to identify where in the quantum costs the actual cost as against the assumed cost does apply. All I am asking is do you take into consideration the actual cost as against the assumed cost? Mr Davies: I am not sure that I can take that much further. The aggregate figures published in the spending review obviously reflect a view reached by government collectively about spending pressures and about any improvements in cost effectiveness that might be expected from local government but those are not identified separately to reach an overall view on what the aggregate should be. Q115 Mr O'Brien: Do you review services separately? Mr Davies: In terms of the individual services there are blocks in the distribution formula for some services which are re-run each year using updated data so if the costs we have modelled for an individual local authority had gone up faster than another, those would come through in the formula. Q116 Sir Paul Beresford: Before the formula grant system changed I think I am correct that the government announced that they believed the council tax system was an acceptable system, accepted generally by the public. We then had the new formula grant system, we then had the outcry, we have had two years of concern, and it is quite clear that at least the size of the taxation through system is unacceptable. Do you think it is linked to the formula grant system changes? Ms Bell: There is quite a lot in that question. I do not necessarily accept the analysis in the first bit of the question If it was meant to be an explanation of why we have got a Balance of Funding Review I do not think I would necessarily accept that. I think the Balance of Funding Review is looking at exactly what it says and it is the issues that have come up about that balance between central and local government, and the operation of the council tax is one factor in that. The changes we have made in the formula have all been widely welcomed by local government, they were all done in agreement with local government, and these were not considered to be disruptive to the tax system. Q117 Chairman: But they upset a lot of voters or their consequences upset a lot of voters? Ms Bell: Any change in distribution always has losers. Mr Davies: It is not possible to get a generally agreeable set of distributional changes, no. Q118 Mr Sanders: What is the importance of ring-fenced grants to local authorities and why have they increased? Ms Bell: The Government's policy on ring-fencing has been that there is recognised that there is a need for ring-fencing, for example to embed something new that you want done, that everyone wants done, but the Government is also clear that its overall policy is to restrict ring-fencing, only use it where necessary and keep it constantly under review so that as soon as we do not need it we remove it. Certainly the direction of travel on ring-fencing is that the amount of money that is ring-fenced is being reduced. Q119 Sir Paul Beresford: The impression the Committee gained last year on this was that the proportion of ring-fenced grant was going down but there was a name change and it became "passported" or it became "targeted funds", and if you aggregate them all together under the same sort of bracket they would have gone up. Ms Bell: I do not think we would accept that passporting is ring-fencing. Q120 Mr Sanders: What is the difference between the two? Ms Bell: The passported money is still part of the unhypothecated pot, it is just government has made it clear to local authorities what it wants to see for the stability and certainty it needs. Mr Sanders: So where does the ring-fenced money come from? Q121 Sir Paul Beresford: When is a fence not a fence? When it is called passporting. Ms Bell: It is different and indeed not all local authorities --- Q122 Mr Sanders: Passported comes from the hypothecated pot; where does the ring-fenced money come from if not the same pot? Mr Allberry: Separately! Q123 Chairman: Let's be clear. Ring-fenced 100 per cent actually gets spent on what it is supposed to be spent on; is that right or is there an underspend? Ms Bell: There could be an underspend with ring-fenced. Q124 Chairman: So ring-fencing basically is 100 per cent. In passporting how much gets spent? Ms Bell: Sorry, I have not got the figures. Mr Davies: You can look at passporting targets for schools spending in two ways, the overall effect or the individual effect. Overall schools spending goes up by almost exactly the increase in FSS for schools for England as a whole. Within that some authorities increase their spending by more and others by less. Q125 Chairman: So passporting has virtually the same effect; 100 per cent of the money intended gets spent, except with ring-fencing the authority is guaranteed that the money goes to the authority. With passporting there are swings and roundabouts and you get some local authorities who may spend a little bit more and others a little bit less. Mr Davies: That is certainly true. You have no choice what you spend a ring-fenced grant on. Q126 Chairman: And in passporting you have very little choice? Mr Davies: There is a choice. Q127 Chairman: I am trying to get at the degree of choice by asking you what percentage. We agree with ring-fencing that 100 per cent gets passed on but with passporting you cannot really tell me how much gets passed on? Mr Davies: I can tell you in aggregate how much gets passed on, it is almost exactly the same as the FSS increase. Most authorities chose to pass on exactly 100 per cent, others more, others less. Mr Sanders: The ODPM says in its written evidence to the Committee that the 2001 White Paper argued that the balance of control was a more serious and urgent issue than the balance of funding. Is this still the Government's view? If so, what problems does it associate with the present balance of control? Q128 Sir Paul Beresford: Perhaps the Treasury could start because you mentioned you had a paper on targeting which I think came out at the same time as the Budget. Mr Shostak: The balance of control is the direction of travel whereby we are looking to empower local authorities --- Q129 Sir Paul Beresford: Empower or impound? Mr Shostak: --- to actually look at more innovative and imaginative ways in terms of meeting their and our overall targets. Q130 Sir Paul Beresford: All the targets are your targets; they are not local authority targets. Mr Shostak: The direction of travel apropos the previous question is the same in looking to reduce the overall global amount that is being ring-fenced and it is expected that we will meet the target of that being less than ten per cent after next year and so it is looking to increase the balance of control within local authorities to be able to actually use their funds as they deem appropriate in terms of meeting their targets. Q131 Mr Sanders: It was the Audit Commission's view that passporting is one of the factors in the 12.9 per cent council tax rise in the last financial year. Is that your view? Mr Shostak: Last year had a particular set of circumstances associated with it in terms of a range of different changes in respect of local authority expenditure, not least of which were within the education sector whereby there is a range of changes in terms of some of the --- Q132 Chairman: --- It is a simple question; did the Audit Commission get it right or wrong? Mr Shostak: It is not for me to comment on that conclusion, that is the judgment that they reached. Q133 Chairman: So do you agree or disagree with the Audit Commission? Mr Shostak: I am not sure I can add much more to it. Q134 Mr Brady: If the total percentage of local government expenditure which is ring-fenced is going to come down to ten per cent could you give us an indication of what the percentage would be of those funds which are ring-fenced and passported added together? Mr Davies: It would be over 50 per cent if you add all schools spending to the ring-fenced amount. Q135 Mr Brady: Just over 50 per cent or? Mr Davies: I do not know exactly. Ms Bell: There is a straight answer to that question; we just do not know it. Chairman: Perhaps you could let us have a note on that. Bill O'Brien? Q136 Mr O'Brien: The ODPM has just said that gearing is a spur to encourage councils to look at ways of driving down cost more than raising taxes but this does not appear to be the case because research done by the Balance of Funding Review shows that highly geared authorities do not perform better than others. Why does gearing not work as an incentive to drive down local taxes as suggested by the Office of the Deputy Prime Minister? Mr Allberry: What the research showed, I think, was that you could not prove a correlation between different rates of gearing and different rates of efficiency. I do not think the research disproved that overall gearing does not provide a spur to efficiency in as much as more efficient councils can have more money to spend from what they raise from council tax on their services. Q137 Mr O'Brien: But the councils that have to provide for large deprived areas do find that gearing is an imposition, so can you address that particular point? Mr Allberry: It is certainly true that gearing tends to be much higher in those areas. All I was saying was that the research did not prove that the degree of efficiency, if any, which that particular level of gearing produced varied from a more lowly geared area. Q138 Chairman: So fourth gear does not move the thing along any faster than first gear? Mr Allberry: That is what the research suggested. Chris Mole: What relationship is there between the total level of spending by an authority and efficiency? Maybe it just provides less services. Q139 Chairman: Come on, tell us why gearing is a good thing; make it quite simple. Mr Allberry: Simply because the local authority picks up the political cost, if you like, of putting up council taxes to increase expenditure and if that increased expenditure is as a result of relative inefficiency --- Q140 Chris Mole: --- If, if, if. Mr Allberry: If, then the local authority must pass that relatively inefficiency to the local authority. Q141 Chris Mole: But that does assume that everyone is spending at the same base level. There are massive differences in base level spending. Mr Allberry: That is true but at the margin there might be a requirement to spend more, and in this case we are assuming that requirement to spend more is as a result of inefficiency --- Q142 Mr O'Brien: In local government now they have ways of explaining to the electorate that gearing is the responsibility of central government and not local government and therefore the question of the impact on the electorate does not always fall on local government. What I am looking for is the way that your Department has been looking at other factors or levers to improve efficiency within local government without the gearing situation. Has any thought been given to that? Mr Allberry: A lot by the Department. Q143 Mr O'Brien: If there has can you tell us what it is. Better still let's have a paper on what you have been doing. Ms Bell: There is a lot else going on to try and help local government both to try and measure efficiency, and one of the problems is how you measure what is down to efficiency, and also to help improve efficiency. The local government performance regime and the best value regime have been operating now to try and secure improvements and there is the CPA regime run by the Audit Commission. Q144 Chairman: The Committee has had quite a bit of evidence that there are ways of going for different forms of grants which will get rid of the gearing problem. How far have those solutions been looked at? Ms Bell: In terms of what they do for efficiency? Q145 Chairman: In terms of whether they get rid of the gearing problem which several people round this table feel is unacceptable. Ms Bell: The Balance of Funding Review is looking at what different mix of things would provide a different spread of central and local things which would affect the --- Q146 Chairman: Yes but in the various papers that have been submitted one or two people have suggested ways of getting round the gearing problem. Do any of those appear to be attractive to the Government? Ms Bell: The Government is still looking at everything that has been put to it in the context of the balance of funding so it has not ruled anything out. Q147 Mr Betts: CIPFA put forward a specific proposal about having a core grant and then a top-up grant which effectively would make a major difference to gearing arrangements. Are there any practical problems foreseen with adopting that sort of approach? Mr Allberry: That suggestion was made in the context of the Balance of Funding Review and we will have to await the --- Q148 Mr Betts: I am asking for an ODPM view. Clearly that is a proposal being put forward. I am not saying are you going to adopt it or do you agree with it; I am saying are there any practical problems with its adoption? Ms Bell: The short answer is I do not know. Q149 Mr Betts: What about the Treasury? Do the Treasury have any practical problems to put forward as to why they might not be too happy with that proposal? Mr Shostak: No, I am not able to respond to that. I just do not know. I have not got enough detail of the specifics of the proposal that you have raised to be able to answer that. Q150 Mr Betts: The idea is essentially that central government would share in funding the costs of the provision of extra services along with local councils so the gearing problem would be got rid of. It is a bit like the system we had for 40 years after the War. Mr Shostak: Gearing is inevitably one of the big issues that the Balance of Funding Review is looking at. There are a variety of alternatives to solve it of which the CIPFA is one particularly. Because of the gearing we know (and in a sense that was part of the rationale behind the Balance of Funding Review at the off) that there is lack of clarity in terms of issues about accountability, there is lack of transparency, there is a range of other problems in terms of its impact in terms of council tax and so on. What the Balance of Funding Review - and the CIPFA proposal is one - is looking at is a range of issues, a range of alternatives that could potentially address that gearing issue. As I say, I do not know enough detail about that particular one. Q151 Mr Betts: That is helpful but let us put it another way. Given that there will always be an element of local government funding presumably that comes from the centre, if only to equalise the difference in needs of different areas and the difference in their resource base, then without some form of approach such as has been proposed by CIPFA there will always be different gearing ratios into different authorities and therefore some inherit unfairness between authorities in the impact of increasing expenditure by a given percentage in those areas. Is that accepted? Mr Shostak: Yes. Q152 Mr Betts: Is that an issue that the Balance of Funding Review will have to address and come out with some ideas on? Mr Shostak: Yes. Q153 Chairman: The CIPFA paper on local income tax; did they get it basically right? Ms Bell: I really cannot pre-empt what the Government's view on that would be. Q154 Chairman: I am not asking for views; I am asking whether the work CIPFA did on local income tax and the costings, things like that, did they basically get it right? Ms Bell: I think it is jolly useful work in that sense and indeed they are doing more work. Q155 Chairman: Does "jolly useful" mean they got it right or do you see major flaws in it? Ms Bell: The short answer is I cannot comment on what our assessment of the work is but the fact that it has been done and they are doing now more detailed more work is precisely because we want to get into this and the devil will be in the detail and we need to find out. We cannot really take it further than that at this stage. Q156 Mr Cummings: Assuming that the revaluation will take place in 2007 - and perhaps you can confirm or deny that this morning - for a revaluation to be completed by 2007 obviously the process will have to start in 2005. If that is the case, can you explain how any changes to the council tax banding coming out of the Balance of Funding Review will be implemented? Could, for example, changes to the number of council tax bands or the introduction of regional banding be implemented by 2007? Ms Bell: The short answer is yes. Q157 Mr Cummings: To all of them? Ms Bell: Yes. Q158 Mr Cummings: That is ideal. What are you going to do to inform the public about the possibly impacts of revaluation and what discussions are you having with local authorities about the possible impact of revaluation? Ms Bell: We are certainly aware that the communications will need to be very clear. This is a big issue and we will be consulting. Exactly what form that will take I do not know and we are certainly also consulting local government. Q159 Chairman: Wait a minute, there must be a timetable now for this actually happening. The revaluation is going to start next year, is it not? Ms Bell: 2005 is the antecedent date, is it not? Mr Allberry: There is a progressive programme of work that the Revaluation Office Agency are already engaged in obviously working up to 2007. Q160 Mr Cummings: Do you have a schedule or programme of when you intend to start with the public information exercise? Do you have a timetable of when you intend to commence negotiations with local government? Mr Allberry: We do not have a published timetable for that yet. Q161 Mr Cummings: If you do not have a published timetable how are you going to persuade us that everything is going to be tickety-boo for 2005. We are half way through 2004 at the present time. Are you working in the dark? Mr Allberry: 2005 is critical most of all because that is the antecedent date. It is the property values in that year that will form the basis of the revaluation two years later in 2007. Mr Cummings: But the process is going to start in 2005? Q162 Sir Paul Beresford: If you have not got a published timetable have you got a draft timetable that you might be able to let us have a glimpse at? Mr Allberry: No, we have not. Sir Paul Beresford: Wonderful. Mr Cummings: You do not have a draft timetable? Q163 Chairman: Let's just work backwards then. We have got 2007 and presumably that is the April when people are going to start paying on the new rates? So if we are going to have extra bands put in, at what point - and as I understand it we need legislation - does legislation have to go through the House to increase the bands? Mr Allberry: Because we do not have a clear and agreed draft timetable I cannot give a particular month for that but obviously we need to allow for that. Q164 Chairman: How long does it take to get legislation through? First of all, let us confirm we do need legislation for some extra bands; is that right? Mr Allberry: It is secondary legislation. Q165 Chairman: How soon does that have to be done before 2007? Mr Allberry: It does not need to be done a great deal in advance of 2007 as far as I am aware. There is enough time between the end of the Balance of Funding Review and the time that ministers will need to take to take decisions and work out detailed proposals on anything coming out of the Balance of Funding Review that is relevant to revaluation to take forward that process, including those important steps that you have mentioned such as public consultation, consultation with local authorities and publication of secondary legislation to get us through to the 2007 revaluation date. I am not saying there is a great deal of time available but there is enough time available. Q166 Chairman: So by the time Ministers come before Committee on this inquiry it should be possible for either you to have supplied us with or the Minister to give us the timetable of when those things will have to happen. Mr Allberry: We can certainly give an indication. Ms Bell: Ministers will not necessarily know at exactly what point the decision is taken because partly it will depend what the decisions are. Given that all options are still open the option of not changing the bands anyway is still an option, in which case the timetable will be different. We will go away and we can work up some key elements in that timetable and what the parameters are but that is probably as far we can go. Q167 Chairman: If I can take you on to the business rates very briefly. Basically the amount of local expenditure met by the business rate has gone down each year, has it not, because of inflation and more has been shifted on either local government grant or from the council tax; is that right? Ms Bell: Yes, the relative balance has shifted, yes. Q168 Chairman: Two-thirds of the council tax is raised by local fees. Is there any reason why councils should not be able to make a profit on some of their charges to cross-subsidise? Ms Bell: There is no theoretical reason. At the moment the Government's policy is that it is a cost of recovery base so that is the position at the moment. Q169 Chairman: But there is no economic reason why it should not be possible and if local electors want to make a profit on one service to subsidise another that should be perfectly reasonable? Ms Bell: If that was the political judgment then, yes, that is feasible. Q170 Christine Russell: Can I ask you about the provision of services by central government and local government. Is the Balance of Funding Review giving any information whatsoever as to who provides public services? I am thinking in particular of education? Ms Bell: No. Q171 Christine Russell: So the review is giving no consideration whatsoever? Ms Bell: It is not part of the remit of the review. The remit is to look at the balance of funding on the basis you need a stable system that would apply with different potential options. Q172 Christine Russell: Okay. Does the Department have a view on whether or not --- Ms Bell: The Department's current view is that the weight of responsibility currently lies the way Government wants it to. Q173 Christine Russell: Does the Department have a view on whether or not services that essentially are directed by and standards which are set by central government which should then be and are delivered by local government should be funded, as they are at the moment, by local government? Ms Bell: The Government view is that the current arrangements are the ones that it wants. The issue long term of whether funding is local or central is indeed for the Balance of Funding Review and that is up for consideration. Q174 Christine Russell: Does the Treasury have a view because obviously at a stroke you could cure the problems with the council tax by taking education funding away from local government. Mr Shostak: The question you were asking was predicated on the fact that standards are set by central government. Standards across many public services are, as it were, agreed nationally. It is actually much more complicated in terms of the responsibilities for local government versus the responsibilities for central government. As I think the Minister has indicated to you, there is consideration in terms of the overall balance of responsibilities in terms of the strategy for local government. That gets into a much broader set of issues and set of questions about public service regulation, public service inspection, public service roles and responsibilities, and where that best sits in terms of local determination, local accountability and so on. Q175 Mr Betts: Can I come back to an issue we raised before. The balance of funding review was established primarily because there was some concern at least that there might be too much of the funding given from central government and too little raised locally so if we move to a situation where local government raises a larger percentage of its income from local taxation, and at present about 4.2 per cent of GDP is actually raised locally in taxes so say we moved to a position where local government raised about ten per cent of GDP in local taxes, would the Treasury have a view about that? Mr Lewis: I think this comes back to the question you were asking at the beginning of this session. Our view is that is an issue that should be considered and indeed can be considered in the context of the Balance of Funding Review. Clearly it would have pretty profound implications for the way in which central government and local authorities interact and it would put pressures on the process of equalisation and so on but provided, as I said before, options can be considered within the context of the Government's overall fiscal policy then those are issues that need to be explored, yes. Q176 Mr Betts: Does the Treasury see any insuperable problems in terms of its desire to control overall fiscal policy in such a shift of funding? Mr Lewis: You say "desire to control", I think it is important, as has been clear throughout the whole process, that decisions on balances of funding - and it is a question of balance rather than the overall level of tax revenue - are taken within the Government's overall macroeconomic context. Q177 Mr Betts: Within that overall macroeconomic context is there an insuperable problem to the shift of the balance of funding to give local authorities a greater degree of control over the amount of money? Mr Lewis: I do not think we could identify an insuperable problem. Clearly there are issues that would need to be explored but I cannot see any insuperable problems. Clearly a percentage change of the sort that you have just hypothesised would have big implications that would need to be thought through. Mr Betts: But there are no problems of principle provided it is within the context of the overall fiscal policy framework as set out by the Chancellor? Q178 Chairman: What would be the levels of devolved expenditure then as far as Scotland and Wales are concerned? If we move off from the 4.2 per cent figure that Clive mentioned, what percentage do we get to in Wales and in Scotland? Mr Lewis: I think the Barnett Formula allocates just over ten per cent for Scotland out of marginal increases in expenditure and I cannot remember the percentage for Wales. Q179 Chairman: No, the Barnett Formula is to do with the increased expenditure as opposed to the actual expenditure. Mr Lewis: That is right. The Treasury published analysis on that in the recent past. Obviously not all expenditure can be defined --- Q180 Chairman: All I was trying to find out was it appears that we can devolve a certain amount to Scotland and I was just trying to find out whether if the same amount of local discretion to spend were exercised by local authorities in England whether you would see that producing a major problem? Mr Lewis: I think that is a slightly different question. Mr Betts was asking about the balance of funding whereas I think your question is about the balance of responsibility, which colleagues have explained is a different issue outside the remit of the Balance of Funding Review. Chairman: On that note, can I thank you very much for your evidence and thank you to the Committee. |