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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 402-v House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE OFFICE OF THE DEPUTY PRIME MINISTER: HOUSING, PLANNING, LOCAL GOVERNMENT AND THE REGIONS COMMITTEE
Wednesday 23 June 2004 JOHN HEALEY, MP SIR JEREMY BEECHAM, MR PETER CHALKE CBE, MR CHRIS CLARKE OBE and SIR BRIAN BRISCOE Evidence heard in Public Questions 651-848
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Committee on Wednesday 23 June 2004 Members present Andrew Bennett, in the Chair Sir Paul Beresford Mr Clive Betts Mr Graham Brady Mr David Clelland Chris Mole Mr Bill O'Brien Christine Russell Mr Adrian Sanders ________________ Witness: John Healey, a Member of the House, Economic Secretary, HM Treasury, examined. Q651 Chairman: May I welcome you to the final session of our inquiry into local government revenue and ask you to identify yourself for the record? John Healey: I am John Healey. I am the Economic Secretary to the Treasury. Q652 Chairman: Do you want to say anything by way of introduction, or are you happy to go straight to questions? John Healey: May I just make three or four brief points to set the context? First, to say that from the Treasury's point of view we very much welcome the Committee's inquiry into the balance of funding and revenue raising between central and local government. In many ways you are in good company. You are well aware of the balance of funding review which the government set up, a review group for government not by government, but really with an unprecedented breadth and depth of expertise in it. May I say that we look forward to the contribution and the conclusions of that review, just as we do of this Committee's report? The first thing to say from the Treasury point of view is this. When considering taxation and spending issues, whether those are central government or local government, the Treasury's first and foremost priority is the maintenance of a strong and stable economy. That underpins absolutely every other decision we take. That is why we set out the principles and objectives for fiscal policy so clearly in the code and why we have set the two tough fiscal rules to guide the spending and investment decisions we made right across government. The second thing to say is that whilst our first priority is safeguarding that economic stability, it is entirely consistent to see a greater devolution and decentralisation and to see that as part and parcel of reforming public services. Not only is it entirely consistent, in fact it is critical, because if we are going to see more effective and responsive public services, and indeed in parts of economic policy management, it is important those decisions are increasingly taken at a regional and local level. Next to say, perhaps rather uncharacteristically or certainly counter to the general perception of the Treasury, since 1997 the Treasury has played not just an important, but in many ways a driving role, in many of the most significant decentralisations which we have seen over the last seven years. We were instrumental not just in helping to set up the regional development agencies, but increasing their budgets and giving them full flexibility and a single funding pot. We have been heavily involved, particularly with the Office of the Deputy Prime Minister, in developing greater freedoms and flexibilities for local authorities and the introduction of the prudential borrowing regime is really a radical of just such an approach. Next, we play a part, as the rest of government does, in the development of our second generation of local public service agreements. Finally, I am a member of the balance of funding review group. I suppose the one thing which the work over the recent months has done is to reinforce the view I started with, first of all that this is a huge and highly complex area, which both they and you are inquiring into, but, secondly, this is a hugely important area as well. Q653 Mr Clelland: It is a highly complex area. One of the simplistic arguments is how much money should be raised centrally by the Treasury and how much money should be raised by local authorities. How far is the Treasury willing to go in allowing local authorities to raise their own finances and how much more power would you give local authorities to raise and set their own taxes? John Healey: The short answer to that is that there is no fixed figure, there is no fixed principle, beyond the first priority to safeguard our ability to manage the economy and public finances soundly. As I said in my opening remarks, some of the arguments for seeing greater decentralisation and devolution can be entirely consistent with that. As long as they are consistent with that, then the Treasury in principle is unlikely to have a problem. Q654 Mr Clelland: You say that the Treasury obviously has to control national expenditure, but you also mentioned in your opening statement the importance of local decision-making. At the moment the gearing, the balance of funding is very heavily weighted towards the centre. We have heard calls for the balance either to be shifted to 50:50 or 75:25 in favour of local authorities. If it were to move to those kinds of figures, it would mean local authorities raising anything from £40 billion to £60 billion a year. Would that be acceptable as part of the Treasury's wider fiscal policy? John Healey: Those arguments, unsurprisingly, have been put to the balance of funding review. Two things have been clear there. The idea that you set a fixed target figure is not a sensible approach. Secondly, in fact the arguments very rapidly move beyond what many start out with as a principled argument, that as a matter of theology or principle we should be shifting to a greater percentage of revenue raised locally, to one of asking how any possible mechanism for achieving a shift in the balance of funding would actually work in practice. It is only when you start to look at how potential measures and mechanisms may work in practice, that you are able to make a judgment then about whether such moves are feasible and desirable. Q655 Mr Clelland: Is it felt to be hugely revolutionary for the Treasury to move from currently, putting it simply, 95 per cent taxes raised centrally and only five per cent locally, to a 50:50 ratio which would only mean moving that to 90 per cent nationally and 10 per cent locally? It is not a massive shift, is it? John Healey: I started by saying that one thing my work on the review group had confirmed was quite how complex this area is. The review group set some useful criteria to guide its work. At the top of its set of criteria, in order to assess the pros and cons of any particular suggestion was, of course, because that was its remit, to look at the degree to which it shifted the balance of funding and revenue raising between local and national government. It also, quite rightly, set a number of other important principles: the degree to which it had an impact and increased local accountability, the degree to which it was progressive and fair, the degree to which it was buoyant, in other words that the revenues rose in line with the general expansion of the economy, the level to which it was predictable, which is an important matter to local government and also the degree to which it was collectable and easy to administer. Once you start getting into a consideration of those important principles, alongside your single starting point of the balance of funding and revenue-raising, then you start to get into some quite complex trade-offs. What we found on the review group was that the work which has been done by that group was a very important start; it has been useful. However, in many of the most contentious areas what is most clear is that there is a lot more work to be done in order to be able to assess whether or not, let alone how, reform could be brought into the area. Q656 Sir Paul Beresford: What proportion of public expenditure is local government expenditure and how would you feel if there were a shift of that, changing responsibilities, an increase? To what degree would you allow an increase? John Healey: If you look at the figures for 1997, you will see that the proportion of central government support, certainly the amount of central government support to local authorities, has gone up very considerably. Q657 Sir Paul Beresford: I was not saying that. John Healey: The point is that there has been a real time increase of 30 per cent since 1997 and that is a reflection of the important role we see that local authorities have in some of the very important services they have to carry out. Q658 Sir Paul Beresford: What proportion is local government expenditure of public expenditure and how much freedom would you allow for that to move upwards as a proportion? John Healey: The current outturns from the previous year, projects for future years, are all set out in the budget documentation each year. The principle is less about what would be a numerical proportion. The principal concern the Treasury would have would be the degree to which the overall balance of public expenditure, made up of central and local, did not breach either the fiscal rules we set or put in jeopardy our ability to manage the economy. That is consistently the yardstick we would come back to, to apply to any potential proposals which were put to us. Q659 Sir Paul Beresford: So ultimately a lid has to be put on that from your point of view. John Healey: Ultimately there has to be some control of public spending, central and local and if we do not have some control of public spending, then we run severe risks with the economy, we run the risk of seeing our public finances run out of control. We have learned from bitter experience in the past the wider impact that can have and the one thing you will see and hear from the Chancellor is that above all he will not put in jeopardy the stability and the steady growth we have managed to establish in the economy over the last seven years. Q660 Mr Betts: I suppose we are all initially bound to be a little sceptical of any Treasury minister who says he is not actually that concerned about giving up the right to determine an extra amount of taxation and he would be quite happy to see taxation locally double from its present level and your officials before said there were no insuperable problems to that as far as the Treasury were concerned. I think what you are really saying to us is that while you are quite happy in principle for local authorities to raise double the amount they raise now in terms of local taxation, you would then want to see control by some other mechanism, maybe the increased use of capping of expenditure or maybe some particular restrictions on how far local authorities can increase their taxation each year. Those sorts of controls are brought in, so in the end the Treasury wants to control local authorities by other means. John Healey: First of all, in terms of the Treasury's credential here, if you look at what we have introduced as the potential borrowing regime, this overturns what is almost a century of centralised control, where local government, as you well know, had to go to central government to ask permission to borrow for capital investment. That is not the case now. It is now carried out at the initiative of local government in reference to a professional code, the code which governs this. Q661 Sir Paul Beresford: Except that the revenue side of it is controlled. John Healey: No, because it is local authorities which are in the position to judge whether they can prudently borrow against a number, not just the central government grant, of potential, reliable funding streams. It is all set out in the code. It gives the local authorities first of all a good deal more freedom to borrow; secondly, the discretion to make those decisions locally. In the end, however - and this perhaps links to your point, Mr Betts - because of our ultimate concern and responsibility for the management of public finances and the economy, we do have the power to set a limit on the overall borrowing by local authorities. Now, we have not chosen to exercise that, we have not judged that we needed to, but it is right that it is there in reserve. Q662 Mr Betts: You have not really answered the question. I asked about revenue controls. If you are going to give up the ability to control a certain amount of taxation because the ability to raise extra money gets passed from the centre to local authorities, will the Treasury then want to see controls over that in terms of limiting the right of local authorities to raise their tax levels in any one year, or will they want to see increased use of expenditure controls, capping, to make sure they have the means to control the overall resources local authorities have available and their expenditure for the sake of the national economic perspective? John Healey: Our principal concern would be to ensure that any alteration in the balance of funding sources did not and could not put in jeopardy our ability to manage the economy properly. This would have to be a fact we considered in the course of analysing any potential option. Q663 Mr Betts: It is how you are going to do that which is of interest to the Committee. How are you going to do that? John Healey: How we would do it, if it were necessary, would be designed to suit the purposes of the particular change which was brought in. I have explained the sort of mechanism we have there in the new borrowing regime and as part of that, perhaps this gives you a specific example of how you link local to the national fiscal rules, in order to help ensure we meet our golden rule, local authorities are only allowed to borrow, just like central government, for capital spending, under the new prudential borrowing regime. Q664 Mr Betts: We are talking about revenue here. John Healey: I am trying to give you a precise example. Rather than talk in hypotheticals, which you are encouraging me to do here, what I am trying to do is give you an example of something which would be put in place where we have given the greater degree of, yes, constrained discretion but nevertheless discretion and devolved decision-making to local authorities. However, in order to safeguard the ability to control public finances and fiscal position we have the ability either to set rules which help safeguard that, or a default power if we choose to use it. On the revenue side, were there a question of any reform potentially jeopardising the same concern for managing the public finances and the economy effectively, then one of the things we would have to consider in considering any option for change would be how we ensure that similar safeguards in that area might be brought in as part of the reform. In a sense it is self-evident. Q665 Chris Mole: I think it would be helpful if I were to bring to the Committee's attention the fact that I have a non-pecuniary interest as a Vice-President of the Local Government Association. The LGA has set out a wide range of new local taxes, which you will be aware of as a member of the balance of funding review group, to supplement local authority income. What would be the Treasury's policy on taking into account what local authorities might additionally raise when calculating the volume of central government grant? Would every additional pound raised by local government reduce central government grant by a pound? John Healey: At this stage we are being entirely speculative, but in general terms rather than in precise terms, if local government had a substantial source of new revenue, then it would need to be taken account of in spending reviews and local authorities would probably need less central grant from national government as a result of the overall balance of funding that it was drawing upon. Q666 Chris Mole: How much discretion is the Treasury prepared to allow local authorities to raise funds which will provide additional spending power? Is there a level at which the volume of taxes raised locally begins to affect national concern? If there is, what is it? John Healey: There are two things here. The first is an important general point. There is no automatic assumption in Treasury that the current balance of funding and revenue raising is correct. That is why we are playing a part in the balance of funding review. The second is that having set up that review, it is sensible for government to wait for its conclusions and then consider very carefully the sort of assessment that the expertise on that group has been able to make and consider at that point whether any of the options which have been analysed by that group may hold out the possibility for future reform, which it may therefore be sensible to consider further. Q667 Chris Mole: You are obviously aware that that basket of additional taxes includes things like potential tourist taxes, congestion charges, sales taxes, localisation of the VAT, a whole range of things. Are there any of those which the Treasury would oppose absolutely in principle? John Healey: You are right that a range of suggestions was put during the consultation and the balance of funding review. When the balance of funding review group looked at the proposals, one thing was clear, that none of them would make a significant contribution to altering the balance of funding between local and national. That was the first and principal conclusion to be drawn from that range of options; they are all relatively small scale. That means in principle therefore that any case for any of those changes would need to be made in terms of its policy merits and the contribution it could make to other objectives which we might have as a government. It would not, in the context of your inquiry here, or of the balance of funding review group's work, make a significant contribution to any shift there. To that extent, in many ways the balance of funding review group quite early on put them to one side. Q668 Chris Mole: Does that imply then that you would not be concerned that any of those proposals would have a particular distorting effect on the national economy? John Healey: As Treasury, we would assess any proposals for measures like that on their merits. The likely scale of those sorts of measures would not give us cause for concern in terms of the overall fiscal arithmetic. Q669 Chris Mole: So you would be happy for a significant number of local authorities to have a local sales tax or a tourist bed tax. John Healey: That is a different question and indeed I am sure the European Commission might have something to say about local authorities having a local sales tax power as well. No, my point here is that none is likely to make any significant contribution to altering the balance of funding, none is likely to have a significant impact on the overall fiscal figures; few of them have any powerful and immediate merits and all have pros and cons which in other policy terms would need to be considered. Q670 Sir Paul Beresford: Given your balance of funding review experience, and it must be quite an interesting experience, would 25 per cent raised locally by whatever means be about right? A bit lower, a bit higher? Just give us a guideline. John Healey: Twenty-five per cent is really the aggregate figure at present. Q671 Sir Paul Beresford: So is that about right? John Healey: As this Committee knows better than anyone, it hides a very wide range which is often glossed over and brings with it, its own considerations and issues. Anything from Westminster, Wandsworth, Newham or Tower Hamlets raises only about ten per cent of what they spend from their council tax base. Chiltern raises 60 per cent. Your 25 per cent figure is a statement of the current situation, as I made clear earlier on. Q672 Sir Paul Beresford: So is it about right or a bit low? John Healey: That is the figure. We make no automatic assumption that that is the right figure or that it is one we should hold to. Q673 Christine Russell: May I move on and ask you about the housing market? Have the Treasury carried out any assessment at all of what the potential impact could be on house prices if the council tax as we know it were abolished? John Healey: The short answer is no. If we were to be interested in such a move, then we might consider making such an analysis. As the Chancellor has made clear, he sees a property tax as a fair form of tax as part of the overall tax system and the council tax is the principal form of property tax which we have in this country. We have stamp duty of course, but that is essentially a tax on property transactions and, in terms of scale, very much smaller than council tax. Q674 Christine Russell: As the Chancellor thinks a property tax is a good idea and as virtually every other country in Europe has a property tax, if the council tax were abolished, would you then conjure up a new form of property tax, perhaps a variation, an extension of stamp duty for instance? John Healey: It is quite difficult to answer a question based on a premise which I do not accept in the first place, but you are right that with the exception of Sweden, every other Western European country has some form of property tax. To move away from it would make us quite exceptional. Q675 Christine Russell: Do you have any concerns? We have some evidence that if council tax were to be abolished, that could result in higher house prices, particularly in areas of the country where prices are already going through the roof. Are you aware of that? Do you think the argument that that could be a risk would hold water? John Healey: As you probably know, the Barker review did look in theory at the connection between a property tax and house prices and demand and the New Policy Institute also submitted some evidence, particularly in the context of potential council tax revaluation, of the link to house prices and the impact on the housing market. Both those studies are relevant to the general questions which the Committee is considering. Q676 Mr O'Brien: Two of the issues which influence local government administration and finance are grants and gearing; they are two of the real problems which have to be faced. Paper 14 for the balance of funding review from CIPFA (the Chartered Institute of Public Finance and Accountancy) suggests that there should be a top-up grant as well as a core grant to help ease the effects of gearing. Has the Treasury any practical objections to the proposals? The proposals seem to benefit all parties, although the level of local authority spending would not be as certain as in the current system. Do the Treasury have any views or objections to the proposals? John Healey: If you study the CIPFA paper, and certainly it will be clear when the balance of funding review reports, there are several problems with that approach. The first is that it creates a degree of uncertainty across the piece, in that the amount of additional grants which central government needs to provide would be uncertain because there would be two rounds of grant making: the first round of grant and then the top-up grant which would depend on what budget the local authorities had set. The second is that there would be an incentive within that sort of system for local authorities perhaps to set higher budgets, because of course they would have a reduced responsibility, a reduced amount of the revenue which they would have to raise locally if they set a higher budget. The third concern really plays into the points which Mr Betts made. If one had a system like that, then the only real way for government in the end to exercise the degree of control on the total which I have tried to explain from the start we do have a legitimate interest in, in terms of the Treasury, would be through some form of fairly crude capping of local authorities' budgets. In a sense, we have been there before. Q677 Sir Paul Beresford: So you mean that from every point of view having gearing concentrates the minds of those setting the council tax. John Healey: No, I am pointing out the problems which are inherent in the particular set of proposals and analyses from CIPFA which Mr O'Brien mentioned. For that reason the funding review group set those proposals to one side and concentrated its attention, after receiving that paper, more on some of the other options which were being analysed. Q678 Mr O'Brien: Some members in this room realise or have had the experience that from the 1960s to the 1980s we had a similar system of grants and it worked. It worked better than the system we have at the present time. If it worked then, why are we saying that it will not work now? John Healey: You asked me about the CIPFA proposals. I really do not want to repeat myself, but it creates a degree of uncertainty in being able to forecast and plan for big expenditure, that is true at central and local government level. Secondly, it risks creating an incentive for local authorities to build up their budgets, knowing that central government will automatically in some way have to pick up the tab. Thirdly, that suggests a dynamic in which central government would have to consider how you might in extremis control that. The risk is - and this was a view which emerged from the balance of funding group, that one might have to look at some form of crude capping, which we would not be keen to do. Q679 Chris Mole: Did GREA not have a negative grant slope in it which was a very strong disincentive to doing just what you have described? Is that not what is in the CIPFA proposal? Does it differ from how GREA worked before 1990? John Healey: The way the CIPFA proposals would work would be first of all that all authorities would be allocated their core grant by central government. Secondly, they would then set their budgets taking that into account. Thirdly, there would be a second round of grant giving, where there would be a second top-up allocation of central government funding, to ensure any shortfall between the two, between the first round of core funding from the government and the budget which local authorities wanted to set, would be met equally by any rise in council tax and any increase in central government top-up grant. In many ways the potential flaws of that system are pretty clear. Q680 Mr O'Brien: What we are looking for is a system whereby we could change the unequal application at the present time, where one authority has a gain of 10:1 and another authority has a gain of 2:1. The grant system could help to ease that situation. Are you prepared to consider that? John Healey: In a sense, in terms of any specific decisions about what government goes on to consider in this area of balance of funding, including the problem of gearing that local authorities in particular have spelled out, that must properly wait until we have had the balance of funding review report. We expect it towards the end of next month, so it is imminent and a lot of work has been done. At that point we would consider with government whether there are ideas in there, whether there is work in there which we should consider further and whether there are options potentially for altering the balance of funding which bear further analysis and consideration. Q681 Mr Sanders: CIPFA produced a supplementary paper on local income tax (LIT) which proposed perhaps five rates of between two pence in the pound up to four pence. Is this a practical option? Would the Treasury be happy to lose this level of control over its revenue? John Healey: The only consideration which has been given to the CIPFA analysis at present has been done on the balance of funding review. It is not therefore something which the Treasury has yet taken a view on; that would follow appropriately once the review, which Treasury as part of government was responsible for setting up --- Q682 Mr Sanders: The paper was to the balance of funding review. John Healey: Of course it was. It is being considered by the balance of funding review and once the balance of funding review has produced its report it will be a report to government, for government, to which government will then give consideration. Chairman: Wait a minute. If you raise expectations with the balance of funding report which the government publishes and then what you are saying is that the Treasury would look at it and decide to veto it, that is not very helpful, is it? Q683 Sir Paul Beresford: Presumably as the Treasury representative on that, you would be looking at the practicalities and implications for the Treasury anyway. John Healey: No, it is very misleading to describe the likely Treasury view as part of government's response to the balance of funding in that way, if I may say so. I would refer you to the conclusions which CIPFA came to, based on its work in two papers which it did on local income tax. These basically recognised that a lot more work needs to be done beyond what they have done in order to work out what the technical and administrative implications might be, what the costs might be, what the impact on individuals and businesses might be and frankly, as CIPFA would recognise, unless that work is done, no-one is in a position clearly and confidently to judge whether such reform could be feasible let alone desirable. It is early days, I am afraid, Mr Sanders. I quite understand your particular interest and impatience on this. Q684 Mr Sanders: Is not the problem here that the way the Treasury will look at this, is probably the same way as the government as a whole will look at this in terms of what they would see as being the system for local government, rather than accepting, as is common in other parts of the world, a power of general competence at the local level to govern communities in the interests of those communities? Government at all times is looking at this in terms of top-down rather than considering it in terms of bottom-up and what would be the right system locally to meet community needs and what would be the best way of financing that. Is there not a tension here between central government and local government? John Healey: I tried to explain in my remarks earlier, that there is no necessary tension. There is of course, quite rightly, some top view and that top view, which the Treasury on behalf of government are the custodians of, which is that we have to ensure that we have an ability to manage the public finances properly, that we get the revenues in which we require to sustain a proper level of public spending and that contributes to the wider economic stability. Within that, as I tried to explain earlier on, there is no necessary contradiction with a greater degree of devolution and a greater degree of decentralisation. We will not, to be clear, be prepared to put at risk what we have established as our system of medium-term fiscal planning, the tough fiscal rules. We will not take steps which will mean we break the code of fiscal policy which we have set out either. Q685 Mr Sanders: If you cannot give a clear view about local income tax until after --- John Healey: I am sorry; I think you will find that it is not just me who cannot give that view. The conclusions CIPFA came to after two detailed papers and those which the balance of funding review are likely to come to are that this is useful work, but it is very early stages and a lot more needs to be done to work out whether a move such as a local income tax may be desirable or feasible. Q686 Mr Sanders: Do you mean a local income tax which is maybe restricted to a few local authorities or is your view that you would have to look at the pros and cons of a local income tax if it were to apply to the whole of the United Kingdom? The CIPFA supplementary paper is suggesting a local income tax for maybe 150 authorities rather than all 450, 500 or whatever there are. John Healey: You are right that the CIPFA paper in a sense started to open up the issue: should or could a local income tax be supplementary or replace council tax? Could it be variable or could it be assigned? Could it be all local authorities or just some local authorities to which it might apply? Those are some fairly fundamental questions and what CIPFA did was to give most attention to some of those options. What they flag up is a whole range of other issues which still in a sense would require further work if there were a judgment that this merited further consideration. Who would collect it, how much it would cost to introduce, how much it would cost to collect, what the burden would be on employers, what forms of income might be taxed, what the impact would be on the individual taxpayer are huge questions and CIPFA themselves recognise that the work they have done has started to scope some of those, but it just does not give the sort of information or analysis which would allow anybody sensibly and with any certainty to say this is an option to pursue. Q687 Mr Betts: Council tax benefit take-up is one of the lowest of any benefit. Are the Treasury really bothered about that, because it does give you a £1 billion windfall each year which otherwise might go to people who currently do not claim? John Healey: No, it does not give us a windfall, it is a demand-led expenditure. There is no pot of money which is allocated in some way and if the take-up falls below 100 per cent this is free money which is allocated elsewhere. That is why it is managed on an annual basis. We have an interest in seeing the highest possible level of take-up and anybody who has a right to the benefit and takes it up will find the payments are made. You are right that the current levels of take-up are not as high as we should like them to be. Our projection for the current year for council tax benefit is that it will cost about £3.6 billion, but there is probably a further £1.2 billion of council tax benefit for which people are eligible but will not be claiming. That is why the work the DWP is doing in the short term, and which you have probably discussed with Chris Pond, is so important. Our interest as a government is to see people fully taking up the rights to these benefits which they have and there is no constraint on the spending for them, that will be managed. Q688 Mr Betts: If we have take-up of 100 per cent, I gather from what you are saying that the government would just find that additional money and there would be no cutback in any funding of services for local authorities. If we are going to look for better methods of take-up, has the Treasury come to a view about the paper put forward to the balance of funding review by the New Policy Institute which looked at calculations being done at national level, probably using Inland Revenue and pension credit data as a means of calculating from the beginning what people should be paying on their council tax. Indeed have you given any thought to the idea of using some form of council tax benefit paid as a tax credit? John Healey: The short answer is that we have not given serious thought to that yet. We are waiting for the balance of spending review group to report first. You are right that it has given quite a lot of attention to the council tax benefit and the New Policy Institute contributed some interesting ideas, for instance moving council tax benefit away from a means-tested claimable benefit into something which transforms into a maximum liability to council tax payment, which is at this distance an interesting idea. We will wait to see the conclusions from the balance of funding review group and then we will take the decision about what further work and in what areas it is worth pursuing. Q689 Mr Betts: And any increase in take-up will not result in a reduction in funding elsewhere. John Healey: Any increase in take-up, like any other benefit, would be managed by the government across the board. It would be managed as part of what we call the annual managed expenditure, which is done on an annual basis, reviewed every six months and if we had 100 per cent take-up this year I should be delighted and those people who claimed it would be paid. Q690 Mr Betts: And local authorities would not lose £1 billion because of that. John Healey: And local authorities would not lose the £1.2 billion which we estimate would be claimed this year if 100 per cent of those entitled actually drew their entitlement. Q691 Chris Mole: I had a very angry 691/2-year-old in my office wanting to know why the £100 payment which the Chancellor announced was not going to be made to all pensioner households instead of just to those with pensioners over 70. What evidence does the government have that it was the over-70s specifically who suffered from larger council tax increases? John Healey: In general terms you are probably aware that the facts show that the over-70s pay a greater proportion of their household income to council tax. You are probably aware that older families tend to have lower incomes, older pensioners are more likely to be living alone and pensioners who are over 70 are more likely to have been living on a fixed income for longer. All those factors taken into account support the decision the Chancellor made to put in place this year and for this year only special provision to help those households. Q692 Chris Mole: So it is not going to become an annual event like the winter fuel allowances. John Healey: It is not. It was clearly announced as a response to pressures this year. It was set out in the budget as such. Q693 Chris Mole: Why is it being paid to all over-70-year-olds, even if they receive 100 per cent council tax benefit? Was it not cost effective to try to target those who were genuinely struggling with their council tax payments? John Healey: We took the view that the simple and straightforward way of paying this additional amount this year would be to link it to the system of paying the winter fuel allowance. Therefore on balance that seemed the best way, both of trying to target it best and most efficiently pay it. Q694 Mr O'Brien: On the question of business rates, I am not going to revisit the question of re-localising them or not, but since the council tax was introduced it has increased by about 100 per cent and business rates have increased by 30 per cent. Would the Treasury have any difficulty with business making a greater contribution to local services? John Healey: The Treasury has taken the view, as government has, that the appropriate rate of increase as we have set it for business rates is set each year at the rate of inflation and that is the approach we have taken and that is the approach we have. Q695 Mr O'Brien: Do you not think that the increase in council tax compared with the increase in business tax, which are both to provide local services, mean that the gap between the two is such now that there ought to be some additional contribution from business rates for local services? John Healey: No, the approach we have at present for setting the level of business rate is right, the proportion that business rates pay towards local government finances is still substantial and there has been a marginal shift in the configuration between business rates, council tax and very substantial increases in central government grant to local authorities. Q696 Mr O'Brien: The CBI have said that business rates have increased by almost £40 billion over the same period but the individual tax has not increased at all. They are making comparisons. Is this a fair assessment? John Healey: Business rates have increased; they have increased each year. Q697 Mr O'Brien: The CBI are saying more should now be put on individuals. Do you think that is a fair assessment? John Healey: I have not seen that particular point in the CBI's submission. Q698 Mr O'Brien: It is a submission to this Committee from the CBI. John Healey: I shall have a look at it. Q699 Mr Betts: Are you saying that you are basically happy that business each year should pay a lower and lower percentage of the total expenditure of local authorities? John Healey: Businesses are still paying --- Q700 Mr Betts: Each year they have paid a lower percentage since the business rate was linked to RPI. John Healey: Each year there has been an increase in the business rate, but that has been set consistently at the level of inflation. Businesses still contribute 22 per cent --- Q701 Mr Betts: It is dropping each year. John Healey: It is 22 per cent. Q702 Mr Betts: And dropping each year. John Healey: That is right, ten years ago it was 27 per cent. It is still a substantial amount and it is right that they make a contribution. Q703 Chairman: The balance is shifting from businesses to the local householders. You could argue that some of the extra duties that the local authorities have been given by central government have been more to help local businesses than to benefit the individual householder. So is it not fair that if extra is coming on, business should at least be increasing or going back to the proportion it used to pay? John Healey: I am not sure I agree with your proposition that those are the right reference points. The point is that business still makes a substantial contribution to local authority finances. Q704 Chairman: Yes, but so do the householders. John Healey: We have put in place other reforms which are better and more creative uses of the business rates. You will be aware of the local authority business growth incentive which comes into force in April next year. This is an incentive for local authorities in being able to keep a proportion of the increase in the business rates; it is to try to encourage local authorities to play a greater role in the economic development of their areas and if we had had that system in place over the last three years, it would have been worth an extra £1 billion to local authorities, an extra £1 billion which we have said would not have been knocked off and will not be knocked off the totals which have already been set in the spending review. Chairman: We are overrunning, so we shall have to close at that. May I thank you very much for coming; a very useful set of evidence. Thank you. Witness: Mr David Miliband, a Member of the House, Minister of State for School Standards, Department for Education and Skills, examined. Q705 Chairman: May we apologise that we are running late; we did start a quarter of an hour late because of the votes and I am afraid the questioning has overrun a little bit. Would you like to introduce yourself for the record, please? Mr Miliband: David Miliband, Minister for Schools. Q706 Chairman: Do you want to say anything by way of introduction? Mr Miliband: No, I think we should probably get on with the questions, as long as there is a clear understanding that I am not going to answer anything about the negative grant slope. I have to say that my predecessor's degree of insight and acumen in that area was truly impressive, but it is an area on which I do not want to trespass. Q707 Christine Russell: Ring-fencing and passporting. Why is ring-fencing so prevalent in education compared with other services? Why do you insist that local authorities have to passport all resources through to schools? Mr Miliband: People have written PhD theses on this. Let me try to summarise a version. First of all, it is important to say that while education accounts for about 40 per cent of local government funding, we account for about 30 per cent of the ring-fencing, which is an interesting starting point. Let me start with the argument about ring-fencing, which takes two forms: first of all, grants which are paid to local authorities for specific functions which government thinks need to be done; secondly grants which are paid to schools. In the former category you might think of something like the music services fund and that has been put there because there was a desperate need to promote innovation and good practice in music services; about £60 million a year goes on that. Certainly innovation and promoting good practice are two good reasons why we have ring-fenced central grants. To take an example of a ring-fenced grant for a school, the ethnic minority achievement grant would be an important example which goes direct to schools and is £120 million in all. That is designed to tackle a particular inequality. I think those three reasons, tackling inequality, promoting innovation, spreading good practice, are three good reasons why one can have ring-fenced grants. Q708 Sir Paul Beresford: That is a high proportion of the total which is ring-fenced. Mr Miliband: With respect, it is not actually. Those examples of innovation, inequality and spreading good practice basically constitute the three heads under which we ring-fence grants. The question about passporting is obviously different because that relates to the increase in education spend which we want to see passed on to the school budget. Obviously it is for local authorities to decide what proportion of the EFSS they spend on schools; some local authorities, like Sir Paul's former authority, decide not to spend at EFSS. In Wandsworth they spend - I stand to be corrected - about 93 or 94 per cent of EFSS on schools. They have judged that schools are not the priority. Other authorities spend above EFSS on schools, but passporting refers to the increase each year. Q709 Sir Paul Beresford: If I take your comment on Wandsworth one step further, in local elections there is usually a fairly low turnout and there is usually a fairly high one in Wandsworth. Is that because they feel they are voting for councillors who have a say and are prepared to have a say, whereas in other local authorities they are totally dominated by government? Mr Miliband: I am pleased to say that there are high turnouts in South Tyneside Borough Council elections, above 50 per cent in the previous two elections. There may be all sorts of reasons to do with the competitive nature of Wandsworth politics which might explain why there are large turnouts. I probably would not want to venture too far down that path. Q710 Christine Russell: Government says it is actually committed to reducing ring-fencing in the future. Do you think you will be following that in education? How do you see the future for ring-fencing as far as education services go? Mr Miliband: May I take schools and LEAs separately, because it is important? In both cases the question for us has to be whether the innovation, the tackling of the direction against inequality, the strengthening of good practice become sufficiently embedded in the structure and culture of local provision that it should be un-ring-fenced. That is a question we have answered in the affirmative in a number of areas. In relation to schools, we are moving increasingly towards what we call a school improvement grant, which is essentially virable across budget heads. In relation to local authority spend as well, we have also consolidated a number of budget heads. There are areas where we have judged, in discussion with local government, that it is not yet the right time to take off the ring fence, especially where local government is performing a particular function on behalf of central government. A good example of that would be our Key Stage 3 strategy, which is for the 11- to 14-year-olds, which is where we have a problem in education. We have taken the decision there for local authorities to play an important role in that strategy, but we want them to spend the money in that area on the Key Stage 3 strategy and it is about £25 to £30 million. The direction of travel is the one you have described. Q711 Mr Betts: We have not really tackled the issue of passporting, have we? This is a fundamental problem which many authorities do face. The settlements to local government generally have been generous, certainly in historical terms, but when the passporting has been taken out for education and social services, I think the authorities last year had something like a 1.4 per cent increase in other services to spend, which was actually a reduction in real terms. It includes important environmental services, street cleaning, refuse collection and all those sorts of things. Is there not a degree of tension and conflict between ministers and the DfES and ODPM about these issues? Mr Miliband: It was going so well until your last half a dozen words. I am forced to say that I have not felt that at all in the discussions I have been having with Nick Raynsford and John Healey. Where you are right is that there are obviously relationships between what you spend on education, what you spend on other services, what central grant is and what the council tax rise is. All those things have to be balanced off and there are difficult decisions for central government about how much grant should increase and Sheffield, along with other parts of the country, have been the happy beneficiaries of increased government investment over the last few years. There are also decisions for local councils to take about council tax and there is an interplay between those factors and I certainly would not pretend at any level that there are not difficult decisions at a local level as well as national level. Q712 Sir Paul Beresford: May I quote to you from an attendee at a LGA meeting? He said that Nick Raynsford volunteered that one of his problems was getting different ministers mutually to liaise. Mr Miliband: I am surprised. I do not think I was at the LGA conference. I am sure Nick would have rebutted that suggestion very, very strongly. Obviously we do have a system in which all parts of government have their interest in local government spending, or the vast majority of government departments have that interest and the Treasury have a key interest in overseeing the public finances and the ODPM are the key players in the distribution of grant. There is no point pretending it is not a complex system, but generally lack of liaison is not the source of whatever difficulties people may have. Q713 Chairman: It is not a question of lack of liaison, it is just that you cannot agree. Mr Miliband: On what have we not agreed? If you take this year's education provision, which is 2004-05, I do not think anyone from government would deny that 2003-04 was a difficult year for school funding. There were many changes and some difficulties for a significant number of schools. For the budget for 2004-05 there has been a very high degree of liaison between the ODPM, the Treasury and the DfES and local government, in fact we have worked extremely closely together, both on the design and the implementation of the school funding guarantee, in the name of the stability which the whole government is committed to for the schools sector and I think that has gone extremely well. I do not detect that disagreement, in fact all departments are singing from the same hymn sheet in terms of what we are trying to do for school funding for this difficult period of 2004-05 and 2005-06. Q714 Mr O'Brien: Are you happy with the way passporting is working? Do you have any intentions to change it? Mr Miliband: Happiness and local government finance are two concepts which do not always sit exactly together. In ploughing through arguments about passporting it is not always happiness which is the immediate emotion which comes to mind. What it is fair to say is that the arrangements for 2004-05 and 2005-06 have certainly worked better than those for 2003-04. There has been a close degree of co-ordination between local government and central government. We are committed to looking at how those arrangements have worked and to learning whatever lessons we can from them. I would certainly say that I am happier with the situation this time this year than I was this time last year. Q715 Mr O'Brien: Are you planning to change the passporting system? Mr Miliband: No, I am not. We have just introduced some arrangements to bring stability to school funding for 2004-05. We have pledged that we will discuss in an open way with all the stakeholders, be they from local government or the education world, how it has worked. If there are any lessons to learn, we shall learn them. Q716 Mr O'Brien: The Audit Commission in evidence to this Committee said that ring-fencing and passporting "... do not promote efficient and effective resource allocation at a local level". How do you respond to that statement? Mr Miliband: I would point to some very, very important changes which have happened in the education system, where I think all sides would actually agree that it has been beneficial. I mentioned the music standards fund earlier. That has been a very important strand of the extension and broadening of education provision. I could also give you the example of the funding of advanced skills teachers, which is done through central grant, now 3,500 advanced skills teachers throughout the country. Those ring-fences have been worked on with local government and the education sector and both of them would be seen by all the people I deal with as having been an important, positive step forward. So I do not agree with the Audit Commission's broad-brush argument that all the ring-fencing we have is wrong. The passporting is a separate issue and the passporting debate reflects the priority the government believes education should have in national investment. Q717 Sir Paul Beresford: Would you agree with local councillors who feel that passporting and ring-fencing are effectively centralisation? Mr Miliband: If you take passporting first, there is a big degree of judgment to be exercised about how local government distributed the grant it gets to schools. If you look at the local authority formulae for the distribution of funding to schools, they are very different around the country. They recognise need in different ways. Some of them recognise need in a very central way, others do not. There is a significant degree of choice to be made by local councils about that. Q718 Sir Paul Beresford: So Wandsworth does not give you any problems. Mr Miliband: I did not say that. I heard myself saying that there was a wide variation in practice in how different councils recognise need in their formulae for distributing funds and the choice which is made about whether or not they recognise need. Some authorities recognise need in a very overt and clear way and others less so. The passporting affirmation by the whole of government reflects the commitment which the whole of government shares to education. In addition, it is significant that local government increasingly sees education not as separate from its ambitions for economic and social renewal, but actually as central to them. The number of local authorities who now see investment in schools and nursery and under-five provision as absolutely essential to the renewal of towns and cities is growing significantly. The idea that education sits in a completely different box from the rest of local government thinking is not true. Q719 Mr O'Brien: So you disagree with the evidence submitted by the Audit Commission. Another view that was put to us by the Audit Commission was that the passporting requirement was one of the factors which led to the 12.9 per cent increase in Band D council tax for 2003-04. What is your view on that? Mr Miliband: What led to the rise in council tax in 2003-04 was the cumulation of all the decisions which everyone made about grant funding and about council tax increases. It is no more significant to say that decisions about passporting were relevant to that increase than that decisions about social services or EPCS or any other part of the budget, nor any more significant than government decisions about government grant. Q720 Mr O'Brien: They were not passported. The Audit Commission is just referring to the principle of passporting and they said this created an increase of 12.9 per cent in Band D council tax. Mr Miliband: It is certainly not the case that the passporting of the five per cent increase in education funding on average above previous levels was the cause of a 12 per cent increase in council tax. The cumulation of decisions about spending on other services and about central grant lead to council tax rises and that is the combination of spending pressures and spending investment which in the end produces a council tax rise. Q721 Chris Mole: Is the DfES not effectively telling people in a local area that it has a better understanding of the relative need to spend on schools or personal social services than the local authority? Mr Miliband: No. That would only be the case if every local council was spending exactly what we told them to spend on education, but they are not. Wandsworth spends 93 per cent of the EFSS on education and the top spending education authority, which I think is Bristol though I stand to be corrected, spends 110 per cent of EFSS. So there is actually a wide variation in education spending by local government. Q722 Chairman: Would you like those variations to increase or decrease? Mr Miliband: I would always like authorities to spend more on education. I do not really want to get into a ding-dong with Wandsworth here about their commitment to the schools in the area, tempting though it is, but I certainly applaud those authorities who are seeing education investments as absolutely critical to the future of their areas. Q723 Chris Mole: When we had universal capping and passporting there was a general convergence between the spending on education and what is now the SF. Does that not implicitly mean that you are going to limit the scope for local authorities to determine what they could spend on environmental and cultural services which are more discretionary in nature? Mr Miliband: Obviously if you spend on one thing you cannot spend on another, subject to the size of the government grant increase and what decisions are made about council tax. The priority that the national government gives to education is symbolised in part in the investment which the national taxpayer makes in education and then it is legitimate on that basis to expect the increase which is being given to local government to be at least matched by the decisions which local government makes. Does that mean that there are implications for other services? Yes. Q724 Chris Mole: You were talking about regeneration in inner urban areas. If you want to achieve joined-up local government, then councils have to have some flexibility on their discretionary spend in order to achieve those. Does passporting not make it more difficult to deliver joined-up local government? Mr Miliband: First of all, passporting relates to the revenue side of the equation. There is a significant investment on the capital side and that is key when one is thinking about the link with regeneration and educational provision. It is important to say first of all that it is not only on the revenue side that you see those links. Secondly, the fact that we are now moving to more schools having extended services before school and after school was a significant contribution to the sort of area renewal which is important. Yes, it would be absurd to deny that there are choices to be made, but there is a balance to be struck and the national priority which has been given to education in the last seven years has actually been to the benefit of the country. Q725 Chairman: Yes, but it has ceased to be local administration, has it not? It is really that government is now saying this has to be spent on education. You are putting in passporting and now you have the minimum funding guarantee. Local authorities are getting less and less discretion, are they not? Mr Miliband: As it happens, if you think about the developments in relation to children's trusts, if you think about the role that the LGA is embracing in relation to 14 to 19 provision, where it is setting out its stall very, very clearly in a recent publication to be the advocate of the pupil, wherever they are learning, whether it be at school, college or work. Those are important ways in which local authorities are playing a key role in championing the interests of citizens in their area. Funding is obviously important, but passporting relates to the increase in spending, not the total spend. As a basis for moving forward it is very, very important, because the taxpayer expects to see at least the increase in their taxes which is being levied for education going on education. Q726 Chairman: Why then do we need the minimum funding guarantee and passporting? Mr Miliband: The minimum funding guarantee has been critical to underpin the longer-term stability which we want to see in the education system. It is clear, despite the detailed work which was done in advance of the 2003-04 settlement, that significant numbers of schools were not fully protected and the minimum funding guarantee is there to provide that degree of protection. At a time when the floor is four per cent and the ceiling is seven to seven and a half per cent, there is significant variation, certainly in a minority of schools which were on the funding guarantee and above that obviously significant discretion is being applied. Q727 Christine Russell: Earlier you conceded that there had been errors in calculating the LEAs' costs for the last financial year. Why do you think that happened and how are you going to ensure it does not happen again? Mr Miliband: I am not sure that I said there had been errors in calculating the LEA costs. Q728 Christine Russell: Just in education services. We had the ping-pong between DfES and local authorities saying there was a difference, did we not, that there was a shortfall in the funding? Mr Miliband: I think I am right in saying that there was universal agreement that the increase in funding of about £2.7 billion exceeded the increase in costs by about £250 million. I do not think there is a dispute between central and local government about that. What was the case was that there were significant changes in the cost structure, notably in relation to pensions for example which ate up £500 to £600 million of that increase. I think that the diagnosis of what happened, the narrowness of the gap between costs and investment, is not actually very strongly disputed. Q729 Christine Russell: What about teachers' pay? Can you not accept that inflation in providing education services has grown at a faster rate than in the rest of the economy? Mr Miliband: It was certainly modelled carefully and now that we have effectively a two and a half year teachers' pay deal from the schoolteachers' review body, that puts us in a much, much stronger position. Most people would say that it was not the headline increase in teachers' pay itself which was the main problem in 2003-04, it was the significant other costs around the system. Q730 Christine Russell: Would it not just be better if you set out an annual estimate so everyone could see, parents could understand, exactly how much funding was coming from central government, local authorities and in turn exactly how the local authorities were spending the money on education? Mr Miliband: It would be helpful for ministers as well as citizens probably. This is certainly a system with significant complexity in it and that can be frustrating. Q731 Christine Russell: It is very confusing for parents to be told that a child in Hertfordshire, for instance, gets X amount of funding per year and a child in Cheshire gets considerably less. Mr Miliband: But the reason for that is that local government plays an important role in deciding how much extra money it wants to put into education. As central government, we give the same amount per pupil, for similar pupils in different parts of the country. Whether they live in Hertfordshire or Herefordshire primary pupils get £2,100; if their family is on income support they get an extra £1,300. That is fixed around the country. However, Hertfordshire and Herefordshire make different decisions about how much extra they want to put in. We defend that system because it respects the constitutional role of local government in making a decision about whether it wants to put extra in. That does mean we are trading off that balance of power with local differences. Q732 Mr Clelland: But that constitutional role is quite restricted in terms of educational spending, is it not? Certainly in my experience and in the evidence we have had to this Committee, those authorities which do have educational responsibilities put education as their number one priority. I am sure you would agree with that. I cannot think of an education authority which does not say that. So why can they not be trusted just to have the freedom to spend according to what they see as their local priorities? Mr Miliband: What I would say is that above that which they are given by central government to meet the increase in the FSS, they are and significant numbers of them do. It is also the case that increasing numbers of local authorities put education first. I think I am right in saying that about 95 per cent of authorities passported the increase without demur in this financial year and that is obviously significant and I hope that reaches 100 per cent in the next financial year. Q733 Mr Clelland: Do you think that your department can actually specify the appropriate budgetary requirement for every school in England? Mr Miliband: Surprisingly many of the head teacher associations have a touching faith in our ability to model the particular needs of 24,000 schools, indeed the Opposition have sometimes had a touching faith in the ability of central government to have a formula which denotes all the variety of urban and rural, small and large settings. We have not had that sufficient confidence to make that move because we think there are advantages in the current system, which does allow the balance of responsibility, the shared responsibility which we think is important. Q734 Mr Brady: Given the process of passporting the whole amount on an annual basis, given the minimum per pupil funding increase, is there not a logic which is driving towards DfES making direct payments? It may not be the whole of the funding which goes to schools. It would still be free for local authorities to pay more if they wished. Is there not a logic in what the government is already doing, which is driving towards direct payment? Mr Miliband: The logic of the government's position is to recognise and improve on the shared responsibility which exists and that is the balance we are trying to achieve. We do have responsibility for setting the framework, setting the guarantees for parents and pupils, but we have to do it in partnership with local authorities because there are different situations in different parts of the country and that is reflected in how much they spend and how they spend it. Q735 Mr Brady: The percentage of funding going to schools which local authorities must pass on to schools will increase every year if government continues to follow its current policy. Mr Miliband: The passporting requirement, as you recognise, is a minority aspect of the system. The shared responsibility I talked about is the right basis on which to think about the future of it. There are some direct payments at the moment to the school standards grant, which goes direct to schools; actually it is paid through local authorities which is interesting, given the way some people talk about logic and simplicity in the system. Q736 Chris Mole: Annually schools do a tango around the redundancy processes with teachers. Last month the Prime Minister told the NAHT that after this year's spending review, school budgets will cover three years and be based on the school rather than the financial year. When is this actually going to happen and what benefits do you believe it will bring? Mr Miliband: The benefits are huge. When head teachers say it is very difficult for them to plan with confidence on the basis of year on year changes to budgets, they are absolutely right. So the benefits are obvious, the benefits to local government as well as to central government are obvious. We are now working with colleagues in government and around the school system, including local government, to put it into practice and we are determined to do so. The current spending review runs up to 2005-06 and we are working hard on an implementation timetable which meets the need, but is also practical and prudential. Q737 Chris Mole: How will you actually switch from a financial to an academic year? This is a very big slice of local government funding which is currently organised April to April. Mr Miliband: It is significant. Further education colleges are paid now on an annual basis, although in a different way and they used to be on a different system. We have to make sure it is done in a way which works. The key step forward we now have is the schoolteachers' review body making two-and-a-half, three-year pay settlements for teachers, because without that we are completely lost. We then have to recognise that different schools have different pupil numbers and there are things to work through in that process. I do not see it as impossible. Q738 Chris Mole: Do you think that will resolve the redundancy problem? Mr Miliband: What you have at the moment is an annual process which anticipates redundancies which in 90 per cent of cases do not actually happen, but they are done as protective notices and that is certainly a process which frightens parents as well as politicians - or excites them sometimes - and that is not very healthy. If we can get over that, it would certainly be good. Q739 Mr Sanders: Further education was taken out of the hands of local government in the 1980s. The LSC actually funds sixth forms and that has now effectively been taken out of the control of local authorities. Why do we bother retaining anything within the local authority which is connected with education? Why does central government not take that over completely. Mr Miliband: The answer to that is surely the LGA document on 14 to 19, where they show a key role for local government as the guarantor for pupils and that is important as well. Chairman: On that note, may I thank you very much for your evidence. The Committee suspended from 4.30pm to 5.27pm for divisions in the House Memoranda submitted by Office of the Deputy Prime Minister
Examination of Witnesses
Witness: Mr Nick Raynsford, a Member of the House, Minister of State for Local and Regional Government, Office of the Deputy Prime Minister, examined. Q740 Chairman: May I welcome you to the Committee and ask you to identify yourself for the record? Mr Raynsford: I am Nick Raynsford, Minister for Local and Regional Government. Q741 Chairman: Do you want to say anything by way of introduction or are you happy for us to go straight to questions? Mr Raynsford: Happy to go straight to questions. Q742 Mr Clelland: Could you tell the Committee when the balance of funding review is expected to report, what format its recommendations will take and when government will decide whether to accept or reject the recommendations? Mr Raynsford: We intend to report before the summer recess. The format will be very much as set out in the terms of reference, which was that we should explore options rather than making specific recommendations. The way in which the government will respond to what is in effect a report to government and not a report by government will obviously need to be determined by the government, but it is possible that something may be said at the time the balance of funding review report is announced. Q743 Mr Clelland: Is the status quo still a realistic option? Mr Raynsford: I do not want to pre-empt the conclusions of the report, because it is a report by a team of members and we have not yet had our final meeting. It is fair to say that we have covered a lot of ground over the course of the last 15 months and we have explored scope for change and scope for improvement. It would be surprising if there were not an indication in the report that improvements could be made in a number of areas. Q744 Mr Betts: Can I take you on a trip down memory lane to your political youth? The Layfield Committee report, which I am sure was compulsory reading for you at the time, did actually say very clearly that "... the first requirement of a financial system is accountability: whoever is responsible for incurring the expenditure should also be responsible for raising the necessary revenue". Do you accept that as a basic premise? Layfield also came up with two basic models, a centralist model and a localist model. Would it be fair to say that government since then has never really been clear about which model they want and somehow we have fudged along in a middle way version, varying slightly from time to time, depending on which government was in power? Mr Raynsford: It is important to remember that when the Layfield Committee reported, there was a dissenting minority report by Professor Alan Day and that report did indicate that there were areas where both central and local government had an interest and therefore the perhaps simplistic view that you could clarify lines of accountability purely in one direction was not perhaps the full picture. I think that reflects the reality that we know that in a small island people do have an expectation of a degree of consistency in performance and that if there are significant failures in particular services, there are often calls on government to act. We also know that government itself has a mandate and some of the key priorities of government are services which are discharged by local authorities, education perhaps being the most obvious example. Therefore it is the case inevitably that both central and local government have a degree of accountability which needs to be reflected. That does make it more difficult to establish that sharp distinction which you presented. Q745 Mr Betts: Setting up the balance of funding review gave perhaps an indication that you and the government were not entirely convinced that we had it right at present. Was that the initial position from which you set out? Has what you have done so far influenced you in any way into thinking that perhaps the balance of funding we have at present is not absolutely right and we ought to be moving in a certain direction? Mr Raynsford: I can go a bit further, because we did make it clear when we set up the balance of funding review that it was because we thought there was room for improvement. As I have indicated in response to David Clelland's earlier question, we have covered a lot of ground, we have made good progress and I hope that the conclusions which are emerging, which I hope will be finalised with the review committee at its next meeting, will set out a number of options for reform and for change which will help to define the agenda for the years ahead. We want to see a fair and sustainable framework for local government finance which will provide answers to some of the difficulties and problems inherent in the current system and will provide greater stability in the years ahead. Q746 Mr Betts: Do you have any idea? Could you let the Committee have a glimpse as to what sort of balance of funding you might be content with at the end of this process? Mr Raynsford: Sadly I cannot, because that would be pre-empting the conclusions of the review. Q747 Mr O'Brien: May I pursue the question of council tax? If we are to reform the council tax, and obviously we have to convince the public, the taxpayers, that changes have actually taken place to try to restore their confidence, the government has to make sure that changes are sustainable. Do you have any comments on that? Mr Raynsford: I do agree with you very much that public confidence is important. I think it is right to say that the rising public concern about council tax has been associated with disproportionately large increases in the level of council tax rather than to do with some of the rather more arcane subjects such as the gearing effect and the balance of funding, which we tend to look at with great interest, but which the public, from the research we have undertaken, clearly does not see as such an important issue. I would agree that public confidence in both the fairness and the viability of the local government finance system is crucial and I hope that the balance of funding review report will help to set out options for achieving a more sustainable framework in the future. Q748 Mr O'Brien: One of the options is to have more bands, one below A and more at the top. Is this an issue which can be considered? Mr Raynsford: You will be aware that we took a lot of detailed evidence, particularly from the New Policy Institute which set out a number of suggestions for reform to the existing council tax system. I do not think it would break too many confidences and anticipate the conclusions of the review to say that we obviously looked with some interest at those and that our report is likely to comment on that area. We are not going to be publishing our report for a few weeks, though we intend to publish it before the summer recess and I do feel we have to wait until that point before I can go into greater detail. Q749 Mr O'Brien: In your capacity as minister for the regions, the suggestion has been put to the Committee that there should be some element of regional variation within council tax, for example that the bands could vary between regions. Are you attracted to this idea? Mr Raynsford: The New Policy Institute, in their evidence to us, highlighted the possible scope for this and also explored some of the potential disadvantages, including the possibility of cliff-edge effects between different regions, though there are cliff-edge effects between different local authorities under the current arrangements. Those issues certainly were considered by the review and we are very conscious that the revaluation, which is scheduled to take effect from 2007, will be quite a challenging process and that the possibility of some regional banding might be appropriate in that context. The reason for the difficulty in being more precise at this stage is that, as you will appreciate, the crucial element is the relative movement of values of property between 1991 and 2005 when the revaluation process begins. During the early part of that period, we saw disproportionate increases in values in the southern part of the country, but more recently we have seen increases in house prices in some of the northern regions exceeding trends in the south. Therefore, if one is going to get an overall picture of what the relativities are likely to be at the time of revaluation, one does have to wait a little bit longer. If one made assumptions about the relative positions of different regions, based on, let us say, data in the year 2000, it might have been very different to what the picture might be in 2005. Q750 Mr O'Brien: If we are going to retain the confidence of people in the council tax, then it has to be progressive. We must demonstrate that this is a progressive approach to retaining the council tax and reforming it. Will progressiveness be part of the report? Mr Raynsford: The difficulty about the word "progressive" is that it has a technical meaning in relation to income. As we have already indicated in earlier evidence, there are questions about the council tax, because it does relate to property values and property values do not necessarily always reflect income levels. There are people with relatively low incomes living in high value areas where they can find themselves in a very high banded property simply because of the area they happen to be living in. There are issues relating to that and of course there is the other very important issue about the relatively disappointing take-up of council tax benefit which does have an effect on low income households who would pay significantly less if they were getting a benefit entitlement. Those are issues which I believe are both important in relation to any conclusions which will emerge from the balance of funding review. Q751 Sir Paul Beresford: Many of the councils feel that local government expenditure has had imposed upon it a number of things in areas and requirements by central government. I know you rushed past the gearing effect, but many of them are funded in such a way that the gearing effect does actually apply to them. If I might just use one local council which wrote to me, they said that planning requirements cost them £150,000, their performance indicators cost them £400,000 a year, external inspections by government £400,000 a year, best value another £150,000, £100,000 for responding to government consultations, £200,000 for government returns and then they mention the beauty contest in bidding for grants, another £300,000. Throw that all into the pot, put in the gearing effect and that is where the blame is laid. Mr Raynsford: Did they also indicate what additional resources they have received as a result of increased government grants in the course of the last seven years? Q752 Sir Paul Beresford: Funnily enough they did, but what they also pointed out was that much of this is not required. I have not given you the details on it, but I could, for instance say that when they are talking about £150,000 on the plethora of plans, these are probably not even looked at. Do you not feel therefore that there is an area in which government could get off local government, reduce some of the effect on local government, have gearing effect in a reverse direction and get the council tax down? Mr Raynsford: We have already announced our intention to reduce the plan-making obligation to virtually nil in the case of excellent authorities and by 75 per cent generally. There is a real move, as I said in previous evidence to this Committee on previous occasions, to reduce unnecessary burdens on local government. I do have to say that we are also very committed to working with local government to raise the performance of local government and many of the things you have referred to have actually played an important role, both in improving standards of performance and indeed in providing additional services to communities which would otherwise not necessarily have received help. Many of the specific targeted grants have helped some of the most deprived communities get additional benefits. We have to make a balance and our objective is to ensure that local authorities continue to improve the quality of their performance, that there is continued pressure to improve the quality of services to communities and in particular to meet the needs of the most deprived communities and we also want to encourage greater cost efficiency on the part of local authorities. If authorities are able to go along with the Gershon agenda and other similar proposals, which would allow them to improve their cost effectiveness, they will find they have more resources to concentrate on frontline services, which is what we want to see, and they will be making savings through efficiency gains, which I am sure you would welcome. Q753 Sir Paul Beresford: I hear what you say but Torbay authority is not a strong authority, it is a weak authority, it is capped and next year, as I understand from one of the members there, they have 24 inspections under the CPA assessment alone. That is like chopping the head off and sticking a knife into the other end. Mr Raynsford: On the contrary. This is an absolutely classic illustration of the benefit of targeted focus where there is worry, as you admitted in your comments. They are a poor authority and I would have thought that it was in everyone's interest to ensure that we saw urgent action to improve the authority. We have made additional funds available to the authority through the capacity-building programme. We have a lead official working closely with the authority. We are doing a considerable amount to help that authority improve its performance and we want to see that. That does not mean that we should simply turn away from the increase in council tax proposed by that council, which was unreasonably high and which was the reason that we announced our intention that they should be capped. Q754 Chairman: May I take you back to the question of bands? If anything is going to happen about bands, can that be done by regulation or does it have to have primary legislation? Mr Raynsford: Plan making obligations are generally subject to regulation. Q755 Chairman: Bands; sorry. Mr Raynsford: Council tax bands. Our existing powers would enable us to make changes both in the existing bands and to introduce regional variations in bands without the need for new primary legislation. Q756 Chairman: So in fact if that was in the recommendations of the review it could be implemented in time for valuations being started in 2005 to take into account the new bands. Mr Raynsford: Yes. Q757 Chris Mole: You mentioned surveys of what mattered to people around council tax. Do you think it is right that many will measure the success or failure of the balance of funding review by the effect it has on local tax bills paid by low earners and pensioners who are on or just above the threshold for council tax benefit? Do you think that is an acceptable measure for success of the balance of funding review? Mr Raynsford: I have to say that I start from more modest objectives. I suspect that the balance of funding review is a matter of complete indifference or indeed ignorance for the vast majority of the public. They are extremely aware and acutely aware of the level of council tax. I am afraid I would be kidding myself if I were to believe that our review was a subject of regular discussion in the Dog and Duck. I hope that the public, in their assessment of progress, will look at the longer-term consequences. I said earlier that I believe that creating a more sustainable, fairer, long-term framework for local government finance was the primary objective. I hope that our review will contribute towards that and I hope the public, if they see the outcome as a satisfactory one, will duly give credit in due course, but I do not expect them to make a judgment in enormous numbers on what we say as a result of our review. Q758 Chris Mole: It may be that you do not feel able to tell us, or maybe you can, depending on its relationship with the balance of funding review, but can you tell us what possible improvements to the council tax benefit system might be under consideration? People have mentioned things like upper limits on savings, integrating income tax and council tax benefit, simplifying the whole process. It seemed, when Mr Healey was before us that the Treasury seem to have been marginally stirred by the notion of changing the name from council tax benefit to something which looks more like a maximum liability to address concerns about people who are uncomfortable with benefits. Are any of those stirring in the ODPM? Mr Raynsford: I could also refer to the evidence you took from my colleague Chris Pond, who is directly involved, because this remains the responsibility of Department for Work and Pensions (DWP) and I think it is fair to say that across government, in Treasury, ODPM and DWP, there is an awareness of the importance of tackling the current problem of unacceptably low level of take-up of council tax benefit among some of the people who are most vulnerable and most in need of it. There are different approaches. Improving the take-up of the existing benefit is obviously one of them. Exploring alternative approaches which might remove some of the obstacles to claiming benefit would also be a very appropriate and fertile area and that includes a range of factors, some of which you mentioned: the capital limits, the rather long application form that there is at the moment, the stigma which in some cases prevents people claiming what they think is charity, which would not be there if this came as a relatively automatic entitlement. Therefore it is clearly important that all these issues are considered. The objective clearly is to try to ensure that those people who are entitled to pay less council tax than they do at the moment should receive help in an appropriate way to achieve that. Q759 Mr O'Brien: You referred earlier to the question of property revaluation. We have listened to concerns expressed by organisations as to the impact revaluation will have on what people pay. What is your department doing to increase public awareness of the effects of revaluation? Mr Raynsford: At the moment we are not, because at this particular time the primary focus of the department is on completing the balance of funding review. The revaluation process will not begin until next year. Obviously preparatory work is being done with the Valuation Office agency to ensure that the necessary arrangements are in place for valuations to happen, but the impact of the changes will not occur until 2007 and it is slightly later down the line before it is really appropriate to begin to alert the public to the issue. If one currently raises questions about what the consequences of revaluation might be without having any answers to the questions people will raise, one might actually stir up a lot of anxiety without being able to give reassuring answers. Q760 Mr O'Brien: There is a lot of anxiety there at the present time. One of the reasons is that the idea in the first instance was that the period between revaluations should be every five years and it has become every ten years. Is the process to be overhauled so that we do not face this situation in the future? Mr Raynsford: I was not part of the government which introduced the council tax, as you will understand, so I was not party to the discussions. I see no evidence that the idea was that there would be revaluation every five years; certainly the legislation did not provide for it. There was provision for revaluation of business rates every five years as part of the normal process, but we found the situation of a council tax which had been based on 1991 values with no timetable for revaluation. Our conclusion was that it was probably appropriate to have a ten-yearly cycle of revaluations. It is a much bigger exercise than the business rate revaluation and in order to ensure that the Valuation Office can cope with the work, we felt that a ten-year cycle was probably appropriate and phasing it so that it did not coincide with the business rate revaluation. That is what we have decided and that is what we have put in place. I accept that the relatively long period of time, 16 years, which will have elapsed between the first valuation and the revaluation is the cause of some anxiety. Can I say that if people are worried that because of a large increase in their property value since 1991 they are likely to be faced with a large increase in council tax, the crucial message which we can all help to get across to our constituents at the present time is that there is no inherent consequence that will lead to increases in people's council tax liability if their property has increased in value by the same average as applies across the country as a whole. It is only where the property increases are significantly higher than the national average that there would be a potential liability for a higher level of council tax. Conversely, if property values have gone up by less than the national average, people in bands other than Band A might well be able to look forward to a reduction. Clearing some of the mythology, that people believe that because property values have increased they are all going to face increases in council tax, is quite an important challenge and that is something all of us can help do. Q761 Chris Mole: So there will be a reduced increase rather than a reduction. Mr Raynsford: It depends on the circumstances. If people are living in properties which have increased by less than the average increase in values between 1991 and the point of revaluation, then they could well qualify for a reduced banding and therefore a reduction in their council tax. Q762 Mr O'Brien: Are you advising them that what your department is looking at is a ten-year cycle of revaluations. Mr Raynsford: Yes. Q763 Mr O'Brien: Concerns which have been expressed have been because there have been reports that the uplift to the tax base could be about 15 per cent. Obviously people are concerned when they are facing a 15 per cent increase in the tax base and it depends how the taxes are levied. Finally, on the balance of funding review, will the decisions taken by your department on balance of funding be available in time to ensure that any recommendations are included in the revaluation programme? Mr Raynsford: May I say firstly on the balance of funding review itself that this is a report to government and it will need to be considered by government? It is not going to make specific recommendations, it will set out options and undoubtedly there will be a wish to ensure that any appropriate conclusions should be drawn from that in time to influence the process of the revaluation which is due to begin next year. As far as the question you asked on the increase in the tax base is concerned, the purpose of revaluation is simply to revalue individual properties, to create a more up-to-date basis for the council tax. The actual levels of council tax will be determined by the bandings. As I have already indicated, we have powers to change bandings and that was one of the issues which was raised in the balance of funding review. I should make clear that the overall impact will be neutral. There is no intention that this should increase the overall level of funding which local authorities derive from the council tax. What it will do is provide a more up-to-date basis for the relative value attaching to individual properties and therefore ensure a more up-to-date banding framework. As you will appreciate, if there were to be changes to the banding, that would affect the outcomes and clearly it would be inappropriate to say anything more before decisions have been taken. Q764 Mr O'Brien: I come back to my first question. What are you doing to reassure people, the public, that the effects of revaluation will be as you have just pointed out now, negative more than vast increases. Mr Raynsford: No, I did not say the effects will be negative. I said the effects should be neutral overall because it is not our intention that this should raise additional revenues for local authorities. For individuals the impact on their personal liability for council tax will vary depending on whether the value of their property has increased or decreased in relation to the average across the country as a whole. That is something we will not know until revaluation has been carried out and it would be premature to try to convey messages to individuals about the likely impact on them at this stage. What we can do, as I suggested, is to try to ensure that people are made aware of the fact that because property values generally have gone up by a very significant amount since 1991, this does not lead on, as some people assumed that it will, to much larger council tax demands, because the overall increase, the average increase across the country as a whole, will simply mean that the valuations on average are raised by that amount. A property which was in Band D in 1991 and has increased in value by the average amount over the intervening period will remain in Band D. So there will be no necessary consequence at all, assuming the local authority does not increase its council tax demands. Q765 Chris Mole: If that leads to regional redistribution of the tax base will you change equalisation to compensate for that? Mr Raynsford: The whole issue of regional banding was introduced by the New Policy Institute on the premise that there might be quite marked variations between regions in the impact of changes in values since 1991. I did say earlier in my evidence that during the first decade, post 1991, there was a disproportionate increase in the southern parts of the country compared with the north, but more recently that has not been the case and we do have to wait until we are nearer to the point of valuation before a more considered judgment can be reached as to what the impact will be on different regions. Q766 Mr Sanders: Is not the problem here, and you alluded to it earlier, the council tax system, that it is not related to ability to pay? If you are in an area where you are disadvantaged by a council tax system which is related to an area's tax base and you have enjoyed - or some may say suffered - from above average house price rises since 1991 and you have low incomes, then this revaluation is just going to pile on the agony in those areas which at the moment have the people with the most difficulty actually paying the council tax? I just think that this revaluation exercise, when it becomes known, will turn the protests into mega-protests. Mr Raynsford: Only if people are misinformed about the implications. As I have made clear already, if someone is living in a property which has increased in value by no more than the average across the country in the intervening period since 1991 --- Q767 Mr Sanders: I am talking about people who at the moment are in part of the country where property prices are well above the national average, incomes are well below the national average, that impacts on the amount of grant which the Council gets because government assumes it has a tax base. That will simply get worse under revaluation for that area. Mr Raynsford: No, no, because if those properties were already above the average for the country as a whole in 1991, there is no reason at all for any change. It is the relativities between 1991 and the date of revaluation which is the critical issue, not whether property values are above or below the national average at the present time. Q768 Chairman: Surely the problem is going to be that people who bought a house in the 1960s and are now pensioners are going to see the property theoretically being worth a lot more, therefore their area's valuations are going to go up, so they are going to have considerably increased tax bills as a result of that. Mr Raynsford: I do not follow that. If the property was bought in the 1960s and if it was above the national average value in 1991 and it remains above the national average value by the same proportion in 2005, there will be no change. Q769 Mr Sanders: There are some parts of the country, particularly the South West, which were above the national average in 1991, but even further above the national average now. So they are clearly going to jump up a band. Mr Raynsford: That is precisely why the New Policy Institute suggested that the issue of regional variations in banding should be considered as part of the approach to revaluation because that would be a mechanism to offset such an effect. Q770 Mr Sanders: Regional variations across an entire region will completely ignore property hot spots in certain parts of that region and it is the property hot spots where you see the biggest protests against the council tax at the moment. Mr Raynsford: I am not sure what the logic of that is. Q771 Mr Sanders: Because the property hot spots which have the higher property prices are in areas which have lower incomes and usually fixed incomes for pensioners. Mr Raynsford: If you are saying that in areas which were the property hot spots in 1991 are where there are particular protests, then there would be logic in your question, but the fact that there may be very high property values currently in those areas will not be a necessary reason for any particular problems at the present time because the council tax is based on 1991 values, not 2004 values. Q772 Mr Sanders: Has the government undertaken or commissioned any work into the technical issues which would have to be determined before the non-domestic rate could be returned to local control - such as, for example, how the grant equalisation arrangement might operate? If you have done the work, what were the main findings? Mr Raynsford: The balance of funding review, as I have stressed, is not a government review, it is a review being carried out with the participation of government, with the participation of local government, with the participation of many others and it is making a series of option appraisals which will then be spelled out in its report. It will then be for government to decide how to respond and there will unquestionably be need for further technical work to be done on a range of issues which are highlighted by the review. I do not want in any way to hide from that. It would be wrong to get the impression that government has been beavering away looking at particular options as part of the balance of funding review. It has not. Q773 Mr Sanders: Has it considered how it might allay any concerns of the business community were non-domestic rates to be given back to local control? Mr Raynsford: It is a known fact that business has expressed concerns and apprehension about the implications of relocalisation of business rates and clearly one of the issues which the Local Government Association highlighted in its evidence was the need for reassurance and issues have been discussed around ways in which that reassurance might be given. I do not want to say more at the moment, because, as I have stressed, the balance of funding review itself is due to report within the next month, I hope, and all will be clear at that point. Q774 Mr Sanders: There has been research which has indicated that the actual business rate is not a key factor in where a business would locate. Therefore, it is perhaps a concern which is unjustified on the part of the business community. Does that chime with any view that you may have about the return of business rates to local control? Mr Raynsford: I am not an expert on the factors which lead businesses to choose to locate in a particular area, but I should be astonished if the level of the business rate itself was the main determinant. It nevertheless could well be a factor that many businesses would take into account and also it could be a factor in businesses deciding whether they wish to remain in an area or might choose to relocate. I certainly would not dismiss it as an issue. It is an issue, but we want to keep it in proportion. Q775 Mr Betts: Do you think it is reasonable that the amount of resources businesses contribute towards local authority expenditure should fall as a percentage of our total expenditure year on year? Mr Raynsford: You in this Committee and we in the review have noted the relative movement in terms of the contribution towards local government funding of the business community on the one side, where the proportion of local authority funding met by business has declined over the last 13 years and the proportion met by the domestic council tax payer has increased. That was a significant finding. You can draw your own conclusions as to whether we will comment on that in our report. Q776 Chris Mole: Last month the Prime Minister told the NAHT that after this year's spending review school budgets will cover three years and be based on the school rather than the financial year. What effect do you think this will have on the rest of the local government finance system? Mr Raynsford: This was a general wish and it is not limited either to schools or to local government, to try to move towards greater financial certainty. The institution of the spending review programme with three-year indications of funding is part of that process. Schools are interested in having greater certainty for a few years ahead and my colleagues in DfES, with whom we have worked very closely in the course of the last year to try to ensure that we squared the circle of how you gave reassurance to schools about their future funding while at the same time not imposing unreasonable straitjackets on local authorities, are keen to pursue this and we are in very constructive discussions with them. Q777 Chris Mole: So you think that the predictability and stability of three-year budgets across local government would be helpful. Mr Raynsford: It would be helpful. I do not want to minimise the difficulties, because there are problems, particularly in areas where there are fluctuations in either pupil numbers or in other demographic trends which impact on the cost of delivering local authority service. If you lock people in to particular levels of funding for a three-year period, without the scope to vary to take account of significant rises in cost pressures, driven by demographics which are entirely outside the authority's or the school's control, you could be creating a different problem. There are issues there which need to be addressed, but the concept and the principle of a greater degree of certainty, so that people can plan ahead, whether it is at the school level or the local authority level, must be right. Q778 Chris Mole: Do you think it would have felt more like stability over the last three years if we had not had the formula funding distribution changes? Mr Raynsford: Undoubtedly, but nevertheless there are many in local government who felt that the formula funding review was long overdue and the member sitting immediately to your left was one of the foremost advocates for that review and government had to take a view on this. We felt the right response was to conduct this review of the grant distribution formula and then to say, having taken the decision, that there would be a three-year freeze, so that authorities would have a period of time with stability and certainty. Q779 Mr O'Brien: In the basket of suggestions for additional funding for local services local income tax has been one which has been analysed quite often by different organisations; a simplified local income tax that would be set only by single and upper tier authorities. Does the government have any objections in principle to such a system where an individual's local income tax payments are netted off the national income tax payments? Has this been discussed with your colleagues in Treasury? Mr Raynsford: I cannot comment on that, because, as I have already indicated, the balance of funding review is not a government review, it is a report which will go to government and government will itself need then to form a view. It is certainly the case that the evidence given to the review by CIPFA pointed quite forcefully to the disadvantage of a local income tax allowing wide variations across a large number of authorities in the rates charged, because there would be consequent administrative complications and pointed quite forcefully in favour of a relatively restricted scope for variation, limited both in the number of different levels of tax which might apply and limited in terms of the number of authorities which might be able to set that. That is one of the factors which obviously have to be taken into account in consideration of this option. Q780 Mr O'Brien: Do you consider then that the matter just referred to there is the reason why you consider the system of local income tax and council tax running side by side would be difficult to operate? Mr Raynsford: No, it is rather the opposite. The evidence which was submitted by CIPFA indicated firstly that the complexity of trying to operate a local income tax in which every local authority in the country would be able to set its own rate and there would therefore be an enormous variety in the number of different rates of local income tax, was a significant obstacle. They then suggested that in the event of a local income tax being introduced as a supplement to council tax rather than an alternative to council tax, then there might be merit in exploring a scheme which was much more limited in terms of the number of different levels which might be set and indeed the number of authorities which might set different levels. That was the logic of their analysis and obviously the Committee has looked at and considered that. Q781 Mr Betts: In 2001 the government white paper concluded that the balance of control was more important than the balance of funding. Has the government changed its view on that now? Mr Raynsford: Certainly in the course of the review we have considered the significance of the balance of funding itself as an issue and also we are very conscious of the issue of the balance of control. People take different views on this and I certainly would not want to argue that one was inherently more important than another. It does vary from authority to authority. If you are an authority where the balance of funding is currently 50:50 between central and local sources because that is the current pattern and there are authorities which are in that position, then the balance of funding may appear to be less important than the balance of control. That may not be the case if you are in an authority where the balance of funding is 1:4 or, in a more extreme case, 1:10. There are authorities where 90 per cent revenue comes from central government and only 10 per cent is raised locally. On mature reflection, after having gone through 15 months of the review and looked at these issues in great detail, I would say that both the balance of funding and the balance of control are important. There is no single overriding view that one is more important than the other. Q782 Mr Betts: The Audit Commission in their evidence said that ring-fencing and passporting "... do not promote efficient and effective resource allocation at a local level". Do you accept that? While the government have clearly committed themselves to reducing the amount of ring-fencing and figures show a reduction of £750 million in this financial year, nevertheless at the same time there was an increase of £1.2 billion in the amount of education funding which they were asked to passport on to their schools. Mr Raynsford: Let us take those two issues in turn. In terms of the Audit Commission's general proposition I do not disagree with the general thrust that we should be seeking to reduce unnecessary ring-fencing, but I could not agree the comment in those bald terms without qualification. As I think I have said in evidence to this Committee before, when you are introducing changed arrangements on highly sensitive services such as supporting people, involving very considerable flows of revenue which are there to help some of the most vulnerable people in our society, if there were no ring-fence at all when that was introduced, real fears were expressed by many of those responsible for those services that this could have a catastrophic consequence on the recipients of the service, if an individual local authority chose not to use the resource for that purpose at all. Therefore we have always said that there may be a case for ring-fencing, particularly as a transitional measure where you are making significant changes and you want to give reassurance that there will be continuity of services of that nature. I would not say that ring-fencing was inherently wrong. It does have the adverse effect the Audit Commission have expressed and we have been seeking, as you rightly highlighted, to reduce it and we have been reasonably successful in getting the trend downwards and we intend to go on. Our objective is to get it below 10 per cent in the next year. On the issue of education funding, there has been a continuing and generally constructive discussion between our department and the Department for Education and Skills about how we balance the two not easily reconciled objectives of ensuring that the money which has been earmarked by parliament for education gets through to the schools, while at the same time not imposing unreasonable restrictions on local authorities. The passporting mechanism has been the mechanism which has been adopted and in the supplementary evidence which we submitted to you, we identified the increased passporting expectation in any individual year as part of the overall ring-fence, because there is an expectation that that money will pass on. As you will understand, there is a need to balance these conflicting pressures to ensure that schools have certainty, a point that Chris Mole was highlighting in earlier discussions about three-year forward planning. They want to have greater certainty; government wants to see schools able to operate with greater certainty. Equally, we want local government to have a greater degree of certainty, but also the discretion to be able to order their finances in a way which is to the benefit of their residents and to allow efficient administration. These are not easy balances to strike. We are working very hard at it. We have a good working relationship with our colleagues in the Department for Education and Skills and there has been huge progress in the last year. The evidence of the settlement in 2004-05, which has resulted in the overwhelming majority of schools' funding going through to schools, is that there is a much more positive atmosphere in schools which feel they are getting the resources they expected. Equally, local government has generally felt a more constructive relationship because there has been an involvement and an understanding of their concerns and their anxieties which they voiced about the 2003-04 settlement. Q783 Mr Betts: In talking about the reduction in ring-fencing and the target of less than 10 per cent of revenue funding, that would still be twice the level in 1997. Is it the government's intention to press on and try to get back to that level? Mr Raynsford: Our commitment is for the current spending review period which expires in 2005-06, but I have already indicated that it is not our wish to eliminate ring-fencing, because ring-fencing may well have an absolutely crucial role in giving certainty and stability when changes such as the Supporting People programme take place. Equally, it can have a role in kick-starting new initiatives, where getting money to new projects would not otherwise perhaps happen if there were no degree of ring-fencing. I believe ring-fencing does have a role to play. Off the top of my head I would not like to pluck out a figure, but it is right for us to continue to drive down the level of ring-fencing, provided that can be done in a way which is compatible with improving the standards of service. The one other factor you have to bear in mind is that since 1997, there has been a very considerable improvement in a number of local services which have benefited from ring-fenced funding. I think of services such as Sure Start, where huge impacts have been achieved at a local level in terms of services for very vulnerable people in deprived communities and that benefit is something which also has to be borne in mind when we think about the consequences of ring-fenced funding in the years since 1997. Q784 Mr Betts: Coming on to other methods of control, one final method which is available to you to control authorities is capping. To what extent has that issue been considered as part of your discussions in the balance of funding review? Mr Raynsford: It has not. Q785 Mr Betts: In terms of the issue about local authorities having the ability to raise more of their funding at local level, we were speaking earlier to your colleague John Healey from the Treasury about the Treasury's concerns about the overall impact of any increase in taxation or increase in spending at local level on the national economic position. Would there be any view about taking on extra powers of control, perhaps the ability to control the level at which local authorities put their tax up each year, if more of the tax raising powers were shifted to them? Mr Raynsford: I should really explain that when the balance of spending review was set up it was made quite clear at the outset that we were not talking about the quantum or the overall level of funding for local government, we were talking about the balance between different sources. Therefore any consideration about what might or might not be a reasonable level of spending by local government as a whole or by individual local authorities was not part of the discussions. Q786 Mr Betts: That is not quite what I am trying to get at. If local authorities have the ability to determine their own funding to a greater degree, maybe they keep the council tax and get the business rate, maybe they keep the council tax and get some ability to raise local income tax, then with more of the GDP of the nation being in control of local authorities in terms of their ability to raise tax, does that not lead to a position where government might want to put some further controls and restrictions on local authorities, maybe the ability to cap their tax raising powers as well as capping their budgets? Mr Raynsford: That has not been part of the discussion and my understanding is that my colleagues in Treasury do not in principle object to a change in the balance of funding which would increase the proportion of revenue raised locally as against the proportion raised centrally. The view we have taken all the way through is that as well as the general issue about the balance of funding, one does need to look very closely at the individual changes proposed. Certainly some of those could only be introduced with very considerable safeguards. It is recognised that the business community are nervous about changes to the business rates and possible relocalisation could only be accomplished if it were to be considered as a serious option with significant safeguards. Yes, there will be a need when we come as government to consider the options spelled out in the balance of funding review to see whether any safeguards might be required to be associated with that. It is certainly not part of our agenda to try to impose further controls on local government. Our agenda is one of trying to give local government greater freedom and flexibility. That has been our agenda since we published the white paper in 2001. Our aim is to try to encourage greater local responsibility for decision-making and local accountability and that has been part of the debate within our review team. Q787 Mr Betts: Do the announcements about the potential capping of certain local authorities this year fit happily with that statement? Mr Raynsford: I think it does because the objective of the balance of funding review is to try to secure a more sustainable, fairer system of local government finance in the long term. It is not about the actual level of revenue of any individual local authority and decisions on that. I believe that the capping regime is necessary, sadly. We have not used it for many years; we did in our first year in government; we have not since then until this year. I am afraid the very large increases in council tax which occurred in 2003 made it inevitable that there would be capping this year. I hope it will not be necessary in future if local authorities do heed the lesson and moderate the council tax increases in the coming year. Q788 Chris Mole: The Audit Commission have recently made some comments which included "The current artificial distinction between fees, charges, direct grants, which are included in councils' net budgets, and central government grant and non-domestic rates, which are excluded, does not promote accountability". Does that imply that government needs to be more transparent about the basis for funding decisions? Do you think that is a fair criticism? Mr Raynsford: I have to say I have not seen that particular paper to which you refer and I should like to look at it, because this is complicated territory and I really would like to consider it in more detail before giving a view. Q789 Chris Mole: More generally then, do you think it is technically possible to provide more public information about the basis of funding decisions, for example the assumptions about spending pressures associated with new obligations or estimated cost increases for existing services? Mr Raynsford: We do operate the new burdens principle. I police it as best I can. I am well supported by the Treasury who support it. Our objective is to ensure that if additional burdens are placed on local government then an appropriate financial allowance is made in the spending review and that has been very much part of the work going on in the current spending review. This is something which involves the local government association. We do involve them in it and I believe that is an entirely appropriate and constructive way of going about it. I would not like to say whether we could be more transparent than that. I am certainly keen that we should try to ensure that principle, the new burden principle, is operated properly, fairly and vigorously and it is certainly my objective to do that. Q790 Chris Mole: Do you think that information is adequately publicly available to improve what has tended to be a somewhat polarised debate between central and local government about the generosity or otherwise of the annual grant settlement? Mr Raynsford: I could not possibly say it is adequately publicly available, because a lot of it is very arcane and involves lengthy and detailed discussions between technical experts and central and local government about the impact of particular new burdens. A lot of that would be very, very complex indeed to try to get into the public domain. That is why I said that I do try to police this in a pretty rigorous way, but we do involve the Local Government Association as part of those discussions and I am committed to continuing that. Q791 Chris Mole: Would public information which was signed off by both yourself and the chair of the LGA be persuasive? Mr Raynsford: Again, I would not want to comment specifically on that without looking at any proposals in a bit more detail. Q792 Mr O'Brien: May I raise a matter which we have raised with you before and with SIGOMA, that is the question of gearing and the fact that the grants are primarily there to try to introduce equalisation? Should grant also fully remove inequalities caused by different gearing ratios between local authorities? Mr Raynsford: Unfortunately it cannot, because the more grant is given to an individual authority in order to compensate it for the disadvantages it suffers, the greater the gearing effect. Currently, for example, a highly deprived authority such as Newham - I know it is not a SIGOMA member, but it is a very deprived area - only meets ten per cent of its spending from its own locally raised resources; 90 per cent comes from government grant. Even if we were to change the balance of funding by 100 per cent and change the gearing ratio by that amount nationally from 25:75 to 50:50, a huge change, even if we were to do that in Newham, the likely consequence, everything else being the same, would only be to change the gearing from 10:90 to 20:80 and they would still be subject to a very significant gearing effect. I am afraid to say that gearing is here to stay, if we are to have equalisation. The degree of gearing, yes, we can change and that can be altered if the balance of funding changes, but if it is our objective - and I believe it is our objective - to ensure that more deprived areas do receive compensating grant from government to help them meet their responsibilities, then there will always be a greater contribution from government sources in such areas and that is likely to have the gearing effect we have discussed. Q793 Mr O'Brien: Are you saying that equalisation is not a possibility? Mr Raynsford: No, equalisation is a possibility; equalisation is absolutely part of our agenda. Q794 Mr O'Brien: You have just said you would always have gearing. Mr Raynsford: Yes. Gearing is a consequence of equalisation, because gearing is the consequence of an authority receiving a significant proportion of its funds from central government. Q795 Mr O'Brien: Arising out of the 2001 White Paper, the government said that gearing will encourage local authorities to look for ways of increasing their spending power by driving down costs, rather than pushing up taxes. Do you still hold that view that it is a pressure on local authorities? Mr Raynsford: No; there are two different views about gearing. Q796 Mr O'Brien: Indeed there are. Mr Raynsford: On the one side there is the view that this is an imposition which creates unreasonable pressure on the council tax because authorities have to increase council tax disproportionately because of the gearing effect. The other point of view is that this is a good financial discipline which ensures that councils think very carefully and hard. Q797 Chairman: Some councils do think very hard, that is the difficulty, is it not? Mr Raynsford: Yes. Q798 Mr Betts: Given that there is this problem with gearing because of equalisation and the need to help poorer authorities, I understand the balance of funding review have received a paper from CIPFA proposing a core grant and a top-up grant where government grant would then increase at the margins alongside the extra funding which the local authority raised through local taxation which would deal with the gearing issue. Does the government have a view about that? It takes us back to a similar system in the 1960s and 1970s which operated then and there was a lot of concern at the time. Mr Raynsford: Yes, indeed and the concern was, and remains the same, that this is in a sense a perverse incentive to increase your spending. If your spending increases are matched by increases in grant, the more you spend the more grant you get. This has exactly the opposite effect to gearing: this provides an incentive to spend more. This may not be in the best interests of economy and efficiency and reductions in council tax demands. Q799 Mr Betts: So we can take it that that will not appear as one of the likely outcomes of the balance of funding review. Mr Raynsford: I should also have stressed that the balance of funding review is not a government review and you asked me what the government's view was on this. All I can say is that you will need to look at the balance of funding review to see whether this idea is taken any further or not. Q800 Chris Mole: The United Kingdom has ratified the European Charter of Local Self-Government which requires - at Article 9 - 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". The independent Commission on Local Governance, set up by the Local Government Information Unit, has concluded that the UK is in breach with the substance and spirit of the charter. Do you agree with that commission? Mr Raynsford: No, I do not. We would not have signed the charter and as a government we did when we came into office; previous government had not. We would not have signed it if we did not believe in it and did not want to apply it. The fact that we are conducting this review at the moment is a pretty clear indication that we are very serious about ensuring that local authorities should have a fair and sustainable basis of funding in the future. It does not mean the present is wholly adequate. I have already indicated that there are criticisms of the current arrangements and we are looking to see what scope there is for improvement. I hope that our report will inform that debate. I do not agree that we are in breach of that charter. Q801 Chairman: On that note, may I thank you very much for your evidence. We look forward to reading the report when it comes out. Mr Raynsford: May I say that I look forward to yours as well. Memorandum submitted by Local Government Association
Examination of Witnesses
Witnesses: Sir Jeremy Beecham, Chairman and Leader of the Labour Group, Mr Peter Chalke CBE, Leader of the Conservative Group, Mr Chris Clarke OBE, Leader of the Liberal Democrat Group and Sir Brian Briscoe, Chief Executive, the Local Government Association (LGA), examined. Q802 Chairman: May I welcome you to the Committee? May I apologise that we are running so late? You will just have to reflect that you did opt to be last on. May I ask you to identify yourselves for the record, please? Sir Jeremy Beecham: Jeremy Beecham, for the next 14 days Chairman of the Local Government Association. Sir Brian Briscoe: Brian Briscoe, Chief Executive of the LGA. Mr Chalke: Peter Chalke, Leader of the Conservative Group at the LGA. Mr Clarke: Chris Clarke, Liberal Democrat Leader in the LGA. Q803 Chairman: Do you want to say anything by way of introduction? Sir Jeremy Beecham: Briefly, if I may. As you will have gathered, the balance within the Local Government Association has been shifting. We are however united in wanting to see a shift in the balance of funding. We believe that the present imbalance has two significant effects. First, it limits the autonomy of local government; the dependence on central government funding has that effect. Second, it creates a system which people who pay current local taxes cannot understand. They cannot understand the relationship between local expenditure decisions and the local taxes they have to pay. If they cannot understand that then our accountability to them is much diminished. We think that it is absolutely essential to move from the present imbalance of funding to a better balanced system and it is not an option to remain where we are. We believe we have put forward a proposal which would achieve the objectives of creating a fairer, more accountable and more buoyant system of local government finance, with a mix of a reformed and more progressive council tax, the relocalisation of the business rates and with an element of local income tax. That is the basis on which we have submitted our evidence. May I make one further point, though it is not strictly related to the balance of funding it is a matter which has been discussed this afternoon? We would strongly urge that reform of the council tax benefit system takes place and that need not wait on the eventual outcome of changes to the system as a whole. That is something we believe should be progressed quickly and put in place as soon as possible, irrespective of the outcome of the balance of funding review. Q804 Christine Russell: You have really answered the question I was going to ask you, so I shall ask you to confirm and to elaborate further. You have indicated that, although the balance of representation on the LGA has changed following the local elections, and perhaps your two colleagues would back you up, there will be no change to the paper you put forward in April, a couple of months ago. Is that correct? Sir Jeremy Beecham: Yes, there is that broad consensus. We have all given a little in our approach to this, but we are all united around the need for change and pretty much on the direction of change. Mr Chalke: As leader of the largest group, we generally subscribe to it. It has been quite an achievement for the three party groups, and the independents of course, to come to a consensus. There are areas of detail where some of us would not want to go down that route. Mr Clarke: Yes. In the way that the report is coming together, and John Healey referred earlier to the criteria which were set out, and in the outline Sir Jeremy has described we now feel that there are enough pieces in the jigsaw that if the will were there from government, it could be moved in such a way as to bring about a change by a mix of funding which would be sustainable, could be efficient and could bring a greater element of fairness than there is now, thereby adjusting the balance of fairness, which was the aim we set out with. Q805 Christine Russell: In your presentation you indicated that you thought there was a need for change because the present system is very complex, it is very difficult to understand and it needs clarification, but some of your critics have said that in fact the comparisons you have come up with are just a confusing wish list. How do you think all the matters you have identified such as relocalising the business rate, having a proportion of income tax, but still retaining some form of property tax are going to clarify the situation in the eyes of the public? Sir Jeremy Beecham: I do not think the public will necessarily ever be clear about how the system works in its various components, any more than perhaps they are clear about how much central taxation is raised by the various methods around, including income tax, VAT and so on. What will be clearer is the translation of a local decision to increase or reduce expenditure and the consequent impact on the tax they have to pay, whether that be a mix in terms of the domestic taxpayer of property tax and local income tax or with the business rate they are obviously paying just the business rate. The outcomes will be much clearer and that will make us more accountable. Q806 Mr Clelland: Peter Chalke suggested that while you are united on the principles there might be some differences on details. Part of the submission which the LGA made at the beginning of the balance of funding review was that there ought to be a basket of extra taxes like local congestion charges, local sales taxes, etcetera. Is this list still the same, or have you now decided that some of these are maybe not such a good idea? Are there new items to add to the list or do you have some preferred options in the list you have submitted. Mr Chalke: I come from the side that I do not want to see extra taxation. I do think that some of those issues will not raise very much money but can actually have policy direction, for example, charging utilities for lane rental when they are digging up roads. Under the public service agreement in Wiltshire, we narrowly missed having one of the pilots. We consulted industry and industry was delighted at the idea that if you tax the utilities for digging up the roads they would go in and out in half or a quarter of the time that they currently do. That has an advantage for traffic flow and cost to industry; so there is a policy advantage and I can accept that. I cannot accept extra taxations just for the sake of it. Sir Jeremy Beecham: The basic position is that few of those would add significantly to the desired objective of adjusting the balance; some of them might have a local policy benefit, such as, for example, localising the collection of vehicle excise duty. Some of them would probably be unacceptable as a matter of principle, for example local sales tax. Few people would advocate that. Q807 Mr Clelland: In your paper you say that a local sales tax or local land value tax could have a significant effect. You heard the Economic Secretary to the Treasury say that he felt these peripheral taxes would be insignificant. Sir Jeremy Beecham: A local sales tax could have a significant effect; unfortunately it would not be a progressive effect. I would not support it because it would be regressive and in a small country there would be boundary problems and so on. It is not workable or desirable from the point of view of equity, although that is perhaps the one thing which could make a significant difference to the balance. However, there are significant disadvantages to that particular tax. Mr Clarke: The common ground is that that mixture of the three which he highlighted could deal with the issue of balance and fairness. These others are peripheral to that, but could be valuable in some separate consideration for policy reasons rather than to assist in dealing with the balance of funding or the fairness issues. Q808 Chairman: If you got some of these additional taxes would you want there to be equalisation? Sir Jeremy Beecham: Of the additional taxes? Q809 Chairman: Yes, of the money from the additional taxes. Sir Jeremy Beecham: The amount they are likely to contribute would be so small as to make equalisation --- Q810 Chairman: Westminster would do quite well out of a bed tax, would it not? Sir Jeremy Beecham: Yes. What we are suggesting there is that there might be an option for a bed tax, but you could not equalise. Part of the problem faced by authorities like Westminster is that there is a significant burden, as well as benefit, from dealing with large numbers of visitors. You do not want to over-complicate the system, but it is likely to be marginal in the event and I would not have thought it was necessary to take equalisation into account with these subsidiary taxes. Q811 Chairman: Would those be taxes which each local authority would be expected to impose or would it be entirely up to local authorities whether they imposed them? Sir Jeremy Beecham: As far as a bed tax is concerned, we are suggesting that that should be entirely optional. There are quite mixed views over which way to go amongst similar types of authorities with an interest in that and different international experience about the effect of such taxes. If you were to localise vehicle excise duty, I suppose that would apply across the piece, for policy reasons rather than revenue reasons. It really is very much a subsidiary issue. The three main planks we are seeking to construct the new framework on are --- Q812 Chairman: Vehicle excise duty does more or less reflect where cars are and there is huge variation between local authorities, so would there not be some case for equalisation? Sir Jeremy Beecham: I do not really think so. It is a policy objective here which would encourage authorities to deal with the problem, amongst other things, of abandoned vehicles and the like, it is a positive incentive for them to ensure that vehicles are taxed. I do not think that would be likely to require equalisation, indeed that might be counter-productive in terms of achieving the policy objective. These are very much subsidiary Q813 Mr Betts: The 2003 Act gave authorities new freedoms to trade and charge for services. There is a feeling around that perhaps they have not been used as widely as local government were saying they would be when they campaigned for them. What is your view of that? Is there scope to do more? Sir Jeremy Beecham: There is scope to do more, but I am not sure we have actually yet got the Order which would facilitate the trading. The department has not actually as yet pressed the Go button on that. It will take time to develop. Although this is significant in the long term, it is more significant in policy than in revenue terms. We would not see that as making a huge difference to the balance of funding and the capacity of authorities will vary quite markedly. Q814 Mr O'Brien: You heard us pressing the minister on the question of council tax and, if it survives, in what form it will be. Do you have a view as to how it should be reformed? Sir Jeremy Beecham: Yes. We think that there certainly need to be extra bands, both at the top and bottom levels. It might also be desirable, although we have not taken a formal view on this, to look at the multipliers between the bands because the range is quite narrow at the moment and even with extra bands it would not --- Q815 Chairman: So you would go back to rates. Sir Jeremy Beecham: Not quite, perhaps; not quite, but more towards that. Appropriately we are meeting in the Thatcher Room, are we not? One becomes quite nostalgic for the situation which pertained before certain decisions were made. Yes, more in that direction. Mr Clarke: Both of the ministers referred to the need for more detailed work and I should just like to add, assuming that they will continue to look seriously at the possibility of a form of local income tax alongside a form of residential property tax, that I strongly believe that the start level of that tax needs to be considered as well. A lot of the anger in the last year or two has been that bills of £1,200, £1,400, £1,500, £1,600 really hurt some people very, very much. As that detail works through, modelling will need to take place on what the start rates should be. For example, the personal allowance gives a degree of protection for people on low incomes from the start rate of income tax; there is not quite the same equivalent in --- Q816 Mr O'Brien: The LGA have suggested that the council tax could be a percentage of capital values rather than bands. How might this work and what benefits would it bring? Sir Jeremy Beecham: That was a possibility which we ventilated. I am not sure it has been taken very much further in the context of the review. There have been people who have suggested that it would be a simpler process than a notional banding, or a rather more accurate process than a banding system, but it has the disadvantage of requiring individual valuations and tracking movements on that basis would be more complicated. The feeling of the review is that perhaps capital valuation is not high on our list of desiderata, unless it were established by further work that was going to be more efficient. Q817 Mr O'Brien: It is not a serious issue then. Sir Jeremy Beecham: I do not think so. Q818 Chris Mole: You heard the minister indicate just now that they see that there needs to be some further work on council tax benefit, and you mentioned in your introduction too, improvement of take-up and making it fairer. What specific changes do the association have in mind to council tax benefit? Sir Jeremy Beecham: All of us on the review, right across this rather large body, were impressed by the fact that, for example, the capital limits have not been raised at all since the benefit was introduced and are low; £16,000 is the maximum amount of capital, apart from the property itself, that somebody can have. This is now 15 years on since the benefit was introduced. Equally the income limits are too low, so one needs to increase the eligibility and one also need to make the application more user-friendly, but in particular we were taken with the notion that you try to change the culture from one of applying for a benefit to one where you are merely limiting your liability to pay tax. That is the way the proposition was put. That might well help people, particularly older people who are reluctant to claim a benefit. We know that there are 1.7 million owner-occupying pensioners who are not claiming on the present eligibility criteria and this cultural inhibition is something we ought seriously to address. Mr Chalke: Coming from a rural area, there is a marked reluctance to claim benefit; there is a pride which stops people doing that. We found that with all the other benefits when we worked with the CAB and went round to these people's homes to suggest to them that they had an entitlement. In the first couple of years £4 million of entitlement was found which people had not claimed. It would not be too difficult to put down your gross income; after all capital limits are irrelevant because it is the actual income you derive from them and at this moment it is probably a fairly low income from the capital. You could include the total income in your electoral registration form and you would then be sent a council tax bill lower than the others. That way you get a reduced bill, you do not queue up for a benefit, which I think is the thing stopping the 1.7 million from accepting it. Q819 Chris Mole: Do you think reform of the council tax benefit system would still be needed if a local income tax comes in alongside council tax? Sir Jeremy Beecham: Yes. Q820 Chris Mole: You had said that as an association you supported discounts on council tax for specific groups. I appreciate there is a degree of irony in the second part of this question. Who did you have in mind and, after Kent County Council had to backtrack on their proposal of discounts for pensioners, is it still a viable option? Sir Jeremy Beecham: Probably not. One of the problems is that the discount which is available, for example for single people and disabled people, is a discount to go down a band. If you are in Band A, you cannot go down a band. That is an issue which needs addressing. There needs to be something below the bottom band, as it were. As to specific other groups, I am really not sure. I do not know whether colleagues have any views about that. If you change the benefit system and change the whole system, the pressure for particular groups, like pensioners and so on, would actually diminish. Q821 Chris Mole: Can you say something about what local authorities have been doing to improve council tax benefit take-up? Sir Jeremy Beecham: There have been several campaigns around this. For example, my own authority in Newcastle included in the council tax bills a lot of information urging people to claim. We have been working with organisations like Age Concern and other organisations working with the elderly to promote advice sessions. We have had hotlines and indeed the government itself has sought to promote take-up with an advertising campaign. Q822 Chairman: What has happened? Has the take-up in Newcastle gone down? Sir Jeremy Beecham: No, only the Labour vote has gone down in Newcastle. The take-up has gone up marginally, because the experience is actually that advertising is not enough. The other measures, for example using data matching on claimants for different types of benefits, going to areas where you know people are getting another benefit - it might be attendance allowance or something like that - and talking one to one, helping them to apply, is much more effective, what Peter presumably experienced in Wiltshire. Advertising is background only; you actually need to get to people directly. Another way is to encourage families of people who are entitled to claim, so that the children of the pensioner owner-occupiers might be another group to work with. It is difficult at the moment to increase take-up without direct contact. Mr Chalke: We gave grants to the Citizens' Advice Bureaux and we gave them lists of those with benefits and the number of people who then started to claim those benefits was significant; after the second year the take-up was around £4 million. Q823 Chairman: This is on other benefits. Mr Chalke: No, they go through everything that these people may be entitled to and point it out to them. Obviously you cannot make them claim, but at least it was a one to one which was helpful, it was not queuing up. Q824 Chairman: With the national trend of take-up going down, in Wiltshire it is going up. Mr Chalke: Yes. Mr Clarke: The same in Somerset. We found that investing in welfare rights' support to people generates a tremendous response. May I make a general point, because I wanted to respond to what you said about complexity? The balance of funding review for local government, as the minister made clear, began to look at this issue of gearing because of the way it blurs accountability. If a one per cent shortfall in grant has to be picked up by council tax payers, on average it pushes up council tax by four per cent. These two issues have now come alongside each other: on the one hand is the issue of fairness and on the other hand the issue of gearing and this is why you have these different dimensions. So the benefit take-up would obviously make a difference to fairness and what people pay, but it would not contribute to the balance. This is why we have come to this view of needing a mixture of things going on: the relocalisation of business rates and the reform of council tax, or residential property tax, to make it fair and local income tax alongside that to move the balance and add a further element of fairness and buoyancy because it directly relates to ability to pay. Q825 Mr Betts: That leads me on to local income tax. Reading the Local Government Chronicle a recent article suggested that the LGA is supporting the local income tax proposal set out by CIPFA. Is that the case and if so, why? Sir Jeremy Beecham: We were persuaded that it looks - because there will inevitably have to be further work upon it - to be a more feasible approach than perhaps we had first envisaged, thinking in terms of widely different rates with all the collection problems which might ensue. The notion which was presented to us of having a relatively small number of bands which could be applied locally and determined locally and based on a particular day in the year - I would not necessarily go along with the particular date they had in mind - in order to avoid the problems of people moving around, so a fixed notion, would also help in terms of predictability, would make an element of LIT more feasible. We have also thought that this might be phased in, possibly by assigning revenue in the first place and then moving towards this choice of a local band in due course. There would obviously be costs to this process, both in terms of collection by the authorities, bigger revenue for local authorities, and also for employers and that is something which would have to be looked at as well and an effort made to minimise. We think it does become feasible and it looked like a reasonable way forward. Q826 Mr Betts: Do you have any idea what balance you would like to see in terms of the revenue raised by local income tax as against the council tax? Sir Jeremy Beecham: I am not sure we looked at it quite in those terms, but what CIPFA were talking about was something between three point five pence and four pence, ranges around that. Quite what that would do to the council tax element, I am not sure. Our overall package would produce something like a reverse of the current 75:25 split and it would then be 75 per cent raised locally and 25 per cent nationally. Mr Clarke: Roughly equal amounts of residential property tax and local income tax. You have talked quite rightly about equalisation, but in fact the amount of funding needed for equalisation is £16 or £17 billion, whereas grants are £40 billion. So, in effect, transferring that difference across to locally set taxes rather than nationally set taxes would be a key part of moving the balance. Q827 Mr Betts: There is still a problem with equalisation, is there not, because the need to compensate still exists? Sir Jeremy Beecham: Oh, yes Mr Clarke: Yes, it does. Q828 Mr Betts: Is not one of the problems with local income tax that the differentials in the tax bases of different authorities, on the income levels, are actually greater than they are on the debt from council tax and therefore the amount of equalisation needed on the local income tax is probably going to be greater than the council tax system and does that not give you problems back onto the gearing issue? Mr Clarke: CIPFA actually said that they are quite similar most often, but there are some places where they are very dissimilar. We were hearing earlier that the South West, which is the region where both Peter and I live, is a region of higher than average prices and lower than average incomes. It is apparently the region in which the mismatch is the greatest, but in most other places, there is quite a degree of correlation. Sir Jeremy Beecham: We have done some modelling which suggests that the gearing could be reduced pretty substantially across the piece and there would only be a relatively small number of authorities which would be either in negative grant or at the other end in the Newham position. Any system would require a measure of equalisation. Q829 Mr Betts: It is generally perceived that income tax would be more buoyant so at one level people might be worried that over a period more and more money would be taken in local income tax and it would be easy for councils to sit back and take the money rather than put up the council tax. Sir Jeremy Beecham: Like the government does. Q830 Mr Betts: Secondly, there are occasions when the national economy may not be doing that well - not under Labour I hasten to add - but the take from local tax might actually go down. How do councils respond to that situation? Does that not cause major problems, particularly when you cannot borrow for revenue purposes in the short term? Sir Jeremy Beecham: That is one of the reasons why we would want a mix of taxes. It would be a mistake to put all your eggs in one tax basket, or, rather, to derive all one's eggs from one tax basket. That is one of the reasons why some of us have never liked the idea of going completely for local income tax. We think a mix is better, because you have more predictability, you spread the risk and we think that is workable. Mr Clarke: CIPFA in their second paper said that by taking that date a year early, they would assume the take in the financial year and therefore if there were the dip, if there were a major closure during the actual financial year, the income would nevertheless have been set in the previous year. That gap would give time to give further adjustment in the next financial year through equalisation. Mr Chalke: I have to say, just to make the point, that this is the area in which there will be some disagreement, as you would expect, from myself. An awful lot more work needs to be done on it, because the proposal to levy it through an adjustment of someone's code number is hardly transparent; no-one knows what their code number is, whereas the council tax is at least a bill which can be compared between councils. Q831 Christine Russell: May I carry on asking you about the CIPFA proposals? I am sure you can all accept that for residents living in Shire counties, two-tier authority areas, there is already considerable confusion as to who does what. My understanding is that part of the CIPFA proposals is that residents would get one bill from the Town Hall, which would cover district council bill, police bill, fire bill and part of the county council bill, but then they would get a separate notification from County Hall about their local income tax. Surely that is going to confuse people even more than the present system? Sir Jeremy Beecham: I do not know that it would confuse them any more than the present system. In the two tier areas there is already considerable confusion, as you have already indicated, as to who is responsible for what. It has to be spelled out as clearly as possible, but I do not see that it would be that difficult to do. After all, all of us contribute to central government taxation in a variety of ways which are very lacking in clarity. Q832 Christine Russell: Is there any logic in, for instance, the costs of running county council services being split between district and county? What is the rationale, what is the logic behind the proposal? Mr Clarke: Yes, this is CIPFA contributing suggestions to reduce the complexity of raising the local income tax, the complexity of collection. I must say that it seems to me that when the detail was being worked through, in the first major paper by CIPFA, they came to the view that with local income tax the optimum would be the level set by local authority and the income collected by the Inland Revenue, because eight out of ten people are in the PAYE system. If the combined option continues to receive further study, I feel it would be logical to look at whether residential property tax ought also to be collected by the Revenue. That method in the first CIPFA paper would save £200 to £300 million a year. Logic suggests the same could apply to residential property tax and that would deal with the complication. Q833 Christine Russell: That was the other question I was going to ask you: whether or not the LGA have actually done any analysis of the cost of the CIPFA proposals. Mr Clarke: Yes, there is some. Sir Brian Briscoe: CIPFA have done an analysis. It is about £300 million. Q834 Christine Russell: This is perhaps a bit of a quirky question, as the proposals would only relate to local authorities in England. For those who represent border constituencies, how do you think the feeling is going to be in Wales over these suggestions? Sir Jeremy Beecham: We will leave Offa's Dyke where it stands, if we may. Q835 Chris Mole: Would the introduction of a local income tax have to coincide with the complete e-filing of PAYE end-year returns, which is not due until 2010, to operate this sort of system? Mr Clarke: It has not been identified as such an issue so far. The longest lead time estimated was three to four years. Sir Jeremy Beecham: We are only looking at PAYE rather than unearned income; I am not quite sure about self-employed people. I must say that I was sceptical about this, because it did seem to me rather invidious that, to name somebody at random, the Duke of Westminster's unearned income might be untaxed for the purposes of local taxation, but the cost of seeking to tax unearned income is too great. Q836 Chairman: And bringing agricultural land into the rating system. Sir Jeremy Beecham: Funny you should mention that, because I did actually float that at the end of the last meeting of the LGA. Q837 Mr O'Brien: During the questioning of the Economic Secretary and the Minister for Local Government on this issue of business rates it emerged that since it was introduced council tax payers have had an increase of above 100 per cent and over the same period there has been a 30 per cent increase in business rates. Do you think they are making a fair contribution to local services? Sir Jeremy Beecham: No and I think their argument, which we have had put very forcefully in the review, is really thoroughly misconceived. As somebody said earlier this afternoon, there is no evidence that location of business is particularly influenced by the level of business rates. On the contrary, the evidence of the Cambridge studies in the 1980s and the experience of the enterprise zones which gave ten-year rate-free periods afterwards was that what is important is the total property outgoing. To the extent that the property tax rises, the rents go down. What we experience, certainly in my enterprise zone, was that the rents rose within the enterprise zone so that the total property outgoings remained the same inside and out. In fact it is another illustration of what Christine Russell was asking earlier in relation to the impact of council tax and property prices. Commercial property tax is a tax on commercial rents in effect and the CBI has completely misconceived that element. Furthermore, they argue that business pays other taxes; well so does every other taxpayer, we all pay a variety of taxes. The other point they seem to overlook is that business is both a huge supplier of services to local government, actually benefits from local government activity in that sense, and they also indirectly benefit from many of the services we provide. We think that at the moment they are not paying a fair share. The final point is that it has to be kept in proportion. Business rates amount to something like three per cent of turnover. I am not saying that is insignificant, but a change in that is not of itself hugely burdensome. We do need to revisit the question of business rates. There has to be protection for business of course. Nobody is suggesting they should be singled out for worse treatment than the domestic taxpayer; that cannot be right. Indeed I would go further and suggest that there might be scope for a variation downwards only for business rate in particular local circumstances where the local authority saw that as necessary in the given circumstances of a particular locality. In general, our view is that relocalisation of business rate is important; it is crucial in our view to achieving a better balance. It might be phased in rather than done in one go, if that were to help, but we think it is an essential component of change. Q838 Mr O'Brien: The CBI say no vote, no increase in rates. What is your answer to that? Mr Chalke: I believe there have to be stronger safeguards and I was pleased to hear the minister say that he thought there should be safeguards as well. We cannot allow the extraordinary increases which have been levied in the past on business; my own factory had 29 per cent increase in one year. You cannot allow that to happen. Business is in a competitive world, it is competing worldwide, not so much within this country even. There should be strong safeguards. I also think that there should be greater involvement of business in local authorities. I believe that the scrutiny role of the larger businesses, scrutinising the council's budget before it is set, with a statutory role for them to report publicly on what they find, could be the sort of deal that the CBI or others might actually believe would involve them. This year is a very easy year to argue; the council tax has gone up on average by six per cent; business rate went up by two per cent. If the two had been together, it would have been a four per cent increase; indeed if you had had a wider base it might have been even less. That is not a price which the business community would baulk at too much. If you go back to last year when it was an average of 12.9 per cent increase in council tax, I do not think we should have been inflicting that sort of increase onto the business community. Q839 Chris Mole: Would you have been happy with a link which said the maximum increase in local business tax would be the same as the maximum increase in the domestic tax? Mr Clarke: Yes. It is interesting also that if you read the second large CIPFA paper, which clearly assumes, because of the way it is constructed, that local authorities will end up setting the business rate and setting a residential property tax and local income tax, it implies that there is a degree of buoyancy and it implies some kind of flexibility which would create a new kind of sustainable balance. The other point about business is that the first complaint was that they did not have a vote. They still do not have a vote, but there is now no connection at all. Other leaders will have had the same experience as I and I am sure you have had, business is asking what impact this decision will have on business rates and we have to look them in the eye and say that nothing we ever do has any effect whatsoever on business rates. The valuer sets the value and the government sets the rate. It is just totally disconnected. Q840 Chairman: Can I take you on now to ring-fencing? Has it got to go? Sir Jeremy Beecham: It has got to be reduced and, taking Clive Betts' previous question, back towards the five per cent which existed in 1997. There are certainly cases, and we have always accepted this, particularly when you are piloting new policies and perhaps, as Nick Raynsford was saying, when there is a transition from one regime to another, where ring-fencing may be justified, but it should not be regarded as a permanent feature. It distorts local accountability, it pre-empts --- Q841 Chairman: Right, you are giving it the thumbs down. Would five per cent be all right? Sir Jeremy Beecham: Five per cent would be acceptable, I would think. Q842 Chairman: Sir Paul was very keen I asked you this question. External inspection and assessment. Is it really necessary? Is it not expensive? Sir Jeremy Beecham: Some external inspection and assessment is necessary, but much more proportionate and at a much reduced cost. I think the cost is around £600 million of external costs at the moment. That should be reduced significantly and we would like to see a much more unified inspection process and a much lighter touch, indeed one or two of the inspectorates, such as OFSTED, are moving in that direction. There is a value in it, but it needs to be much more proportionate. Mr Chalke: I of course would go along with the opinion Sir Paul expressed. Q843 Chairman: In my youth I lived in Manchester and my father always used to complain that we paid higher rates in Manchester and got good services, but some of his colleagues used to go into Stretford or into Stockport where they paid much lower rates and then they would sneak back across the borders to get the better services from Manchester. Do you think there is a justification for really having significantly different standards of service between one local authority and another? Sir Jeremy Beecham: Yes, in the sense that if that is what the electorate vote for, that is what they get and they ought to be the people deciding that. It is up to the competing candidates and political parties to draw on any such differences and to seek to emulate the best. If they cannot persuade people to vote for that, that is the consequence of democracy. Having said that, there ought to be - and I think most of us would accept this - a sort of national minimum, I would prefer to use the word entitlement rather than standard, across perhaps key services, social care, education, but there would be perfectly legitimate differences. If an authority chooses to put more money into roads, maintenance and less into sports facilities or whatever, that seems to me legitimate. Mr Clarke: You have put your finger on the main point. We want those variations from place to place to arise from local decisions, not the misrepresentation of local decisions that you get through the gearing effect. In 2003-04, when council tax went up by 13 per cent, that was not all caused by ridiculous local councils, there were national drivers doing that. That obscured the impact of local decisions. Q844 Chairman: But you have already conceded as far as education and social services are concerned, that you probably have to have national standards. Since most roads are now still the responsibility of local authorities, probably I drive my car more on roads outside my local authority area than in it. I have no influence on whether they fill in the potholes or not, do I, when I vote. Mr Clarke: You do, you do. When I led my council I ran my campaign to put pupils before potholes and not all of the electorate agreed with me and my successor does not. Q845 Mr Betts: Is there a case for capping the expenditure and revenue of a local authority? Sir Jeremy Beecham: I do not believe there is, as a matter of fact. I would stand on the principle that capping is wrong. It is perfectly legitimate for government to require councils to explain themselves and justify themselves, but they should be doing that to their electorate. Maybe there is a case for a mechanism whereby there would be a special report from the District Auditor or Audit Commission if council's expenditure - and it is really the expenditure which needs to be looked at rather than the level of tax I would suggest, because that is distorted by gearing and other factors - were significantly out of line and that is information which should be conveyed to the electorate. That is the right way to do it rather than for government to impose its judgment. Q846 Mr Betts: I can see that is a logical argument for saying an individual local authority and the impact it has relates to the electorate in that area, but if we are moving to a situation where local authorities are going to be responsible for about ten per cent of GDP in terms of their tax-raising ability, if we double the current amount, surely the Treasury has to have some interest in what local authorities are doing collectively and the impact that may have on the national economy. Is it not in that area where central government in the end have to have ability to control? Sir Jeremy Beecham: I do not know where that leads us. It seems to me that leads us to almost universal capping rather than individual capping and that cannot be acceptable. There are levers the government will continue to have under any local government finance system, which they may be able to apply without going to the length of totally controlling the expenditure. If you look at what is happening on the capital side, the expectation is that authorities will be prudent and a prudential borrowing regime is set in place. All we are saying is that the local government finance system will be one which will be a prudential revenue system in which people will be held to account by their electorate. Of course there will be the opportunity for government and others to highlight apparent discrepancies, both at local level and perhaps at national level. Q847 Chris Mole: The last question you will be pleased to hear and you have probably been here long enough to hear me ask several ministers about the Prime Minister's commitment that after this year's spending review funding will allow schools to budget for three years ahead. Do you welcome this? Sir Jeremy Beecham: Yes, provided we get three-year budgets for local government as well. There will need to be an element of flexibility; a minimum guarantee, as it were, should be available to councils and within that context it would be feasible to plan for schools and other services. Q848 Chris Mole: With which you have smartly answered two parts of the question in one fell swoop. Should directly elected regional assemblies have a role in distributing government grant to local councils and monitoring local council's spending and tax levels? What is the LGA's view? Sir Jeremy Beecham: No. I have for 30-odd years been a very keen proponent of elected regional government and I am looking forward to a referendum, which I hope will take place as scheduled in November on an all-postal ballot, but I say that without the support of my colleagues. However, frankly I should not like to see regional assemblies in the business of adjudicating on local government services. Their role is quite distinct and the temptation to get lost in the local government agenda would be altogether too great. They have much more strategic functions to carry out and I would not like to see them involved there. Mr Clarke: May I just add a quick comment on Mr Betts' question? Since local authorities only raise three per cent of the national taxation it is very, very hard to see how a few rogue councils could wreck the national economy, is it not? It just does not scan. Mr Chalke: My only comment on regional assemblies is that I do not believe there will be any yeses in the referendum. I think it is an irrelevant question. Chairman: On that note, may I thank you very much for your evidence and thank everybody else for a very long session. Thank you. |