Examination of Witnesses (Questions 1-19)
SIR SANDY
BRUCE-LOCKHART,
SIR JEREMY
BEECHAM, SIR
DAVID WILLIAMS
AND SIR
BRIAN BRISCOE
21 NOVEMBER 2005
Q1 Chair: Gentlemen, may I welcome you
to this committee meeting. I am not sure whether the shorthand
reporter might require it, but the first time that you speak could
you make sure that you identify yourselves. You do not have to
keep doing it every time, but if you could do that it would be
most helpful. I would like to start the questioning on the issue
of the balance of funding and some of the information that has
been in your submissions about the LGA's policy on wishing to
reduce the gearing effect by reducing the proportion of local
revenue which is raised through the council tax. I would like
to ask which one of you wants to respond first, but, given that
you have consistently argued that the fact that 75% of your income
is direct from government and has negative effects on council
tax, why is it that your memorandum is suggesting that you actually
want an even smaller proportion of revenue to be raised through
the council tax than it is at the moment?
Sir Sandy Bruce-Lockhart: What
we are going to have to say is partly about the issue of balance
of funding and partly about the issues that we will come to, I
am sure, in a while, which was the need to get off from the kind
of very unsatisfactory year-to-year negotiations which have not
been very helpful. On the balance of funding, I think the first
thing to say is that it has not simply been the LGA which has
said this has been so important, it has been the Government as
well; and we need to take ourselves back to February 2003, when
Nick Raynsford, who was then Minister, set up the Balance of Funding
Ministerial Committee to look at the balance of funding. We were
on the committee. We had three members of the LGA but the committee
was chaired by Nick Raynsford. It had all the civil servants,
the professionals, it sought external advice and it worked for
15 months to draw up what we hoped would be final recommendations.
We put forward some options for that, we worked amongst ourselves
and reached agreements and the options were set out for you, but
they were broadly around a property tax, the return of the business
rate, possibly an assigned revenue, and the Minister then made
a statement in the House and called for that to be kicked into
touch with the first Lyons review. That review started in September
2004 and then, very unfortunately, it was kicked into touch once
again in September 2005. We think it is immensely important that
the balance of funding, or the rebalance of funding, takes place.
At the moment there is not clear accountability to the public
about who is responsible for council tax increases. That is a
highly unsatisfactory situation. Also, we believe that if funding
was rebalanced, if there was also a reduction in specific grant,
it would allow councils to much more actively engage in medium-term
financial planning, not lurching from year to year, because they
would be responsible for the whole of the money that they spent,
and this would therefore help to stabilise council tax as well.
So we simply start off with that position.
Q2 Chair: Can I just press you, and
maybe Sir Jeremy can have another go. You are suggesting that
the proportion of local government funding that should be raised
from council tax should be reduced. Is the implication of that
that you believe that more funding should be coming from business
so it should be shifted from the council tax payer to the business,
or is it your view that the difference would be made up by a basket
of other local taxes?
Sir Jeremy Beecham: Could I begin,
Chair, by congratulating you in your election as Chair of the
Committee. The LGA's combination option would reverse the 75%
centrally raised 25% locally raised proportions. The question
is then how you divide up what would then be the 75% raised locally.
It is our view that the share of business, which has fallen, I
think, from 29% to 22% in the last 10 years, would rise over time
but only to the extent that council tax and other local taxes
rise. We do not propose a basket of other taxes. We did examine,
the Raynsford Review examined a range of other taxes with one
or two exceptions, the possibility of a vehicle excise tax being
raised locally rather for policy purposes than revenue raising
purposes. We are suggesting essentially that the options should
be a mix of a reform of council tax—it is important that
we are not simply proposing to roll forward the council tax in
its present form—the repatriation of business rates and
an element of local income tax, perhaps by way of assignment,
so that the gearing changes dramatically.
Q3 Mr Betts: Why do you think we
have made no progress on the issue of localising the business
rate all these years? It seem to be a fairly consistent view right
across the board in local government but an almost equally consistent
view across the board in national government, but they do no do
anything about it?
Sir David Williams: I think that
businesses are very wary of the problems that they had 15, 20
years ago before business rates were nationalised in 1990, I think,
where in some places they did rocket considerably and businesses
did not like it. Ironically, it is exactly the same as council
tax payers do not like considerably more than inflation increases
in council tax, but that is what we have been given. The Association
has tried very hard to persuade business organisations that this
is actually the right way forward. They need the safeguards, but,
as Sir Jeremy has said, the proportion of council income that
businesses pay has gone down in the last few years—it has
not been stable—but the point that I wanted to emphasise,
reinforce, as Sandy has said, we have got a hopelessly unstable
system which those of you, like you Clive and Paul, who have been
council leaders know exactly what the problem is. We are expected
to plan hundreds of millions of pounds of services with a lot
of long-term financial decisions, more and more services contracted
out, which gives us less and less flexibility, and we are expected
to do this at the moment every year from a provisional settlement
in December for the year April to March. This is a crazy way to
plan that size of operation, and the instability, or the uncertainty,
means a lot of big reserves, or it means huge swings in the local
tax, and we have got into over the years—I can remember
this virtually every year we have a significant council tax increase
as a council leader—the blame transference game between
us and government, which you never win. You might get somewhere,
but it is seriously counter-productive and there must be a better
way of doing this.
Q4 Mr Betts: In terms of the gearing
of all the work you have put to us, the one change that would
actually alter the gearing is localising the business rate, is
it not?
Sir Jeremy Beecham: Yes.
Q5 Mr Betts: There is one fundamental
difference.
Sir Jeremy Beecham: Yes.
Q6 Mr Betts: And without that it
does not really hang together, does it?
Sir Sandy Bruce-Lockhart: Correct.
Q7 Mr Betts: Just to push one further
point, in order to get a switch of the business rate to a local
level I notice you are arguing that there should be a link in
terms of future increases with the council tax so the two grow
up together, so that authorities cannot lump all their increased
spending on to local business?
Sir Sandy Bruce-Lockhart: Yes.
Q8 Mr Betts: Presumably, therefore,
you would need a council tax to enable the two to be linked?
Sir Jeremy Beecham: We do say
that a property tax, a reformed council tax, should be part of
the system. A property tax is present in most jurisdictions. The
present council tax is flawed for a number of reasons, it can
be and ought to be improved, and council tax benefit needs to
be improved, but we do take the view that it should be very much
part of the system; and there is one further rider, which is that
I think the Association's position in its evidence to the Raynsford
Review was that, whereas business rates should not rise faster
than council tax, councils should have a discretion to allow them
to rise at a lower rate than council tax. It did not exist before,
so it would not be paid only in an upward direction.
Chair: There are a number of colleagues,
I think, who want to pursue the issue of business tax. I would
like to stick to that for the moment. I know it is not quite the
order we were before. Then if we could return after that to the
reform of council tax, which is another issue that was raised,
but if we could stick to business tax at the moment, Alison, John
and Anne.
Q9 Alison Seabeck: We have highlighted
the fact that the balance has switched to the council tax payer
and the business tax payer. It has almost completely reversed
the position in terms of the percentages they now pay. Business
had their limit increases capped, partly because of the massive
increases which many businesses suffered, unfortunately, under
different government regimes, and they are understandably, I assume,
fairly nervous about some of the changes which are being mooted
at the moment. What recommendations have you made to Sir Michael?
Are you proposing that a cap of some sort would still exist in
terms of the business rate element?
Sir Sandy Bruce-Lockhart: I think
the important thing is to understand the distinction between the
increase in the revenue expenditure of local councils and the
increase in council tax. Sometimes the council tax goes up substantially
more than the increase in revenue expenditure, and particularly
in recent years when councils have been wholly responsible for
funding education budgets and have been instructed to give their
schools 6½% more and then the grant going to those councils
has been 4%, or whatever, and so the council tax payer has that
to fill the gap. Quite understandably the business sector is nervous
about having to fill the gap for general taxation and the short-changing
in councils in grant. Therefore what we need to do is to give
clear assurances, firstly, that councils' revenue expenditure
will not rise more than a certain amount, and one would clearly
be looking at the levels of inflation. We need to recognise, I
think, that councils have been making substantial efficiency savings,
and I think that that perhaps has not been fully appreciated by
the business sector. We do need, I think, to give some inflation
safeguards to the business sector. I think that can be done, but
we can only do that (and I am sure we will discuss this later
on) if the new legislation and costs coming from the Government
imposed on the council are actually paid for through general taxation
and not by the council tax payer and, indeed, the business rate
if it was returned.
Q10 Sir Paul Beresford: If the business
rate is returned and it is set by local authorities individually,
you will have to have some form of equalisation?
Sir Sandy Bruce-Lockhart: Yes.
Q11 Sir Paul Beresford: Who would
fund that? How would you work that?
Sir Sandy Bruce-Lockhart: It was
done before, was it not?
Q12 Sir Paul Beresford: Yes, but
it was a slightly different situation before. How would you do
it now?
Sir David Williams: If it could
be done in London like it was done with the London rate equalisation
on business rates before 1990, anything is possible. Then 45%
of the business rate in the whole of London was raised by Westminster
and the City of London, I think, and if you can organise a redistribution
amongst warring London boroughs, which you will well remember,
you can do it anywhere, I reckon.
Q13 Sir Paul Beresford: I was thinking
of rural areas. I can think of some rural areas that have a village
shop or three, but that is about it.
Sir David Williams: You get into
arguments about needs as well as resources then, which you cannot
escape from, but with reasonable good will it is very possible
to do this.
Sir Jeremy Beecham: And Government
can be engaged in that using the 25%, as it were, of what would
still be centrally provided. We are also proposing to phase in
a reintroduction of business rates, and it is just worth recalling
two things. First, some of the horror stories about the impact
of business rates were clearly demonstrated by the Cambridge studies
in the eighties to have been exaggerated in terms of their economic
effects, and, second, the proportion of company business expenditure
represented by business rates is actually quite small, I think
something less than 3% of turnover on the latest figures. I am
not saying it is not an issue, it is an issue, but it is not one
that ought to terrify business or policy-makers.
Q14 Dr Pugh: I have a few residual
concerns about what you have to say on business rates, but can
I understand the proposition correctly. You are advocating as
a united, unanimous whole, as it were, a harmonious group of people,
a proposition which fundamentally involves a shift, a reversal
really of the current balance between central and local funding,
and therefore local government is somehow going to provide 75%
of its own income in total. If 25%, or something like that, is
what is paid at the moment, another 25% comes from business rates,
there is clearly another element there which has got to be found
from local government and which will not be found either from
the business rates or directly from the council tax payer. Are
we understanding things correctly, firstly, and, secondly, how
do you propose to find that missing percentage?
Sir Sandy Bruce-Lockhart: The
answer is we put forward to the Nick Raynsford review a balance
of ideas. They include simply retaining some taxation already
raised locally. Motor licence discs are one thing. Some parts
of the world have a tourist tax, but that was a new tax so we
were broadly against anything that was new. We looked at an assigned
income tax; we looked at a local income tax. As I said, we put
forward what we called a "basket of options".
Q15 Dr Pugh: It looks a little bit
ad hoc to me. In other words, there may be certain members
of the LGA who would like one option rather than another option.
There is a significant amount of money which you have to find
here. What I would like to have clarity about is how that money
is going to come your way?
Sir David Williams: It is not
ad hoc, John. This is something that has been worked out very
carefully and it has got all-party agreement. What we are saying
to you today is that we think proper funding for local governments
is more important than any political differences that we have,
and we do have political differences about this inevitably, but
we think that the problem is so significant that we have to work
together to give the added dimension of unanimity on this because
the problem is so serious, and it is in complete contrast with
what happens in most other democracies in the world where you
have direct accountability because the local council raises most
of its income.
Q16 Chair: Is it not a consequence,
if you want to switch the balance from 75 national to 25 local
to completely the other way round (and that includes the localisation
of business tax) and you want more funding coming into local government,
that you cannot square that circle by also trying to limit the
increase in business tax for businesses?
Sir David Williams: If we had
more stability it would be very possible.
Sir Sandy Bruce-Lockhart: Can
I add one particular point? We did not say that we wanted more
funding or taxation coming into local government, we are trying
to argue simply to get an inflation increase every year. We are
not saying we want substantially more coming in. Let us be clear
about that.
Q17 Dr Pugh: In terms of consulting
with the business community, there has to be some form of consultation
process at the moment, but it is fairly meaningless. Do you want
some robust process for consultation, because I cannot personally
think that this proposal of the council asking for the business
rates is necessarily going to be welcome up and down the small
business federations of the land. What consultation procedures
would you suggest would be appropriate or improved?
Sir Jeremy Beecham: The Government
conducted a consultation process after 1997.
Q18 Dr Pugh: I mean with the business
community. Before you land them with a business rate, what are
you going to do in order to convince them they are incorporated
(to use the modern jargon) stakeholders in this process?
Sir Jeremy Beecham: There are
two ways of approaching this. The first is at national level about
the principle of a repatriating business rate, and on that the
Association has had discussions with the CBI and Chambers of Commerce
nationally. You are quite right to say that they are not enthusiastic
about the concept, but then they were not enthusiastic about advanced
corporation tax or about windfall tax either and, for a group
of policy reasons, government legislated for both of those. At
a local level, which is perhaps the most significant point, it
will actually give some meaning to the consultation that we had
with local business and other non-domestic rate payers about local
expenditure plans and the local taxes to be levied, because at
the moment these are rather unreal since business rates collected
locally, of course, go centrally and there is no relationship
between what businesses pay locally and what happens locally.
Q19 Dr Pugh: So it would be the same
dialogue, but with more bite this time?
Sir Jeremy Beecham: Absolutely.
There would be a real purpose for business to engage with their
local council, and that is missing at the moment.
Sir David Williams: Past select
committees have supported the return of the business rate, the
Government has not, but we do need allies, of course, in this
because the business community will say, "We consider ourselves
protected at the moment. Why should we change?", and I think
the Government has got to take a view about this, which we are
all probably failing to do.
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