Michael Gove (Surrey Heath) (Con): It is a pleasure to see the Economic Secretary in his place today. I am grateful for his breaking off early from the celebratory lunch that I know will be taking place in No. 11 Downing street today, but given the scant number of contributors we may expect this afternoon there will be ample opportunity for him to return to the Treasury before midnight and I expect that the party will still be in full swing.
I also thank the Economic Secretary for being so fluent and authoritative in his remarks. I wish, however, to pick him up on just one error. He seems to labour under the misapprehension that Opposition Front Benchers in some way oppose house building and development. I have no wish to detain him from the celebrations that he will attend later, but I refer him to the variety of speeches that I, my hon. Friend the Member for Tatton (Mr. Osborne) and my right hon. Friend the Member for Witney (Mr. Cameron) have made, in the House and elsewhere, identifying the need for more housing development in our country and making the case that without additional house building we will not have the supply to meet the demand that exists. Without that additional house building, we will not be able to help first-time buyers on to the property ladder as they deserve. I am always happy to reach a consensus with the Economic Secretary and with his hon. Friend the Minister for Housing and Planning. Every opportunity to reach a consensus on the need for more house building is one that I am delighted to take.
Ed Balls: We have discussed this issue regularly over the past few years in proceedings on the Finance Bill and, from time to time, over breakfast, as the hon. Gentleman acknowledges. I understand that speeches have been made containing general statements about the support for house building and first-time buyers, but statements are also regularly made on the websites of the hon. Gentleman and his Front-Bench colleagues that oppose house building in their own constituencies. Have those website references been removed or do his nimby tendencies continue to flourish in his constituency?
Michael Gove: I am flattered that the Economic Secretary takes such a close interest in what appears on my website. I hope that he has also been reading my articles in The Times. I have written repeatedly to the Minister for Housing and Planning and the Secretary of State for Communities and Local Government specifically asking for more development in my constituency. As I am sure the Minister for Local Government is aware, there is a particular issue in my constituency as a consequence of a European Union ruling. The Thames basin heath special protection area, which covers much of my constituency, has an effective moratorium on development, and I am seeking its removal. As a constituency Member and as shadow Minister for Housing and Planning, I am anxious to see more development, reflecting both the national interest and the interests of my constituents. I am grateful to the Department for Communities and Local Government for the help that I have received as a constituency Member.
Michael Gove: No, I have no trouble with my colleagues. I receive from them a generosity of support and enthusiasm in making the case for more house building that I find more encouraging than I can say.
Anne Main: My hon. Friend will know that we had a good debate about housing totals in Hertfordshire. We welcome our share of development in the area, but we do not welcome unsustainable development or development that has no environmental impact assessment. Unfortunately, that is what we are suffering at present. We ask only that the level of development is reasonable, not unreasonable. The unreasonable figure of 93,200 was not acceptable, but 79,200 was. It is a case not of no building, but of sustainable building. I know that my hon. Friend feels the same about that issue.
Thank you, Madam Deputy Speaker. Your intervention enables me to make the point that struck all of us listening to the Economic Secretary. Fascinating as it was when he gave us a tour dhorizon of market rents in the commercial sector, the real aim of his speech was not so much the more effective
operation of the property market as to speak in service of yet another tax increase. Fluent and authoritative as he so often is, all that fluency and authority were bent towards one endensuring that the Chancellor can get the £900 million additional revenue that this measure will raise every year. The most compelling argument in favour of the measure was not made at the Dispatch Box today by the Economic Secretary, but in the Red Book when that figure was produced. That is the principal justification for the change. The Chancellors imperative is plugging his black hole, not the sensitive rebalancing of rates and reliefs to secure the better working of the property market.
The Economic Secretary mentioned Sir Michael Lyons report, and it is fascinating reading. If the Economic Secretary had told us everything that the report contained, he would no doubt have reminded the House that it had suggested that any change to the relief be introduced only in 2010 after extensive consultation. He is introducing it two years before Sir Michael envisaged, without the consultation that he requested.
Ed Balls: Last week, shadow Treasury Ministers spent £500 million on opposing pension term assurance. Four weeks ago, the shadow Pensions Minister spent some £3.5 billion a year on a pledge to reverse the pension tax credit reform of 1997. Is the hon. Gentleman now saying that he would trump those pledges by spending £1 billion a year under a future Conservative Government by reversing this reform?
Michael Gove: That is an intriguing question, but it is the Opposition who ask the questions here, and I have several for the Minister for Local Government to answer when he winds up. It is the answers to those questions that will dictate what we will do. We will see what happens as a consequence of the arguments made by the Minister.
Mr. Stewart Jackson: Given that the CBI has estimated that the tax burden on business has risen since 1997 by £50 billion, would my hon. Friend find more merit in the proposals if there was a compensatory reduction in business taxes to match the rhetoric of the Chancellor and the Economic Secretary?
Michael Gove: As ever, my hon. Friend makes an excellent point. Some of the Economic Secretarys comments about the support that he wishes to see for small business would carry more credibility if the Budget that he helped to co-author had not been responsible for such a comprehensive tax hit on small businesses overall. The record of the Economic Secretary and the Treasury in supporting small businesses is far from exemplary. In that respect, one can understand the degree of scepticism on this side of the House.
I wish to raise three broad issues in connection with this measure, and I have several specific questions. I appreciate the kind invitation from the Economic Secretary to reach a measure of consensus. As I said earlier, I love consensus and I always like to reach it whenever possible. But we can be certain that the measure is worthy of support only if we get satisfactory
answers to those questions. The three broad areas are a matter of theory, a question of principle and the reality in practice.
On a matter of theory, on what basis do we levy business rates? What is the theoretical principle behind them? As widely understood, they are a tax on business activity. As my hon. Friend the Member for Peterborough (Mr. Jackson) might say, it is one of all too many taxes on business activity. Nevertheless, business rates are an accepted part of the Chancellors portfolio. Business rates are supposed to be a tax not on land values but on commercial activity. That is why there is a relief when there is no activity. Changing the principle to remove that relief does more than increase revenue: it changes the very nature of the levy, and it raises key questions in turn.
The principle that there should be tax relief on empty properties was outlined by the admirable Kate Barker, whom the Economic Secretary prayed in aid in support of the measure. However, it is also clear that, in her report, she made the case for a relief on business rates when properties are empty. She said:
The principle behind empty rates relief is to create a broadly symmetrical tax, given uncertainty. When property earns a positive revenue, it is taxed; when it does not, relief is granted. This helps remove what would otherwise be a distortion.
According to Kate Barker, therefore, the Government, by removing the existing relief, are introducing a distortion. They are levying a tax that should be designed to get revenue from activity on property that is inactive and, in the process, changing the nature of the tax itself. Why? Do the Government accept Kate Barkers argument that the change would be a distortion? If not, why not? What is the justification for the change?
We acknowledge that, all other things being equal, the change will raise revenue. The Economic Secretary said with some pride that the amount would be £900 million. However, that tax increase raises another issue. One of the principles underpinning business rates is that, overall, the yield nationally from them should remain broadly neutral in real terms. In other words, when business rates rise, they should do so broadly in relation to the retail prices index.
If the proposed change is made, the amount generated by business rates will increase by more than the rate of inflationeven as that has been adjusted under this Government, and even as inflation rises and the Governor of the Bank of England writes to the Chancellor warning of the consequences.
The question that we have to ask is as follows: are the Government contemplating a balancing reduction in the burden on business? My hon. Friend the Member for Peterborough asked that question earlier. Alternatively, are the Government breaking another golden rulethat business rates should not be used to make up losses elsewhere?
The danger in using business rates as another source of revenue to make up shortfalls elsewhere was explored in the review by Sir Michael Lyons. The Economic Secretary also prayed in aid Sir Michael in support of his argument, but we should look at what he actually said. Sir Michael said that
the national business rate is not an appropriate way to raise additional resources to fund services...particularly given the high level of taxation on property that business rates represent, by international standards.
The RPI cap on the national level of business rates should be retained.
Will the Minister for Local Government spell out whether the Government agree with that principle? If so, given that the measure amounts to a tax increase, will there be compensation elsewhere in the level of business rates? I shall be very interested in the reply.
I have asked a series of questions about the theory of the business rate, and all of them touch on the fact that, under this Government, business faces a bigger burden of taxation than ever. I now want to move to the key issue of principle at the heart of the relationship between business and Governmentthe need for certainty.
When business is asked what it wants, the answer nearly always is that it wants certainty and stability. However, some businesses fear that this change will jeopardise all that. Many will have built the rate reliefs into their plans and accepted them in their balance sheets, and altering the reliefs could throw into uncertainty a series of developments that would bring economic growth and regeneration to parts of the country.
Conservative Members guiding principle is that the tax system should raise revenue and support economic growth and development wherever possible. The process of assembling suitable sites for redevelopment or of putting together the complex business deals that can bring regeneration is often complex, with many variables. Some companies might have to accept that some sites will be left vacant for longer than might be desirable in other circumstances. For instance, they might be left vacant until the correct combination of land sites and finance is in place to make a significant regeneration project truly viable.
For some deals, the existing reliefs will have been factored into the equation already. Under the changes proposed by the Chancellor some companies will have to look again at potential regeneration projects.
That consideration is more than theoretical. I am sure that the Economic Secretary will have read this weeks Property Week. It reported that, as a result of the measure, a company called Palmer Capital Partners had suffered what was described as an £80 million hit. The company has had to scrap a project on which it was planning to embark as a direct consequence of the proposed change. Regeneration projects and economic growth that would have taken place are now not happening. A director of the company, Alex Price, said that it could not go ahead with the plan
because we couldnt quantify what business rates would be.
That shows that an element of uncertainty had been introduced into the calculations, with the result that the project could no longer go ahead. I would be grateful if the Minister for Local Government let me know what assessment was made of the potential impact on current regeneration projects that were factoring the
relief into their calculations. That is not merely a theoretical concern, as it goes to the heart of the active business of regeneration today.
I have discussed the theory of business rates, and the matter of principle in connection with certainty. I turn now to some specific matters of reality, in an attempt to discern what happens on the ground when it comes to regeneration. I have a series of questions to which I hope the Minister will respond.
First, it is appropriate that we learn from history. A very similar measure to the one being proposed was introduced in February 1974, when the Conservative Government of the day were on their way out and desperate to secure tax revenue by any means necessary. If any historical parallels suggest themselves, I am more than happy that Ministers should draw them.
One consequence of the removal of rate relief introduced in 1974 was that empty properties were not proposed for development or deployed for commercial use. Instead, some properties were wrecked or left to become dilapidated so that people could escape paying rates on them altogether. What guarantees can the Minister give that the change will not create a perverse incentive? Can he assure the House that empty properties will not be turned into derelict sites rather than being proposed for productive economic use?
Secondly, the presumption inherent in the Economic Secretarys speech was that business is deliberately keeping property idle instead of using it, because it wishes to earn that relief. Will the Minister for Local Government give us the evidence base for that assumption? Can he point to specific examples of companies that have not put sites to productive use because they prefer to earn the tax relief rather than create viable economic activity? I can understand the theoretical justification behind the Ministers argument but he produced no practical examples, from any business sector or from any part of the country, to show that landlords or owners were deliberately sitting idle to earn the relief. Production of that evidence base would certainly be useful for the House.
The change in timings goes to the heart of the measure so, thirdly, what assessment have the Treasury and the Department for Communities and Local Government made of the genuine turnover in the business cycle? For example, the British Retail Consortium argues that it can often be 21 months between one business winding up and another being economically active on the same site. Have the Treasury and the DCLG conducted a proper survey into the speed with which vacant and void sites become not just occupied but economically active as new tenants take them over? What evidence base is there to justify the change?
Fourthly, there is a real risk, which has been outlined by both the BRC and the Royal Institution of Chartered Surveyors, that the change will hit the areas of the country most in need of redevelopment. Property developers face the greatest risk in those areas, because by definition that is where there is the least current demand for property, whether commercial or residential. By removing the relief, the risk of making an investment in those areas increases, because one would have to be absolutely certain of securing occupancy to make the same investment viable. What assessment has the Minister made of the impact on areas most in need of regeneration of, in effect, introducing an extra cost and an extra risk for development in those areas?
Fifthly, the change could have a particularly adverse effect on businesses in the event of a recession, as my hon. Friend the Member for Peterborough pointed out. It will add lead to the economic pendulum, because it will mean that businesses that have to relinquish property to downsize during an economic downturn will face an additional cost just as the economic weather is turning. Has the Minister factored into his calculations the impact of an economic downturn on the commercial property market once the reliefs have gone?
Sixthly, there is a clear disincentive for certain businesses to take on leases. Given the operation of the commercial leasehold market, taking on a lease could involve bearing additional cost and risk in the event that commercial activity means that the property becomes vacant at any point in the future. Again, what assessment has the Minister made of the likelihood of companies shying away from taking on leases because they have to take into account on their balance sheet an additional risk factor?
Overall, I have spelled out a number of ways in which there is increased risk. My seventh, and final, point about the genuine, practical, real-time effect of the measure is that increased risk may have an effect on property values. If there is a downward effect on commercial property values as a consequence of increased risk, it may have an effect on the share price and on the dividends paid by commercial property companies. Given what has happened elsewhere in the economy, especially in equities, over the past 10 years, more and more pension fundspublic and private sectorrely on commercial property as part of their portfolio. If there is downward pressure on the balance sheets of companies that operate in the commercial property sphere and if it has a knock-on effect on the portfolios of pension funds, what is that effect likely to be? What calculation has been made? We know from the past that there can be, and often are, dangerous unintended consequences of changes made by the present Chancellor that have a knock-on effect on pension funds and the capacity of individuals who have saved to receive an appropriate rate of return?