To be published as HC 1470 -i

House of COMMONS





Monday 12 September 2011

Right Hon Eric Pickles MP, Robert Neill MP and Simon Ridley

Evidence heard in Public Questions 1 - 98



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Oral Evidence

Taken before the Communities and Local Government Committee

on Monday 12 September 2011

Members present:

Mr Clive Betts (Chair)

Heidi Alexander

Bob Blackman

Simon Danczuk

Mr David Heyes

George Hollingbery

James Morris

Steve Rotheram


Examination of Witnesses

Witnesses: Rt Hon Eric Pickles MP, Secretary of State, Robert Neill MP, Parliamentary Under-Secretary of State, and Simon Ridley, Director, Local Government Finance, Department for Communities and Local Government, gave evidence.

Q1 Chair: Good afternoon, Secretary of State and Minister. You are most welcome to this one-off evidence session on the Local Government Resource Review. We understand that you have come to explain to us how this new system is both simpler and fairer to all concerned, but we will leave those words to yourself in due course. Perhaps we may begin with the scope of the resource view. There was comment in the press a few months ago-of course, I do not believe everything I read in the press-about a degree of contention between yourself, who wanted a particularly focused review which looked particularly at business rates, and the Deputy Prime Minister who wanted a somewhat wider review. Is this one of those occasions when you have shown the Deputy Prime Minister who is really the boss?

Mr Pickles: It is a delight to be here, Mr Betts. I am looking forward to your report, which I hope will give us your views on the various options. The Government have gone into this in a very open way. I have been very pleased by comments from local authorities and how they feel that this is a genuine and open discussion. The idea is very simple, but the detail involves our creating the equivalent of the Duckworth-Lewis rules so far as concerns need. With regard to those uncharacteristically barbed remarks, my relationship with the Deputy Prime Minister is so harmonious that it might break out in sea shanties. I believe I have said to you before, but it is good to get it on the record, that things have gone really wrong in the past-we are both old enough to have seen different reorganisations of local government finance-when we have tended to bite off too much. I think it all becomes complicated in the process of doing that. There are things the Deputy Prime Minister and Liberal Democrats would like to do; there are things that the Conservatives would like to do, but unless we get the repatriation of the business rates bedded in and use that as a proper foundation, I do not think it will be possible to do many of the other things. A bit later on we will be coming to talk to you about other options, but local government needs stability and to be able to get these things in place. I think that is the big part of the jigsaw that we need to get in, and on that I and the Deputy Prime Minister are at one.

Q2 Chair: It is good to hear that. I am sure you are more than familiar with the terms of reference of the review. When it talks in i) about "examining the scope for further financial freedoms for local authorities", does it mean you are saying today that the business rates are a first and very important step in addressing those issues but you are anticipating that you will be moving on to other aspects of financial reform for local government in due course? If so, have you any idea of the sort of subjects on which you might touch or the timetable you might have in mind for that?

Mr Pickles: There was also an indication of where we are going with TIF, which is an integral part of this. We are consulting on two options. That is something that both sides of the coalition think is very important. I think we need to get that into place, and from that you create a kind of bed in which it is very clear that local authorities are able to cope in this environment. I have a complete belief that local authorities are able to cope with much more complicated financial arrangements. Tempting though it is to go through it further-I do not want to start any hares running now-I do see this as part of a process by which local authorities get greater financial management, but I think it is important, Mr Betts, that we move incrementally and on the basis of consensus, getting reforms in place and getting them bedded down.

Q3 Chair: Do I understand correctly that what we are seeing are proposals for business rate retention linked to TIF and then proposals on community budgets, with the door at least being open for other proposals and ideas to be discussed in due course?

Mr Pickles: Yes, absolutely; that is certainly my view. As to time scale and getting them in place, fundamentally I cannot see anything being in place by, say, 2015, but I certainly think it will be possible to talk about them. You have to be at least a few years ahead in terms of what is happening, but once authorities get used to operating this system it will enable greater freedom to slot in much easier.

Q4 James Morris: You talked about wanting to move towards a more autonomous system. Is there any particular reason you have chosen not to allow councils to determine the level of business rate?

Mr Pickles: It would have been very bad to have a massive row about the prospects of increased business rates. The row would have been on two levels. First, we are keen that there is an incentive scheme. For an incentive scheme to operate you should not be able artificially to increase the total pool just by increasing the multiplier. Second, there would have been enormous opposition from business groups to the extent that I do not believe we would have been able to have the reasoned discussion, which so far it has been, in the various technical papers that we have put out. I think that business, like councils, should be able to have predictability.

Q5 James Morris: Can you envisage a situation at some future point in this reform process whereby sufficient confidence is built up that local authorities can cope with this change but businesses would have the confidence that local authorities would not do something to them that they might regret? Can you envisage a situation where we move to a fully autonomous model?

Mr Pickles: No.

James Morris: That is clear. Thank you.

Q6 Chair: Nevertheless, the system you are devising would allow that to happen if there was a political decision made in due course, would it not?

Mr Pickles: Yes. No one can rule out it happening in future, but, as I think we say in our trade, good luck with that.

Q7 George Hollingbery: Secretary of State, I am tasked with investigating set-aside. If I may explain what I think set-aside means, perhaps you will tell me where I am wrong or illuminate me further. Is it correct that the intention of the Department is to follow the spending laid down in the CSR and any excess generated by local government over the amount they need to spend as laid out in the CSR will be retained by the Department and/or Treasury?

Mr Pickles: Within this period, yes.

Q8 George Hollingbery: Within the period of the CSR?

Mr Pickles: Within this CSR period, but beyond that I hope we may be able to align such changes more closely with local authorities.

Q9 George Hollingbery: Perhaps I may investigate with you a little further where that money goes. My understanding as a relative new boy is that legislation is in place to ensure that all money raised from the NNDR is distributed to local government. Can you just explore with us a little where that money will go?

Mr Pickles: It will go to local government but not through what currently is a formula grant. A number of different headings are paid for which are not in the formula grant. We will also have to come to a view, as you will see in the papers, with regard to police authorities and other billing authorities like fire and rescue. As you will see in the paper, there is an argument that, once we get out of this period, there might well be a case for the police to be funded directly from the Home Office.

Q10 George Hollingbery: Some might say that wealthier authorities in the south where development is easier and the new homes bonus might be funded by this method could see a channelling of NNDR to them rather than more needy councils if the spending is set over a two or three-year period before we start. Is that something that worries you at all?

Mr Pickles: That is entirely separate from set-aside, and that is why we have introduced tariffs, top-ups and a levy system.

Q11 George Hollingbery: Just to be clear, set-aside is not going to be used for new homes bonus?

Mr Pickles: The set-aside will be within the total envelope of the settlement. You will understand, Mr Hollingbery, that it is very important for us to be able to retain spending within the settlement, and it cannot be suggested that we are going to increase spending. In terms of buoyancy within the non-domestic rate, that is something on which we shall quickly be getting into negotiations, but we cannot put in where we are going to put the new homes bonus until we are capable of understanding exactly where the police is to be funded, the relationship with fire and rescue authorities and, within the technical paper, the two-tier authorities in terms of that kind of break. It is not a simple yes or no, but I suppose it comes down to that very old Yorkshire expression "it depends, lad."

Q12 George Hollingbery: To press you a little further for an absolutely unequivocal statement, is it the intention that the entirety of NNDR will be distributed to local government in the round?

Mr Pickles: Yes, in the round for local government services.

Q13 George Hollingbery: The police and fire authorities, wherever it may be?

Mr Pickles: It is a big question. Local government finance is not as exciting as it sounds to begin with. I am a bit torn as to how we should fund the police. I have not seen many of the kinds of responses we get, but the questioning we have been getting from local authorities has been interesting. There is quite a debate to be had, and I would be very interested in the Committee’s views.

Q14 George Hollingbery: There is some talk about the Treasury being the beneficiary of set-aside. I am more concerned to think about it from the angle of the Local Government Association. They have said that where you set assumptions about growth and inflation will ultimately dictate how much is taken away in set aside. Are you satisfied that the metrics you are using are fair to local government, because there are some concerns? We have heard that it is not.

Mr Pickles: That comes back to exactly where you set the baseline. That has an enormous effect. There are a number of technical papers on how we deal with that. Bob, you are seeing some folks tomorrow who want to talk about whether or not area cost adjustment should be taken into consideration. There is a kind of balance between stability and certainty and ensuring that there is an incentive for growth.

Robert Neill: It is worth saying that if you look at technical paper 2, in particular chapter 3, we postulate a number of options which I think pick up the issues raised by the Local Government Group and others as to the various ways in which you might carry out that calculation on forecasting. It is a genuine consultation; we are quite happy to take the feedback, and I think that will be helpful us, but we are very keen to make sure we deal with these technical issues in a pragmatic fashion.

Q15 Chair: I recognise that the intention of the reforms is to give an incentive for local authorities to increase their business rate base, but surely the reality for this CSR round is that if local authorities collectively increase their business rate base that will simply increase the amount of set-aside which will be used to fund something that otherwise would be funded by central Government in a different way. In other words, is it not the case that local government will not in total benefit in this CSR round? Individual authorities might do so but not in total.

Mr Pickles: Individual authorities should be able to, but again it is a balance. I was really upfront about this in the statement; I wanted to make this absolutely clear, because there can be no suggestion that within this spending round we will be able to breach the figures decided upon.

Q16 Chair: So, that is the case in this spending round?

Mr Pickles: Absolutely, but I hope that in the next spending round we can better match the level of non-domestic rates and the level of local government expenditure. I cannot get this in before 2013 and by that time we shall be starting negotiations on the next set of spending rounds.

Q17 Heidi Alexander: I would like to look at some of the longer-term consequences of this. Your proposals bring in quite a fundamental reform of local government finance and replace the formula grant system with partial retention of business rates. How can you be sure that in, say, 10 years’ time, local authorities will have sufficient funds available to meet the needs of their communities?

Mr Pickles: I suppose that is the point where we start to bring in the Duckworth-Lewis rules. We start from the basis of need, which is the first year, and there it remains. In aspects, it artificially freezes where need is, but, given the way in which non-domestic rates operate, pretty soon we will be able to see a difference between whether or not they are seeing above average, average or below average growth. In terms of being able to offer help to authorities that may not grow as fast as others, that will depend on our taking away a levy of disproportionate growth. We will have to come to a view about how much you take that away and how long it is before we reset the system. But the important thing we need to do is, something that, frankly, we should have done but the present system is too slow to allow, which is to get early warning of that. The help that we are offering to local authorities should not be confined to this: there is the equivalent of the regional growth fund; there are enterprise zones and the like. There is bespoke help. Therefore, before it becomes a significant problem we should be able to assist and work in partnership with local authorities to do something about this. I am pretty confident that local authorities will be able to work alongside their businesses to get greater growth. For some of the stuff we saw in the northern cities they would have done a lot better under this system than the old system. At least it gives to civic leaders a real opportunity to shape and work a system. There is no intention in this to leave anybody behind, but there is an intention to work in partnership with local authorities to be able to address some of the long-term structural problems.

Q18 Heidi Alexander: In that answer there was a lot of "it depends on this and that".

Mr Pickles: Of course it does.

Q19 Heidi Alexander: I suggest to you that those guarantees do not really exist and you cannot be sure that those local authorities will not be disadvantaged in, say, 10 years’ time. But the fundamental principle is whether it is right that local authorities are funded on the basis of how many businesses they can attract to an area, as opposed to the existing needs. So their ability to finance the provision of care for the elderly, for example, will be based on the number of businesses attracted to an area. Is that right?

Mr Pickles: Of course not. I think you have to pull away from a party view on this and see it in terms of what we are trying to achieve. The reason people have wanted to move to this is that local authorities should have a stream of income from their tax base and a great interest in it. But in terms of all those various social issues to which you refer, we start from the basis of need. We have a very good way of being able to measure whether authorities are managing at the national average or below it and the opportunity to reset the system. That is what those things are about; that is why we have a levy and a top-up. That is the whole purpose of being able to ensure that no one is left behind. Of course, we have to put together a balance and that is why this is a consultation on the amount of levy we are going to take from authorities that grow disproportionately and the length between the resets. I think that simple sentence describes the whole system.

Q20 Heidi Alexander: On a very practical level, the new set-up is due to come in in 2013-14, which is the year when council tax benefit is also due to be localised. How confident are you that local authorities will be able to cope with the risks of those two things coming into force in the same year?

Mr Pickles: Very confident. Local authorities are very adaptable.

Q21 Heidi Alexander: You say local authorities are very adaptable, but what about the scenario where perhaps a big local employer goes out of business? Not only does the local authority lose potential growth in business rate retention but there is also an impact upon council tax benefit. Are you concerned about that scenario?

Mr Pickles: Two things might happen there. It would have to be pretty big if there was pooling. We are recommending to local authorities, although we do not make it compulsory, that they should pool. The London authorities and, I think, Manchester, West Yorkshire and the West Midlands, are looking at this. If that was the case, the buoyancy within the pool would be able to take care of something rather large. When I was describing a kind of catastrophic failure, I referring to what happened with Pfizer. I said we would have to have something special to deal with that, although eventually I was ticked off and I said "something like Pfizer". But if there was something absolutely fundamental that happened, we would have a top-up to be able to come in and deal with a failure.

Q22 Bob Blackman: To move to the system that will be in place from 2014-15 onwards, one of the things you talk about in the consultation document is the alignment of functions and responsibilities with income from business rates. One of the immediate concerns will be is to ask: does that mean that if a council is outstandingly successful in setting up new businesses in its area, therefore getting more income, all of that will be sucked away to pay for new responsibilities?

Mr Pickles: I think the short answer is no. The system we need to operate, Mr Blackman, is one that provides an incentive. If there is not an incentive we are back to the same kind of splodgy porridge we currently have in terms of a system. There are some fundamental questions we need to ask after the initial bedding in as we move into the next financial period, and a lot of that revolves around police funding. We need do so some technical stuff with regard to two-tier authorities to make sure the baseline is right, but in terms of functions there is the new burdens doctrine, according to which we can no longer impose on local authorities new functions without coughing up, which I think is a very good thing.

Q23 Bob Blackman: Having been involved in local government for a long time, I know that frequently what happens is that national Government devolve more responsibility to local government and say they have fully funded it but have not met the full costs, which are then sucked in from the other revenue that a local authority is generating.

Mr Pickles: I am shocked at the cynicism of someone so young. Often when there are changes there has to be a robust discussion about costings, but by and large since the new burdens doctrine has been in place we have been able to come up with an agreed set of figures with local authorities, and the position is likely to remain the same.

Robert Neill: There is quite a detailed discussion in technical papers 5 and 6 about the way you handle this, and again a number of issues are pointed out. But the thing we stress throughout this, as the Secretary of State has just said, is that we are satisfied it is perfectly deliverable to have both a system of safety nets and levy and a system of resets, which deals with the point Miss Alexander also raised, where there may be changes in need. All of that can be built in, but at the same time the key thing we stress is that you can do that in a system where there is some incentive. The element of growth must always come through so there always remains an incentive to grow and attract. Of course, that applies to all local authorities wherever they are in terms of the strength of their business base, whether they already have a good business base or they are seeking to increase it from a weaker position. As the Secretary of State said, you do not do that in isolation.

Q24 Bob Blackman: I take an example which may happen. Responsibility for public health may go to local authorities. That is a new responsibility, which will be fully funded at the time in health and well-being reports.

Mr Pickles: Public health grants. I just did not catch what you said.

Q25 Bob Blackman: Yes. Clearly, that will be a major responsibility for local authorities. What is to stop the Government saying that their extra funding is to be picked up as part of this process?

Mr Pickles: The health grant is outside the settlement.

Q26 Bob Blackman: At the moment.

Mr Pickles: Yes. I cannot envisage how we might be able to integrate it within that measure even in the medium term. You have to bear in mind that that is in partnership with the health service. You raise a legitimate point, which I dealt with earlier in response to Mr Hollingbery’s question. There is a whole series of sums and grants available that are currently outside the settlement, and we need to rationalise those to ensure that local authorities have a greater say in the mix that is going down to them.

Q27 Bob Blackman: Moving to the possible effect on individual councils and the fixing of the baseline that will start the whole process from 2012-13, one concern will be that every local government finance settlement, probably in living memory, has had some system of damping or fixing the system so people do not lose out. One of the concerns here is that after you have fixed the system of top-ups and tariffs they will remain the same for the period, so how will that be adjusted to take account of additional need?

Mr Pickles: It goes back to the earlier point I made in response to Miss Alexander. There is a paper on how you deal with this and whether you apply it before or after dampening. My instinct-I have listened to what people say-given the need for stability, is that it is probably sensible to do it after dampening. The reason I say that is that I think it is the price of stability, certainty and predictability. If you were to do it before dampening there would be enormous turbulence within the system. You would then have to apply some transitional relief, so it could be decades before the incentive started to work. The present system is far from perfect. If it was perfect there would have been no need to produce all this transitional movement, but local authorities need certainty more than minor tinkering, though we are very happy to talk about the mechanics of how the base is formed. We have had some very good submissions.

Q28 Bob Blackman: Are the top-ups and tariffs to be inflation-linked year by year, or will they be fixed in stone at 2012-13 levels?

Mr Pickles: They are fixed in the process, but after that there is a levy. This is precisely the question of what makes it work. You could probably have a relatively low levy to take up growth provided you could say to local authorities that they had a reasonable length of time before you reset. The converse is that you can have a relatively high levy and quick resets. I think it will be a judgment. You need enough within the system for the incentives to kick in but not so high that some authorities are left behind, which is the last thing we want to achieve.

Robert Neill: Technical paper 5 contains quite a detailed discussion on this and in particular it asks for views as to whether you do or do not index the levy. It makes the point that you have to be alert to the fact that indexation has very different consequences for different types of authorities. That is why we have set up what we think is the best way to achieve stability.

Q29 Bob Blackman: Do you have a fixed view on when that reset will happen?

Mr Pickles: No. I am listening to the consultation, and I shall be listening very carefully to what the Committee says. My instinct is to have a longer reset. That will give us more flexibility to deal with some of the long-term structural problems that exist in some authorities, but if you look at economic growth, you cannot do a north-south analysis; it is different all over the place.

Q30 Bob Blackman: I think one of the concerns of local authorities is whether they will get the extra money that they generate through their economic development activities or it will be swallowed up into the pool and redistributed to other less well performing authorities.

Mr Pickles: The pool is a voluntary arrangement and it is designed to deal with the minor turbulences and the slight changes that exist in terms of a drop in the total tax base. It could take care of that. Authorities would not be quite as jealous, or unhappy, if a growthgenerating unit went into an adjoining authority because they would be the beneficiaries within the pool. As to whether it will be swallowed up, clearly places like Hammersmith and Fulham and Westminster will see enormous growth. If we are not careful the whole thing will get out of kilter, and that is why we have the levy.

Q31 Chair: To go back to the top-ups and tariffs, at this stage do you have a view about whether they will be frozen and cashed in from the beginning or they will be indexed for inflation? It is in the consultation paper.

Mr Pickles: That is in the consultation paper.

Q32 Chair: You do not have a view either way at this stage?

Robert Neill: We have been genuinely very open in that. We set out the pluses and minuses on both sides, and that something on which we want to hear people’s views.

Mr Pickles: I am genuinely torn. We are interested in their views.

Q33 Chair: To go back to set-aside, I heard what you said about the fact that in this CSR period the spending totals for local government are fixed. When we come to future CSR rounds, there is a real potential for continuing dispute between central and local government. We have a situation where local authority spending each year is fixed irrespective of how well they do at growing their business rate, and all they see is that growth going to fund other things that are currently funded directly by central Government. When you look at the next spending round, which as you say is only three years away, will it be your intention to try to ensure that for local government collectively, not merely individual councils, there is a real incentive for growing their business rates in terms of having extra money to spend?

Mr Pickles: Yes.

Q34 Simon Danczuk: I think there is potential for these proposals and what they suggest to be very exciting for local government. I think that the general principles are a good thing. Which councils do you think will do best and worst out of this?

Mr Pickles: I think some of the core authorities will do quite well, for example Liverpool and Manchester. I do not think Sheffield is a core authority but it should do okay, because we are talking about relative growth. Authorities that will not do so well will tend to be those slightly in the middle. We can only project backwards. The problems Derby has had over the past few years will make it difficult because it will get slightly below average growth, but you will be able to do something about it under this system. This is not a system that neglects. As to the old formula, I often felt that basically it was like wandering round after the battle had been won or lost quietly bayoneting the wounded, but with this system you can actively work alongside the local authority, look at different things you have brought in and at various incentives before it becomes a problem. We have chatted a long time about regional aid and such processes. Generally, with regional aid you are playing catch up. I am not saying this is entirely real time, but you have the possibility of being able to do something much quicker than under the current system.

Q35 Simon Danczuk: You mentioned that you could really look only backwards at what has gone before and try to make estimates. Have the Department conducted some kind of modelling on how the system would apply to each local authority over the last, say, three, five years or whatever? If they have, could that be made available to us?

Mr Pickles: The existing position in terms of growth local authority by local authority is available in the public domain. The question of being able to predict the level of income from non-domestic rates is something we are actively discussing with local authorities to get an agreement about the methodology and the formula to use. That seems to be progressing pretty well. In addition to the papers, my officials, of whom we have here a very fine example, meet on a very regular basis with the Local Government Association and CIPFA to ensure that what we are doing in terms of the facts and figures is something we can arrive at on the basis of consultation.

Q36 Simon Danczuk: For clarity, has any modelling been done based on the proposed system?

Mr Pickles: Only crudely in terms of applying the schedule that is already in the public domain.

Q37 Simon Danczuk: There are people out there who suggest that the proposed system will exacerbate the disparities between rich and poor areas that already exist. In the long term are you completely confident that that will not occur, or in a few years’ time will we have an academic doing a study which suggests that the poorer areas have done badly and the richer areas have done well?

Mr Pickles: It is my experience that in terms of studies you can probably get an academic to do anything you want. I am pretty confident because the system is not designed to leave people behind. The system is designed to ensure that local authority leadership gets the benefit of growth, such that where authorities for structural reasons cannot achieve that, we can work alongside them in partnership.

Q38 Chair: You talked quite rightly about the need for local authorities to have some degree of certainty so they can properly plan ahead. I think we all see that as absolutely desirable. When we come to reset, that is probably the biggest issue here in terms of creating uncertainty. There is a trade-off, is there not? You said that at this stage your instinct was to have a longer period of resetting, which means less frequent changes, but it also means that when the changes come they are likely to be bigger.

Mr Pickles: But it also means that the levy would be lower. I think the question is the benefit as between the reset and the levy, and that is something on which we would appreciate your views.

Q39 Chair: You are looking at the possibility of two different ways of resetting, either a partial reset against the baseline system or a full reset of the whole system. Are you still open-minded about that?

Mr Pickles: I am very open-minded on that.

Q40 Chair: One of the other big possibilities for complete dislocation is revaluations. Presumably, we are going to have revaluations.

Mr Pickles: Every five years.

Q41 Chair: Yes, unlike the council tax which we seem to have lost in the mists of time. Has any thought been given to aligning resetting and revaluations so there is one shock to the system every so often rather than more frequent shocks?

Mr Pickles: That is indeed an idea. People who have sat in this chair since Gladstone was a lad will have told you that revaluations are entirely neutral in their effects. I have never seen one that has been entirely neutral in its particular effects. It might be so across the board, but it has some changes. Of course, it would be technically difficult, but not impossible, to do a reset that took in, say, two revaluation periods. We would have to look at it very carefully to ensure that it did not artificially change the base, but these lovely technical papers which obviously Bob has read over the summer-we are very proud of him for doing so-are there to be able to come to a reasoned view on it.

Q42 Simon Danczuk: Earlier you referred to pooling. First, is it something you are encouraging, and, secondly, are there any incentives for local authorities to form pools?

Mr Pickles: I think there are lots of incentives for local authorities to pool. Obviously, London is easy to do. I think it would make a lot of sense-and I have no objections-for local authorities inside LEPs to pool, but you could pool them across two or three adjoining counties. There are all kinds of ways in which you can put them together. It has to be voluntary, for the reason that the arrangements between the authorities have to be equitable. We have experience of pooling in London in the old days and, to use a technical term, it was an absolute stonker of a scheme. From what I have seen of the discussions, it seems to me that local authorities will be able to do this quite naturally.

Q43 Chair: Technically, will it be possible for metropolitan district unitary authorities to pool with shire districts if the whole of the county does not join the pool?

Mr Pickles: It would be difficult, but it would not be impossible.

Simon Ridley: It would be technically possible. We would be setting this up so we could deal with every local authority individually. In a sense, by aggregating a set of local authorities you create just one. We would have to have shares between districts and counties anyway. It would have complications in terms of governance, but technically in terms of how you calculate the money it would be perfectly possible.

Mr Pickles: You would want counties and districts working as one towards economic benefits. I do not know whether you have a particular one in mind.

Q44 Chair: I have in mind one where metropolitan districts and shire districts but not the whole of county forms the LEP area.

Mr Pickles: You definitely have a point about Sheffield where areas around north Derbyshire-this will probably cause problems in the Derbyshire Herald-tend to look towards Sheffield.

Q45 Chair: And it is also a genuine LEP?

Mr Pickles: A genuine economic area, yes.

Q46 Heidi Alexander: Perhaps I may explore some of the effects of these changes on business growth. I think I am right in saying you anticipate that these proposals will result in business growth that goes beyond that which would have arisen in the absence of the proposals. How are you going to measure that?

Mr Pickles: We will be able to measure that in real time. You will see from the documents how we measure the projected growth in non-domestic rates. We are seeking to come to an agreement with local authorities about that, and anything beyond that is a plus.

Q47 Heidi Alexander: How will you know that that is the result of these proposals to change the way that local government is financed? How do you establish that causal link between the two?

Mr Pickles: We will establish that by agreement between local authorities and the Government. We are actively negotiating with them with regard to an agreement on what they see as a reasonable projection. Once we have put in that calculation, because the baseline, top-ups and levies are set, it is the bit that’s left over.

Q48 Heidi Alexander: Do you have any concerns that local authorities will be competing for that business growth? The County Councils Network have said that there could be the unintended consequence of increasing competition between areas for the same business without necessarily benefiting overall economic growth. Do you share that concern?

Mr Pickles: I do not want to see a displacement.

Q49 Heidi Alexander: So, you think they are wrong to worry about that?

Mr Pickles: I do not want to see a displacement. You will forgive me. Perhaps I come from a different political perspective. I do not mind the idea of a bit of competition or local authorities saying, "Come to us. This is what we’ll do for you." In truth, it is what local authorities tend to do, if you talk to the city leaders of Sheffield, Bradford or Leeds. They are not necessarily chasing around, which is a problem we have had in regional development for a long time, but I see no reason why a go-ahead authority that is prepared to do things should not get the benefits.

Q50 Heidi Alexander: What do you envisage councils will be doing differently as a result of these proposals from what they are doing at the moment to attract economic growth in their areas and stimulate business development?

Mr Pickles: Currently, the big difference is how the Government treats them. At the moment, if they do particularly well and start to increase the prosperity of the city or the council we say, "Thank you for doing a fantastic job. Now we’ll have the money back." At the moment there is no incentive on paper to improve a particular council. If you look at the submissions we received under the last settlement, a common theme was, "This authority is getting that. We do not like the area cost adjustment. We fundamentally disagree with the money that is going to this area." I remember visiting my cousins years ago. My dear auntie Marjorie was measuring out the amount of Ribena each got so nobody got an advantage over another. The system we operate at the moment is that if you show any initiative or enterprise we punish you. That is not such a great system to have.

Q51 Heidi Alexander: I am interested in your views on how the system operates at the moment.

Mr Pickles: I am glad.

Q52 Heidi Alexander: But my question was specifically about what you would see councils doing differently in very practical terms from that which they are doing at the moment. Perhaps you could give two or three practical examples.

Mr Pickles: I think they would see the reward.

Q53 Heidi Alexander: No. What would they do?

Mr Pickles: Please do not badger me like this; I am a sensitive man. I would see them having a much closer relationship with enterprise and trends within their authority. If you go to most authorities in the country, at the beginning of their financial year they are looking at the size of their population, the mixture of shops and industry and they are actively seeking to intervene and encourage people to come to their area. That is something authorities do throughout the world, and English local authorities should be able to do it very well. You will be able to bang the drum for your own local authority.

Q54 Heidi Alexander: I am sure the Chair would like to move on, but there are many local authorities that already have those very well established relationships.

Robert Neill: Before I came to this place first time I was on the Committee of the Regions, as you may remember, Heidi. The truth is that colleagues I met there would have regarded it as bizarre that there was not some linkage in terms of the ability to keep part of the tax which is generated locally by the business rate. What we are seeking to do is create the very positive and in the long very healthy relationship that you see among many of our competitors. The proof of the pudding is in the eating. You see both a real resilience in civic pride and a closer connection between political decision makers at a local level and the business community. I think that makes for better decision making on a raft of topics.

Q55 Chair: It is good to see the Conservatives drawing on best examples from Europe, but at that point we will pass on.

Robert Neill: I will sort of give you that one. It was merely a comparative example.

Q56 Bob Blackman: The consultation document talks about the supply of land potentially hampering business growth. What evidence do you have that the availability of land is preventing business growth from happening?

Mr Pickles: I think there is a lot of government land currently tied up. There is a site across the river not very far from here where the American embassy is to go. That is probably going to be a really exciting project in terms of housing and the commercial sector there. One of the big hold-ups is the large government landholding. If we can release that it will make quite a big difference. I need to be careful in what I say. I do not want to go through each area, but one where we really want to make a big difference is some of the government landholding which is a bit of a blockage to growth.

Q57 Bob Blackman: From what I am hearing, you are saying that if central Government get their act together and decide to ensure that the land that could be made available is made available for business growth that would solve the land supply issues, and it is not something else that is a blockage.

Mr Pickles: I think the planning system is a little difficult.

Q58 Bob Blackman: I think that is outside the scope of this inquiry.

Mr Pickles: I suspect we will soon be back to talk about that.

Q59 Bob Blackman: Looking also at the type of growth that may occur as a result of the incentives which will be in place, how do you respond to the claims by some people who say they might get the wrong type of growth and not the right kinds of things they want in this particular area?

Mr Pickles: Please! I saw something that was plain silly, that everybody would be producing shopping centres because that was the best way to do it. It certainly would be if it was on a Monopoly board, but there is a market there and a limit. The market helps to determine these things, besides which local authorities are normal, sensible organisations. They want to have a balance and ensure they do not have all their eggs in one basket. I think that a process of common sense and the market should ensure that the rather bizarre ideas that wonks have put together as things that may go wrong just are not going to happen. I have not met a single local authority leader who says that in a depressed area the thing that is needed is a big shopping mall. You need to be able to work with the market and market technicians as to what would take in a particular place.

Q60 Bob Blackman: But in some areas the incentive may not be strong enough to encourage this type of development, particularly if it is an authority with a relatively low base of business rates.

Mr Pickles: That is why I say the market will regulate it. The key question, to which I referred in answer to Mr Betts, is to ensure that the incentive is sufficient to be a driver. I think the incentive relates to the size of the levy and the length of the period before resetting.

Q61 Bob Blackman: Take the hypothetical example of a local authority with a relatively low non-domestic rate income at the present time and a sudden proposal for a large-scale new business park within their area, which would have a dramatic increase in the amount of non-domestic rates income they will get. The question is whether they will keep that money or it will be swallowed up in the reset. What confidence can you give them?

Mr Pickles: At the risk of being repetitious, in arriving at that we need to come to a reasoned view on the amount of time an authority like that would be able to retain a substantial amount of that growth and the level of the levy and reset. Whether it is an authority looking towards a big business park, factory or office block, you always have to pitch the level of the incentive sufficient to be able to induce it but not ensure that one part of the country enjoys disproportionate levels of growth and it gets out of kilter. What you really want to do in terms of equity is ensure that in those areas that enjoy high growth in business rate revenue, which could be purely an increase in valuation, some of it can be redirected to other areas so the rest of the country can share in that.

Q62 Bob Blackman: Clearly, one of the concerns of local authorities, possibly in deprived areas, is to say that this is a great incentive for them to improve the business potential in their area and that money will go into funding local services, boost their income and everyone will gain from it, except that the Secretary of State may step in and say this is a windfall; they have just been lucky and he will take that money and redistribute it to other people. How can you satisfy the people who worked a lot to get that money?

Mr Pickles: Because, following the report you will be sending to me and the various submissions-I suspect I will want to talk to the Chancellor, and I might even want to talk to you-I hope to get that balance between length and the size of the levy exactly right so it remains an attractive proposition to local authorities but does not cause problems in other authorities and we have sufficient to be able to ensure a virtuous circle.

Robert Neill: The Secretary of State did not mention enterprise zones. It is worth saying for the record that we have already made it clear that business rates created in enterprise zones will be disregarded in the calculation of any levy, so there is no idea that the Government will be gobbling up a windfall in those cases.

Mr Pickles: That is absolutely correct.

Q63 James Morris: The consultation document says that the LEPs will get the revenue from the enterprise zones. Is there not a danger that essentially the LEP will be competing with individual authorities for business growth, depending on the success of the enterprise zones?

Robert Neill: I do not think so. The Secretary of State will come in if I have not covered it, but it is worth making two points. For a start, local authorities are partners in the LEP, so I do not see that the LEP is in competition with the local authority. On the contrary, we have been talking about pooling arrangements. I am not sure you were here at the time. Very often the LEP may be a logical unit in which pooling takes place with the local authorities who are partners in the LEP. I think they are very sensibly seeking to attract business where it will have benefits for a number of the authorities in the LEP. I do not think that is a risk. Is there anything else?

Mr Pickles: No; I am quite happy with that response.

Q64 George Hollingbery: Am I beginning to hear that we will be examining every single local authority individually to look at its current business yield, its increase in business yield and its original base? Is it Westminster? Is it Barnsley? Do we look at each one before we reset to another level and see what effect that would have?

Mr Pickles: No. It is going to be important to get the baseline, and we having discussions with the Local Government Association and individual and groups of local authorities about the composition of the baseline. That is why the technical paper is there. We do understand the importance of getting the baseline agreed in terms of both methodology but also consent. People should feel confident about the system.

Q65 George Hollingbery: But there are all sorts of different horses on this course, are there not: the City of Westminster with its billions and Barnsley with its millions? Is that baseline to be set every five years with a formula that works for all, or are you going to have to look at every single local authority and make a judgment as to what is right for them at the moment as the current situation is, frankly?

Mr Pickles: There is a possibility of resetting the baseline. In resetting the baseline we would go through exactly the same procedures as are outlined by these papers, but I am reasonably confident that, given the existing time lag with formula grants, we will see variations quicker than we would under the formula grant which has a terrifically long tail.

Robert Neill: There is the option of partial and full resetting. That may be one of the things the Committee wants to explore.

Q66 Chair: But in reality do you feel more comfortable with a system which has a bit more incentive in it and perhaps a weaker safety net? Is not the fundamental problem that the stronger the safety net the less the incentive?

Mr Pickles: You are leading me now. You want me to say something that is not within. I want to be able to get a balance between those two things. I want the incentive to be there, but I do not want Miss Alexander ticking me off a couple of years down the line, saying that she was absolutely right and I was absolutely wrong. I want her to be sidling up to me in the Lobby and saying, "Eric, I’m a true believer now."

Q67 Chair: We would all like to be present when that happens. I just want to turn to tax increment financing, of which I am personally supportive. Indeed, some time ago the Local Government Group in Parliament conducted an inquiry which came out very strongly in favour of it. Can you tell us a little more about how you think it might operate in the new world of business rates being kept by authorities as you have described to us? I understand there are two potential ways forward. One is that tax increment financing is funded from the generality of business rates of an authority and it borrows against those, in which case the decision to go ahead would be effectively the authority’s; or it could be that the discrete part of the rate which is generated by a scheme as part of TIF could be kept in addition to anything else in the scheme, whereupon you would need government approval. Do you have a feeling for which way it would work?

Mr Pickles: There are two options. I think option 1 would have to be part of the levy, but as to the various possibilities under option 2 I think the Government would need a greater say in the actual schemes. I think that is how it would operate. I cannot see us wanting restrictions on option 1.

Robert Neill: There is a trade-off, is there not? There is a guarantee in option 2 and a degree of consent. There is a greater element of risk on option 1, which means we can take a more hands-off approach to the operation of it.

Q68 Chair: Are you suggesting that authorities may be able to choose between options 1 and 2 or that the Government will make a choice?

Mr Pickles: I think that under option 2 there has to be a greater degree of working alongside Government because of the guarantee.

Q69 Chair: But does an authority have the choice of going for option 1 or option 2? Does it have a choice as to which route to go down?

Mr Pickles: We have not finally decided, but that would be my view.

Robert Neill: But the wording of the document says that it will operate alongside. It is the option that we will know about.

Simon Ridley: There are two key points. Option 2 requires different policy underpinnings so the Government have to make a definitive decision about that. It is the choice of the local authority whether to go down the option 2 route, but because it allows growth to remain in the area there comes a point when we would have to make a decision about whether or not we were rationing the number of schemes under that option, as the Secretary of State set out.

Q70 Chair: As to how TIF operates, will there be a requirement to ensure that generally it does produce additional development, in other words development that would not happen without TIF funding, and that we do not get competing TIFs? How would that operate under option 1? I know that in the United States they have had problems where towns a few miles apart have developed TIF schemes to fund a retail scheme each of which is supposed to take the same trade and they end up in conflict rather than sitting nicely side by side.

Mr Pickles: Of course, we have the town centre rule first which might militate against that. I do not envisage that degree of competition between authorities. I was hoping to leave the two options there. As to the kind of thing you are talking about, under option 1 it would be part of the general levy and would be included in the whole thing. It is only in option 2 where that kind of thing might happen, and you would require Government consent because of the guarantee. Maybe that acts as a block.

Q71 Chair: Nevertheless, under option 1 public money would be going into these schemes where effectively you could have authorities competing against each other. You could be putting public money into two schemes which assume a growth in consumer demand on which both schemes rely.

Simon Ridley: It is worth bearing in mind that local authorities have freedom to borrow at the moment under the prudential code for a whole range of different investments, and we do not see large numbers of that example. Option 1 essentially enables local authorities to exercise those borrowing powers that exist in the prudential code on the back of business rates income which we are allowing them to retain through this system.

Mr Pickles: You would have to make out a business case. It would be a brave person who lent on the basis that Rotherham was about to put up a development and next door Sheffield was about to do something. He would say, "Just hold on a minute. Can we just go through this?"

Q72 Chair: I am not going to divide Sheffield and Rotherham anyway.

Mr Pickles: Heaven forbid!

Q73 George Hollingbery: Secretary of State, I confess that I have not read the entire technical consultation, but, from the discussions we have had today with our technical adviser and with you today, it seems to me to be enormously complex. I want to put a very specific question which perhaps is better directed to Mr Neill. Do you think you will get any meaningful response from local authorities? I can see certain very large local authorities having the capacity to give you a very well-reasoned and extremely diligent response. I am a little more sceptical that my local authorities, East Hampshire District Council and Winchester City Council, have the capacity to give you a fully reasoned response. There are so many things that interact with the proposals and so many ways they vary that to predict what might or might not happen in any scenario seems to me to be very difficult.

Mr Pickles: It is a brave Member of Parliament who attacks the competence of his local authority given the new constituency boundaries that have come out today. I think that is a very brave thing for you to do. My experience is that it is not that complicated. Some of the technical papers are complicated but, talking to Mr Ridley and other officers, we seem to be coming very close to consensus on the calculation. This system is not complicated. The most complicated thing is the one about which I have talked to Mr Betts and Mr Blackman: the level of the levy and the length of the period. If you get that right, everything flows accordingly. Quite rightly, given the kinds of things local authorities are raising, they should have some confidence in the scheme because we are sacrificing changes in the system for stability. We could have introduced a running period and have transitional relief, but by the time that transitional relief had moved through we might even be in another period of parliamentary boundary redistribution.

Q74 George Hollingbery: Do you think there is any possibility that in the long run there will be a steady state when you can begin to pare things back and reduce even further the complexity and make it more understandable?

Mr Pickles: I think it is a very understandable system. Essentially, except for a few anoraks and this marvellous Committee, most normal people will not be that concerned about the internal workings of the system, but I think people will take an interest in terms of whether or not this system works. The technical papers are exactly what they would suggest, but the simplicity of a system, which says that if you bring growth you keep the money, is a very powerful incentive for local authorities and, rightly, places them in a similar position to authorities throughout the world.

Q75 Chair: Has the Department looked at what would have happened if this system had been introduced five years ago and where authorities would be now compared with where they are?

Mr Pickles: Only in the sense we have looked at the level of economic growth, and that is publicly available information. I have brought a piece of paper which shows where every local authority would have been.

Q76 Chair: Have you modelled things like top-up and tariffs being held in cash terms or increased in line with inflation, and what difference that would have made over a five-year period?

Mr Pickles: We have looked only at the odd place. I have had a look at your place which is below the national average but not significantly; it is only 0.3%. Lewisham East is on the national growth figure; Mr Blackman is 6.5%.

Q77 Chair: That is one example. Given there are so many different variables in the proposals, have you modelled all of them? It will depend on what variables react in what way and how you choose.

Mr Pickles: They are within the technical papers. We want to be very open with the Committee. If the Committee wants to look at some of the stuff that is coming in, we are very happy to provide it. This is a genuine attempt to arrive at a degree of consensus.

Q78 Chair: It would be very helpful to have that information.

Robert Neill: It is worth stressing that that is why we created the interactive calculator. The whole point is there and you can explore those various elements, with the local authority putting in the appropriate inputs to see how it affects them. I do not think we can be much more upfront than that. We are an interactive department.

Mr Pickles: We really want this to be very transparent so there is no suggestion of any sleight of hand. It is important that if you move to a new system everybody should be confident.

Q79 Heidi Alexander: I think phase 2 of the review relates to the community budget pilots. Can you tell me how much money has been pooled at source by central Government for use in the community budgets?

Mr Pickles: Are you talking about the next phase of community budgets or troubled families?

Q80 Heidi Alexander: The troubled families, the 16 pilots as I understand it.

Mr Pickles: You ask a really good question. I could not answer that question. Last week the Prime Minister put me in charge of this. Currently, I am putting together a unit. I think there are some good things. I think some of the members of the Committee have been to some of the 16 pilots. There are some really good things; there are others that are less good. But I came to a view pretty quickly that getting people to share budgets is not the problem but a symptom of it. The real problem is an inability for one agency of government, or central Government, to accept the assessment of another arm of government. There is a reluctance to let go. In some parts of the country that has happened; in other places it is less so. I shall be making further announcements relatively soon. You are very welcome to be briefed on where we are on these things, because you raise the first question that I asked and I was not convinced by the answers I was given. People also talk about virtual budgets whereby some arms of central Government for legal reasons cannot let go, but nevertheless you could assign a proportion of that to remain within the control of the original authority, but the pooling arrangements could still happen. In trying to put this together we made a heck of a lot of progress in a very short time, but again you are very welcome to see where we are on this.

Q81 Heidi Alexander: I recognise that you were put in charge of this only last week, so it would be really useful if we could have data on the funding at source in terms of the budgets for the community budgets. Who was in charge of this before you?

Mr Pickles: I think it was the secretary of state for good intentions. They were not doing such a good job.

Q82 Heidi Alexander: So, you are playing catch-up?

Mr Pickles: I am playing catch-up, but basically in terms of ownership we needed to have somebody in charge of it. My Department had a big input, as did the Department for Education, the Home Office and the DWP, but, given the Prime Minister’s commitment to this and seeing people’s lives turned round by very small things that make a big difference, I think this is very well worthwhile doing. I just think about my old chum Councillor Greenwood, who is now leading Bradford. When we are talking about families, the same ones I was dealing with in Bradford had problems all those years ago. It is just a new generation coming on. I think we can turn round people’s lives with this.

Q83 Heidi Alexander: I think the community pilots are very laudable and their focus on families with multiple problems is entirely right, but my question relates not only to the pooling of budgets at national level but also local agencies. Given your new responsibilities, will you be looking at the possibility of mandating local public agencies to share their budgets at a local level, as opposed to just leaving it up to them?

Mr Pickles: I shall be looking for intense co-operation and to wind it out pretty quickly. Of the 16 pilots, some are more stable than others, but I think there is enough in there to be able to wind it out quickly to authorities that have a critical mass to be able to deal with this.

Q84 Heidi Alexander: Some might say that encouraging intense cooperation is not vastly different from previous attempts to get better multi-agency working between authorities dealing with those problem families, if you like. What do you think distinguishes community budget pilots from those previous attempts at trying to solve these problems if you are not going to compel local agencies to share budgets?

Mr Pickles: I think Total Place was a reasonably good start but never got off the ground, and we have learnt some lessons from that. But these are early days. Miss Alexander, I hope you will forgive me if I am slightly shifty in my answers, because we will be making a statement relatively soon about how we move on.

Q85 Chair: I suppose we want to know is whether the Prime Minister has given you the authority to tell agencies that report to other Government departments that they must cooperate.

Mr Pickles: I enjoy the same harmonious relationship with the Prime Minister as with the Deputy Prime Minister, but I doubt we will be involved in sea shanties.

Q86 Chair: But has he given you that power?

Mr Pickles: I shall be making a statement fairly soon.

Chair: I am sure we will all be there.

Q87 George Hollingbery: I was going to ask you some questions on a very similar theme. I will not press too hard on where you have got to in the Department in this cooperative relationship, because plainly it is very early days yet. But we were promised the publication of a prospectus on the single budget and the neighbourhood level pilots. It has been delayed and delayed.

Mr Pickles: It will be the end of the month. Remember, these are separate from the ones Miss Alexander is talking about. They are about putting together total expenditure by agencies within these two pilots with a view to coming up with firm practical ways of doing it and pushing it out.

Q88 George Hollingbery: But was it not the original intention to have all Government spending in an area put into a pot to achieve a result?

Mr Pickles: Yes.

Q89 George Hollingbery: The Department for Education and DWP?

Mr Pickles: Indeed. We are talking about finding ways to do this, but I hope you will forgive me if I say we have been a tad busy over the summer.

Q90 George Hollingbery: Do you think two pilots are enough to create a meaningful model to do anything else with later?

Mr Pickles: Yes.

Q91 Bob Blackman: I accept it is early days, but has anything come out of your initial view about the governance and accountability arrangements for the community budgets?

Mr Pickles: Governance and accountability are a key factor and it is something to which I shall be giving a very high priority. Once we have been able to pull these things together and move forward I hope to talk to the Committee.

Q92 Bob Blackman: I accept that you have not necessarily come to a conclusion on this, but I think people would be interested in the governance arrangements. Will they be similar to or different from local area agreements?

Mr Pickles: Local area agreements are a bit like being taken to a dance at age 14 by your parents who then park outside and you leave at 10 o’clock. I am hoping for something slightly more fundamental.

Q93 Heidi Alexander: I do not want to pursue that analogy.

Mr Pickles: It just brings back memories, doesn’t it?

Q94 Heidi Alexander: I am just slightly worried that perhaps we have let you off the hook a little, Secretary of State.

Mr Pickles: Why? You have given me a terrible grilling.

Q95 Heidi Alexander: You have taken on responsibility for these community pilots in the last week, but it was a year ago that the CLG issued a press release and said various strands of Whitehall funds would be pooled into a local bank account. Does it worry you? During the last 12 months have you been concerned about who is in charge of this process and who knows what is going on with the community pilots?

Mr Pickles: I suppose we might have been guilty of a tad of optimism with a bright start, but I would not underestimate the amount of effort and barrier busting that has gone on to make them work. I think the pilots are now in a pretty good position in the way that possibly they were not six months ago. My colleague Baroness Hanham has done absolutely sterling work in getting this into proper order. I am reasonably confident we can start to roll these things out with the political commitment of the Prime Minister and Deputy Prime Minister. A lot of the authorities that I am working with are Labour authorities. We have been able to arrive at a broad consensus of what we want to do, and I think we have something of which we can be quite proud.

Q96 Heidi Alexander: You referred to it as optimism. Some might say that perhaps there was complacency within the Department.

Mr Pickles: I think you are a very hard woman. I do not think I saw any complacency within the Department. I saw an awful lot of people who were very committed to dealing with troubled families and making a difference. I think that within those pilots we can point to how people’s lives have been turned round and real monuments of success, not just to those families but also their neighbourhoods. With that intervention, there are now people in further education and in jobs; there are children going to school regularly; and people are enjoying the discipline of work that currently would not. What does Mr Travers have to say for himself, Mr Betts?

Q97 Chair: If you carry on talking I propose to read it.

Mr Pickles: I think "complacency" would be utterly wrong. When I arrived my abiding image was one of enormous frustration in not being able to move on. I do not blame my predecessors for this; I recognise the real mountain they had to climb. Starting afresh without the experience we have had is a brave thing to do.

Q98 Chair: Secretary of State, we have just about concluded. Just to make sure we have no problems with this, this is not for Mr Travers. We are very pleased to hear of your concerted efforts supported by the Prime Minister and Deputy Prime Minister. I think we also remain a little sceptical as to whether you have received as much co-operation from every Secretary of State. We do not want to mention the Department for Work and Pensions once again in this regard, but we look forward to your coming back to us to explain how all Secretaries of State are absolutely signed up to these principles.

Mr Pickles: Perhaps the sea shanty will be heard.

Chair: It might be. Thank you very much.

Prepared 16th September 2011