Local Government Revenue (HC 402-iv) ODPM Committee 25 May 2004

Evidence given by Paul Woods, Finance Officer; Councillor Bob Gibson, Leader; Association of North East Councils: Michael Roberts, Director of Business Environment; Lucinda Turner, Head of Infrastructure; Simon Parker, Senior Policy Adviser, Public Services Directorate, Confederation of British Industry (CBI).

Q517 Mr. David Clelland: The question of local accountability was mentioned there. Could you explain to the Committee what difference it would make, in your view, to the accountability of local authorities if the proportion of expenditure financed by local taxes was increased substantially?

Mr Woods: At the present time, obviously there is the accountability through the ballot box, but I think tax-payers are so used to seeing regular increases in council tax, which often are not related to changes in service, they are related to inflation or other factors, that perhaps they have not been as engaged in local policy-making, local politics, because they do not think they can influence that. Also, there is the misunderstanding of increases in council tax because of the gearing effect, the four to one effect of a one per cent on expenditure, resulting in a four per cent increase in tax. I think, if we could change the local government finance system, which has a more buoyant form of income coming to local government, and if we could look at changing the gearing to something below 50 per cent, it would mean that the council tax increases should reflect more some of the changes in the council's own expenditure and in the services. It is not going to mirror it directly, because you have not got a one-to-one relationship, but it is going to be more reflecting. I would expect that would have a greater incentive for people to be more active in terms of their decision-making and their involvement in politics, but it is very difficult to predict what the outcome would be. I think it can only help rather than hinder people's engagement in local politics.

Q518 Mr. David Clelland: Really what people are concerned about is how much they pay, is it not, rather than from where the money comes?

Councillor Gibson: It is, to a certain degree, but people are quite happy, in my view, to pay a tax which also reflects quality of service. If you are delivering good services, if you are constantly in touch with the people, and accountability is not just around the council tax, local government should be accountable for everything it does to the people it represents, so that the accountability is wide-ranging. There are many, many ways of making ourselves accountable to the people we represent locally. If you are delivering good services, if the services have the approval of the people you represent, and you can do that in numerous ways, so MORI polls, Touchstone groups, or whatever, however local government chooses to do that, if you are in touch with the people, you are delivering the services that they want to see, perhaps it is not the great argument that people make it out to be. But accountability is not just around council tax, accountability is around everything that you do, all of the time.

Q519 Mr. David Clelland: On that point, obviously, although they are across the local authority as a whole, local authority services affect different communities in different ways and sometimes local authorities have specific projects in specific areas. I do not know if you have seen the Home Secretary's suggestion that, in small areas like housing estates, there could be votes on whether more money should be spent on policing on those estates. Is that something which you think would recommend itself, in terms of local accountability, and should that sort of principle, of having these sorts of local referenda, be extended to other services?

Councillor Gibson: You can do it that way. A lot of that accountability is building with the NRF and SRB-type funding that we have had in the past in the areas of high deprivation. We can use that system of funding to go right into the heart of the communities and build up the plans for the communities and the capacity-building right from the bottom, so that at the end of it all we know exactly what the feedback is and what has been approved by the people who live on the estates, and that is what it is about, and what has not been approved. Through the SRB, NRF and those types of funding, you can have another arrangement of accountability, which brings local government right into the community centres, which is very good.

+++

Q522 Mr. David Clelland: If we assume that shifting the balance of funding in favour of local authorities will improve local accountability, and if these other measures which we have referred to, like the neighbourhood committees, improve, or we assume will improve, local accountability, I do not know if we have any evidence for that actually, how would we measure whether that had been successful or not? Would it be based purely on voter turnout, for instance, in local elections? For instance, if voter turnout did not improve, would that be an argument for going back to the status quo?

Mr Woods: I think possibly there are three different ways in which you can measure the results of that. One clearly is through voter turnout. The second is, there is a household survey which is carried out every other year through independent organisations and that gets an assessment of people's views about the services which are being provided locally. Also, councils themselves carry out their own research using citizens' panels and a whole range of other forms of information to see how services are improving, and that is a very important piece of information for councils. It is probably more important than the local elections because those questions can be related specifically to types of service. With voter turnout you are not quite sure what the turnout is about, is it about a local issue, is it about a national issue, and within that what do the voters actually want, because the manifesto they might be voting on might contain a wide range of measures, so you are not clear which of those measures is getting the public support. Having those surveys and more information from the public I think helps inform councils where their priorities are.

Q523 Mr. David Clelland: What is it that you have learned from these surveys which convinces you that shifting the balance of funding in favour of local authorities is the way we need to go?

Mr Woods: I think those surveys do not actually talk about the balance of funding. What they talk about is local public priorities and service.

Q524 Mr. David Clelland: To an extent, I am playing devil's advocate here, but you were arguing initially that shifting the balance of payment in favour of a local authority would improve local accountability. You say you have tried out all these surveys but actually they do not demonstrate that point, do they?

Mr Woods: The surveys were not intended to demonstrate that point. What I am arguing is that, in theory, if you make the tax more responsive, basically it should increase local accountability. One of the ways of measuring engagement of the public and their views about the services which are being provided, and whether or not they get value for money from local councils, I think that some of the questions which should be asked in these surveys should be linked to the value for money which they perceive they are getting, so you could get information back from those substance surveys.

Q525 Mr. David Clelland: We should shift the balance of funding in favour of local authorities first and then carry out one of these surveys to see whether actually that has improved the accountability?

Councillor Gibson: Local government should be carrying out its own surveys.

Q526 Mr. David Clelland: Then what if they prove that local accountability has not improved?

Mr Woods: If it has not improved, it has failed, has it not?

Q527 Mr. David Clelland: Then should they go back to the balance of funding which they have now?

Councillor Gibson: No.

Mr Woods: No, definitely not.

+++

Q558 Mr. David Clelland: Just to clarify this point, Councillor Gibson said before that what is done best at Westminster should be done at Westminster and what is done best regionally, what is done best locally should be done at those levels. I think the question is, would it be better for Westminster to allocate local government funding to regions and then for regions to decide, in terms of their own priorities and problems, what the allocation to the local authorities in their area should be?

Councillor Gibson: I think, in the long term, that ought to be a vision for regional government. It is not something which could be done in the next four or five years, I think, and not until that interface with local government and any elected regional government is properly worked through, so that we are all comfortable with whatever the arrangements are going to be. I do not see a problem with that, to be absolutely honest.

Mr Woods: The point was made by one of your colleagues - I am sorry, I cannot see the name-plate - about education, and I think there are substantial elements of local government where there would need to be a basic level of service around the country. I think we are not talking about the whole of local government funding being allocated at a regional level, but certainly on the margin, and I think the starting-point might be the concept that we have for the Regional Regeneration Fund and that would be a very helpful thing to start with. We have to recognise that local government distribution of funding has been built up from decades of very detailed research, very detailed assessment. Simply to hand that over to a region and expect it to deliver a fair allocation would be a very difficult task, and I think we have got to look at taking this step by step.

+++

Q579 Mr. David Clelland: You inferred earlier that you would like to see the business rate returned to local control. Could you explain just what difference that would make?

Mr Woods: If the business rate were returned to local control, it would bring the balance of funding back in line broadly with the 50/50 split as it was previously, slightly less because obviously business rate since 1990 has not increased as much as council tax and as much as national income tax support for local government. That would help in terms of restoring the balance of funding. However, there is considerable concern, I think, among some local authorities in the North East not to deter business. We are very conscious of the concerns of business, so we would want to see appropriate controls, which would mean that the tax increases for businesses would not be substantial, so some limiting around the level of the local tax increase might be said to be appropriate as well. Significant partnerships are being built up with local business communities in the North East by individual councils, and there is a concern that those business partnerships could be damaged if there was a very negative reaction of businesses to the full restoration of business tax locally.

Q580 Mr. David Clelland: In general, do you feel that businesses should be making a bigger contribution locally than they are at the moment?

Mr Woods: Yes.

Q581 Mr. David Clelland: Should all businesses be paying the same amounts, regardless of the authority? For instance, why should business in Stockton be paying more than they are perhaps in Hexham, or Alnwick, or somewhere like that, and getting the same services?

Councillor Gibson: I do not know how that operates. If it could happen then, yes, it would be fairer for everybody.

Q582 Mr. David Clelland: If what could happen, if they all paid the same?

Councillor Gibson: If there was an equalisation of the business rate and how it was paid.

Mr Woods: One of the things that we find very interesting is the concept of a Business Improvement District and there are certain types of opportunity there for having different levels of business rate for different types of business. In cities such as Newcastle, for example, we have a lot of expenditure which draws in tourists, through events, through some of the cultural activities which go on, and that brings substantial benefits to hotels, shops, restaurants, etc. With the Business Improvement District there is an opportunity to work with a certain group of business tax-payers. Excluding the manufacturing sector, for example, you can work with them to provide additional funding with their support, at the present point in time, for additional investment which actually brings income in to those businesses. I think a degree of flexibility, which currently is starting to come into play with Business Improvement Districts, should be retained whatever happens in terms of the business rates.

Q583 Mr. David Clelland: Not surprisingly, business is not keen on this idea, and we will be hearing from the CBI in a moment on their views. How can you allay the fears of business that this would lead to huge increases in rates for them?

Mr Woods: I think the level of restriction on the increases probably in the early years is important at a national level. There has been talk, and this has been considered, of placing a limit, so that if there was a five per cent increase in council tax, or whatever the local tax was, there would not be a higher increase on business, and I think that is an important consideration. I think the LGAs are looking perhaps for a phased return of business rates now, so some sort of step-by-step approach might be worth taking so that the confidence can be built up in the business sector. It is clear that their proportion of funding of local government has fallen, from 29 per cent in 1990-91 to about 21 per cent now, because the annual increase is pegged at inflation. I think the whole issue needs to be revisited, in terms of the contribution that business is making.

+++

Q587 Mr. David Clelland: What evidence do you have that the previous system, the pre-1990 system, did harm to businesses?

Mr Roberts: At the time, this was in the eighties, there were a few surveys, to which we refer in our submission, which tried to identify business' perception of the effect of the rate and the impact it had on business decisions. For example, I think there was a survey carried out by the British Chambers of Commerce which indicated that firms saw a negative impact particularly as a result of the annual increases which were taking place at the time and the locally-set rate.

Q588 Mr. David Clelland: You have been getting annual increases under this system, have you not?

Mr Roberts: It was the scale of the annual increases which was particularly the bone of contention. Of course, it is RPI-linked at the moment, or has been for the last ten or 15 years. The analysis at the time, before the national non-domestic rate was introduced, suggested that the annual increases across a range of local authorities was way in excess of the rate of inflation at the time, and it was that scale of impact which was of particular concern. Some identified the impact in terms of their profitability, some identified the impact as being a reason why they would reconsider where they based their business operations.

Q589 Mr. David Clelland: For instance, if this was returned to local control and non-domestic rates were increased in some areas, would not this have an impact on the rents in those areas, so there would be a sort of equalisation taking place anyway in terms of the cost on business?

Mr Roberts: That is a possible response. I suppose our view is informed by what happened the last time round. As I said, all the evidence, talking to businesses at that time, was that the net impact, particularly of the larger-scale increases in certain local areas, was a negative one. That was one of the reasons why we were particularly keen to see the changes which eventually were introduced.

Ms Turner: I think it was the issue of lack of ability of businesses to plan. The rates often bore very little relationship to the wider economic context. Even at times of recession rates varied enormously and were increasing significantly. There was a massive variation in the rates which did not bear any relation to the property market, to economic conditions, but bore relationship to what local authorities wanted to set the rate at.

Q590 Mr. David Clelland: Have not things moved on quite a bit since then? Local authorities are very keen for businesses to remain and survive and prosper in their areas, they do not want to drive business out. Really are not your fears overexaggerated?

Mr Roberts: We would argue that one of the reasons why that conversation between business and local government has improved is because one of the major bones of contention which did exist before has been removed, in other words, the annual setting of a rate which was set locally. We recognise that life has changed and that local authorities probably are more focused on the needs of economic development in their areas, in some cases. This is why we have been particularly keen on some of the initiatives which the Government has introduced recently - Business Improvement Districts, otherwise known as BIDs, or the Local Authority Business Growth Initiatives, LABGI - where we see a greater ability for bringing together the needs of the local authority and the business community.

Q591 Mr. David Clelland: Do you not see any case for a variation in business rates between regions? Would it not be better for the North East, for instance, if somehow their business rates were lower in the North East in order to attract more business there? Should not there be a variation between regions?

Mr Roberts: In a sense, there is already, in that property values, of course, are different according to areas of different economic activity, and, to some extent, therefore, this is happening already. I think the concern is, if you add another element of variation, which is the poundages which apply to rateable property values, which is the bit which previously was variable and which, as I mentioned, because of the practice that businesses perceived on the part of local authorities, they felt was not a helpful variation when it came to business planning.

Q592 Mr. David Clelland: If the Government does decide, having listened to all the arguments, to return business rates to local control, what safeguards would you like to see built in?

Mr Roberts: It is not a proposition from which we start initially, in terms of agreeing. There are a number of critical principles, from the point of view of business, with regard to how money which is raised from it is spent by local government. Put simply, I think there needs to be some clarity about what the money is aimed to buy. There needs to be some comfort given in terms of the efficiency with which that money raised is spent, and I think there needs to be some ability on the part of business to influence how those decisions are made about where the money is spent. Those are some of the reasons why I think we find things like BIDs attractive, because there is an opportunity for business to engage directly with local government, in terms of defining the project for which money is being raised and in terms of, as it were, overseeing the way in which that money is spent.

Ms Turner: Without any clear parameters, I think there would be a real fear within the business community that local authorities would see the business rate as a way of reducing the pressure on council tax and would use that because of the pressure from local tax-payers on the local authorities. There would be far more pressure from that community to lower the council tax and push the burden onto business, rather than vice versa.

+++

Q617 Mr. David Clelland: This is on competitive procurement. It all sounds fine, but, for instance, if local authorities start getting together and buying all their goods from one big supplier, they buy all their plants from B&Q, or somewhere, what about all your members who are in small businesses who are providing these services at the moment, they are all going to go out of business, are they not?

Mr Roberts: I do not think that need be the case.

Mr Parker: I think the exact structures for perhaps sharing services will be for the determination of local authorities. I do not think anyone is proposing to force them into anything, although clearly there will be incentives to make them move in that direction.

Q618 Mr. David Clelland: With this grand idea of big procurement some businesses are going to suffer as a result, are they not, they are going to go out of business?

Mr Parker: Local government and its private sector partners clearly will need to think about the kind of market that they wish to create and obviously they will want to factor in elements about the competitiveness of that market. In terms of SMEs and other local businesses, actually, in some cases, with a lot of these big strategic partnerships there will be back office work. The role for SMEs as primary contractors is already quite limited because they do not have the capacity, in many cases, so actually a lot of that is about local sourcing and about sub-contracting. There is absolutely no reason why that cannot be built into the system to ensure that they still have a role to play, and of course we hope they will still have a role to play. I am sure they will.

+++

Q625 Mr. David Clelland: Do the services which local authorities provide to businesses vary? For instance, are the services provided in Torquay by Torbay Council different from the services provided by South Tyneside Council to Jarrow? If they are different, should not businesses be paying different rates to reflect that?

Mr Roberts: Yes, in some aspects of service delivery, they are different. If I refer to planning, in particular, there are big variations in council performance, in terms of meeting targets for processing planning applications. Do not ask me to give you chapter and verse on the particular examples which you cited. Should that result in a differential form of payment? If you did that, and it is an 'if', that might lead to some interesting, potentially perverse consequences, in that you might end up with the worst-performing councils getting even less revenue than is the case currently. I am not sure, in terms of the wider agenda of dealing with gearing, or any of those issues, that is a particularly helpful outcome necessarily.

Mr Parker: Of course, BIDs and town centre management schemes have provided the means for business to pay into those service variations, in the case of town centre management schemes, for some time.

Q626 Mr. David Clelland: Can we turn to the Local Government Act 2003, which gave local authorities new freedoms to borrow, to attract business and to trade and charge for services. Have you noticed any differences in local authority performance as a result of this?

Ms Turner: Not yet. I think it is still early days. I think they were measures which broadly we welcomed. The prudential borrowing regime is something which we have supported and the greater freedoms and flexibilities to trade, as long as they are used effectively rather than perhaps the fear that in some cases they may be used to disengage from the private sector. As long as that happens effectively, I think we expect to see some performance measures coming through, so, I think, too early to say, but measures that we did welcome.

Q627 Mr. David Clelland: Are there any additional measures you would like to see introduced? For instance, I think somebody earlier mentioned the question of Business Improvement Districts. Are these powers which you would like to see local authorities be given in this country?

Ms Turner: Yes; absolutely. I think there are a number of mechanisms which could make them even more effective, for example, some models to involve property owners rather than just occupiers, since in many cases it will be owners who benefit directly from the measures taken. I mentioned Local Authority Business Growth Incentives earlier. I think the more that can be done to make that as meaningful as possible for local authorities, to broaden that base and actually incentivise local authorities further, we would like to see that. Definitely, Business Improvement Districts we do support.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.