Local Government Revenue (HC 402-v) ODPM Committee 23Jun 2004

Evidence given by: John Healey MP, Economic Secretary, HM Treasury; David Miliband MP, Minister of State for School Standards, Department for Education and Skills; Rt. Hon Nick Raynsford MP, Minister of State for Local and Regional Government, Office of the Deputy Prime Minister; Local Government Association; Sir Jeremy Beecham, LGA Chairman and Leader of the Labour Group; Peter Chalke CBE, Leader of the LGA Conservative Group; Chris Clarke OBE, Leader of the LGA Liberal Democrat Group; Sir Brian Briscoe, Chief Executive.

Q653 Mr. David Clelland: It is a highly complex area. One of the simplistic arguments is how much money should be raised centrally by the Treasury and how much money should be raised by local authorities. How far is the Treasury willing to go in allowing local authorities to raise their own finances and how much more power would you give local authorities to raise and set their own taxes?

John Healey: The short answer to that is that there is no fixed figure, there is no fixed principle, beyond the first priority to safeguard our ability to manage the economy and public finances soundly. As I said in my opening remarks, some of the arguments for seeing greater decentralisation and devolution can be entirely consistent with that. As long as they are consistent with that, then the Treasury in principle is unlikely to have a problem.

Q654 Mr. David Clelland: You say that the Treasury obviously has to control national expenditure, but you also mentioned in your opening statement the importance of local decision-making. At the moment the gearing, the balance of funding is very heavily weighted towards the centre. We have heard calls for the balance either to be shifted to 50:50 or 75:25 in favour of local authorities. If it were to move to those kinds of figures, it would mean local authorities raising anything from £40 billion to £60 billion a year. Would that be acceptable as part of the Treasury's wider fiscal policy?

John Healey: Those arguments, unsurprisingly, have been put to the balance of funding review. Two things have been clear there. The idea that you set a fixed target figure is not a sensible approach. Secondly, in fact the arguments very rapidly move beyond what many start out with as a principled argument, that as a matter of theology or principle we should be shifting to a greater percentage of revenue raised locally, to one of asking how any possible mechanism for achieving a shift in the balance of funding would actually work in practice. It is only when you start to look at how potential measures and mechanisms may work in practice, that you are able to make a judgement then about whether such moves are feasible and desirable.

Q655 Mr. David Clelland: Is it felt to be hugely revolutionary for the Treasury to move from currently, putting it simply, 95 per cent taxes raised centrally and only five per cent locally, to a 50:50 ratio which would only mean moving that to 90 per cent nationally and 10 per cent locally? It is not a massive shift, is it?

John Healey: I started by saying that one thing my work on the review group had confirmed was quite how complex this area is. The review group set some useful criteria to guide its work. At the top of its set of criteria, in order to assess the pros and cons of any particular suggestion was, of course, because that was its remit, to look at the degree to which it shifted the balance of funding and revenue raising between local and national government. It also, quite rightly, set a number of other important principles: the degree to which it had an impact and increased local accountability, the degree to which it was progressive and fair, the degree to which it was buoyant, in other words that the revenues rose in line with the general expansion of the economy, the level to which it was predictable, which is an important matter to local government and also the degree to which it was collectable and easy to administer. Once you start getting into a consideration of those important principles, alongside your single starting point of the balance of funding and revenue-raising, then you start to get into some quite complex trade-offs. What we found on the review group was that the work which has been done by that group was a very important start; it has been useful. However, in many of the most contentious areas what is most clear is that there is a lot more work to be done in order to be able to assess whether or not, let alone how, reform could be brought into the area.

+++

Q732 Mr. David Clelland: But that constitutional role is quite restricted in terms of educational spending, is it not? Certainly in my experience and in the evidence we have had to this Committee, those authorities which do have educational responsibilities put education as their number one priority. I am sure you would agree with that. I cannot think of an education authority which does not say that. So why can they not be trusted just to have the freedom to spend according to what they see as their local priorities?

Mr Miliband: What I would say is that above that which they are given by central government to meet the increase in the FSS, they are and significant numbers of them do. It is also the case that increasing numbers of local authorities put education first. I think I am right in saying that about 95 per cent of authorities passported the increase without demur in this financial year and that is obviously significant and I hope that reaches 100 per cent in the next financial year.

Q733 Mr. David Clelland: Do you think that your department can actually specify the appropriate budgetary requirement for every school in England?

Mr Miliband: Surprisingly many of the head teacher associations have a touching faith in our ability to model the particular needs of 24,000 schools, indeed the Opposition have sometimes had a touching faith in the ability of central government to have a formula which denotes all the variety of urban and rural, small and large settings. We have not had that sufficient confidence to make that move because we think there are advantages in the current system, which does allow the balance of responsibility, the shared responsibility which we think is important.

+++

Q742 Mr. David Clelland: Could you tell the Committee when the balance of funding review is expected to report, what format its recommendations will take and when government will decide whether to accept or reject the recommendations?

Mr Raynsford: We intend to report before the summer recess. The format will be very much as set out in the terms of reference, which was that we should explore options rather than making specific recommendations. The way in which the government will respond to what is in effect a report to government and not a report by government will obviously need to be determined by the government, but it is possible that something may be said at the time the balance of funding review report is announced.

Q743 Mr. David Clelland: Is the status quo still a realistic option?

Mr Raynsford: I do not want to pre-empt the conclusions of the report, because it is a report by a team of members and we have not yet had our final meeting. It is fair to say that we have covered a lot of ground over the course of the last 15 months and we have explored scope for change and scope for improvement. It would be surprising if there were not an indication in the report that improvements could be made in a number of areas.

+++

Q806 Mr. David Clelland: Peter Chalke suggested that while you are united on the principles there might be some differences on details. Part of the submission which the LGA made at the beginning of the balance of funding review was that there ought to be a basket of extra taxes like local congestion charges, local sales taxes, etcetera. Is this list still the same, or have you now decided that some of these are maybe not such a good idea? Are there new items to add to the list or do you have some preferred options in the list you have submitted.

Mr Chalke: I come from the side that I do not want to see extra taxation. I do think that some of those issues will not raise very much money but can actually have policy direction, for example, charging utilities for lane rental when they are digging up roads. Under the public service agreement in Wiltshire, we narrowly missed having one of the pilots. We consulted industry and industry was delighted at the idea that if you tax the utilities for digging up the roads they would go in and out in half or a quarter of the time that they currently do. That has an advantage for traffic flow and cost to industry; so there is a policy advantage and I can accept that. I cannot accept extra taxation just for the sake of it.

Sir Jeremy Beecham: The basic position is that few of those would add significantly to the desired objective of adjusting the balance; some of them might have a local policy benefit, such as, for example, localising the collection of vehicle excise duty. Some of them would probably be unacceptable as a matter of principle, for example local sales tax. Few people would advocate that.

Q807 Mr. David Clelland: In your paper you say that a local sales tax or local land value tax could have a significant effect. You heard the Economic Secretary to the Treasury say that he felt these peripheral taxes would be insignificant.

Sir Jeremy Beecham: A local sales tax could have a significant effect; unfortunately it would not be a progressive effect. I would not support it because it would be regressive and in a small country there would be boundary problems and so on. It is not workable or desirable from the point of view of equity, although that is perhaps the one thing which could make a significant difference to the balance. However, there are significant disadvantages to that particular tax.

Mr Clarke: The common ground is that that mixture of the three which he highlighted could deal with the issue of balance and fairness. These others are peripheral to that, but could be valuable in some separate consideration for policy reasons rather than to assist in dealing with the balance of funding or the fairness issues.

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.