My Lords, creating growth, reducing debt and handing back power to local people go to the heart of the Local Government Finance Bill. It is a limited Bill, confined to two issues: the retention of business rates, which appear in Clauses 1 to 8, and council tax, in Clauses 9 to 15. The remaining clauses, Clauses 16 to 19, deal with general provisions.
The new local retention of business rates will for the first time in a generation allow local areas to share in the proceeds of growth. The Bill incentivises local government to encourage growth through increased business and economic activity by directly linking financial benefit to the decisions that it makes. The Bill also provides a framework to allow local councils to design their own schemes for council tax support, replacing council tax benefit, which will be abolished by the Welfare Reform Act. There is wide recognition that welfare spending needs to be targeted better. Part of the way we can achieve that is for councils to have control over council tax support and for local authorities to have the freedom to decide how to help provide for the most vulnerable in their communities.
I shall spend a little time in explaining the background to the Bill and outlining the scrutiny and consultation prior to the proceedings in this House. The Bill originates in the core principles and agreement of the coalition Government and has evolved through extensive consultation. Local retention of the business rate emerged as part of the local government resource review in early 2011. The consultation on its provisions was published in July 2011, along with eight technical papers to explain the thinking behind the reforms. We have discussed the details of the scheme with local government through the Local Government Finance Working Group and its sub-groups, which have met frequently since January. Localising support for council tax is a pragmatic approach to delivering a spending decision to reduce expenditure on council tax benefit by 10%. That originated in the spending review of 2010. The welfare reform White Paper published in autumn 2010 set out the Government’s broad intentions. The department undertook pre-consultation engagement with local councils and other groups to consider the issues. Events were held in August and September 2011, and a full three-month public consultation took place from 2 August to 14 October 2011, which generated over 400 responses.
Set against this background of consultation and information-sharing, while the Bill was in the other place we published a series of statements of intent to provide clarity and assurance to both Parliament and councils about how all these reforms will work in practice. We have also published our proposals for funding localised support for council tax.
The Bill was considered at length in the other place and debate was extensive, having proceeded through a Committee of the whole House. As a result of this debate, the Government made a number of changes which we believe improve the Bill and reflect the views of Members of the other place.
On rates retention, the process for distributing any surplus levy income to local councils is being speeded up. The basis of distribution will now be set out in regulations which, once made, will enable the money to be distributed immediately to local authorities without having to wait for the next local government finance report. This change followed concerns expressed during Commons Committee stage that the process originally set out in the Bill was too long-winded and would mean that even when the Government had taken a decision to distribute some, or all, of any levy surplus to local government, authorities would have to wait between six months and a year before they received the money. Additionally, there were concerns that holding back some surplus levy income from one year to another potentially created a problem if there was a deficit in the levy fund in the early years, before any surpluses had built up. We have therefore amended the Bill to provide that, instead of holding back levy income, any deficit would be met by additional money being paid into the levy account.
Despite the Government’s assurances to the contrary, there were still concerns that the 50% central share would be seen as a cash cow and that the Government would use the money for their own purposes, avoiding returning it to local government. The Bill was therefore amended to define local government—namely, those authorities which are able to raise local taxes, precepts or levies, and to which the central share will be distributed in year.
We have also taken steps in the Bill to make things easier for local councils to press ahead with delivering local support for council tax. We have clarified that billing authorities can consult precepting authorities to produce a draft scheme and can consult more widely before the Bill receives Royal Assent. This will enable councils to start the process now if they choose to do so.
A little time might usefully be used to explain the key features of the main policies within the Bill—first rates retention, and then reforms to council tax. Business rates retention proposals represent a fundamental shift in the way that local authorities are funded, giving councils a strong financial incentive to drive local economic growth. There are some key elements to this policy, which I want to be clear on now, and I should like to take this opportunity to reassure your Lordships on a number of issues.
We will ensure a stable starting point so that no council is worse off as a result of its initial business rates base at the outset of the scheme. This will be
achieved through a system of tariffs and top-ups, with councils with a business rate income that exceeds their local need paying a tariff to top-up those councils with a current tax base that is below their level of need. These payments will be fixed in future years so that councils can benefit from any growth in their business rates.
Tariffs and top-ups will be uprated by inflation to ensure, for example, that a major part of a top-up authority’s income is not eroded in real terms. We have also proposed further protections, including a safety net funded by a levy on councils with a disproportionate gain from business growth. The safety net will help to ensure that service provision does not suffer as a result of a sudden and significant drop in a council’s business rates base—for example, from a major employer going out of business. We have announced our intention to set the safety net threshold at a level between 7.5% and 10% and the proportional levy ratio at 1:1, subject to consultation this summer. I know that noble Lords will be reassured to know that where councils want to pool their business rates, sharing the rewards and risks with their other local authorities and thinking together strategically about them, the Bill will allow them to do so.
Lastly on rates retention, through this system the Bill establishes the framework to deliver tax increment financing, allowing unfettered access to TIF 1 for all councils, without government control or interference. However, the Bill also allows for a second tax increment financing project. The 2012 Budget confirmed that the Government will make up to £150 million available from 2013-14 through additional funding for larger-scale projects in a number of core cities, to be financed through tax increment financing, which is known as TIF 2, if I may use the acronym.
I shall now address the measures in the Bill that relate to council tax. As your Lordships know, the Welfare Reform Act abolished council tax benefit. However, the Government are committed to retaining council tax support for the most vulnerable and the Bill therefore legislates for councils to develop their own local rebate schemes. This reform is part of the decentralisation agenda, making support for council tax an integral part of the council tax system and creating stronger incentives for councils to encourage people back into work.
Council tax benefit expenditure more than doubled between 1997-98 and 2009-10. Localising support for council tax will include a requirement for local authorities to achieve a 10% saving on council tax benefit expenditure and give them control over how this saving is found. The Government believe that councils are best placed to understand the needs of their vulnerable residents. This reform enables them to take local factors into account when deciding on levels of support. At present, councils can put up council tax without considering the impact on the cost of council tax benefit. Localising council tax support will change this and encourage greater local financial accountability.
Making councils financially responsible for addressing an individual’s need creates stronger incentives for them to encourage and assist people back into work. This reinforces the positive benefits of driving economic growth in their areas, provided through the retained
business rates system. Together with the introduction of local council tax referendums, this helps make local authorities fully accountable for decisions over council tax levels and strengthens the incentive to provide value for money for the taxpayer.
I am also keen to provide reassurance that we are providing the detail and support required to ensure that councils are well placed to press ahead with the implementation of their local schemes by April 2013. For example, we have announced and paid out £30 million of initial funding to help councils meet the cost of planning and analysing draft schemes. We have also published detailed statements of intent on key regulations, including pensioner protections and the default scheme policies, so that councils understand the intended parameters of the new rebate support system.
The Government will put local authorities in the best possible position to develop and consult on their own local schemes. I stress that local authorities can make their own decisions about how they develop their schemes for working-age council tax payers, what protection they choose to offer and how they choose to fund that protection. Different areas face different challenges and will make different decisions, but that is localism.
I know that we will spend time going through the detail of the Bill but I hope that I have provided a certain degree of clarity and reassurance on the Government’s reforms. I reiterate that these reforms are designed to promote growth and decentralise power away from central government to local councils. All money raised through business rates will continue to be spent on and by local government, which will also now share in the proceeds of growth. No council will lose out on day one as we will ensure a stable starting point for all, so that no council is worse off as a result of its initial business rates base at the outset.
On council tax support, the Government have explained what the fallback default system will be if authorities do not make a local scheme in time; and in terms of administration, this is a continuation of the existing arrangements. Councils should not be phased by using a system with which they are already familiar. Indeed, councils can build on this foundation with full flexibility to develop their own tailored schemes to support vulnerable people in their own local area. My noble friend Lord Attlee and I are keen to work with the Committee to examine the Bill in detail as it progresses through your Lordship’s House.
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