LOCAL GOVERNMENT FINANCE (Hansard, 19 May 1977)

§ The Secretary of State for the Environment (Mr. Peter Shore)
With permission, Mr. Speaker, I wish to make a statement. The Government's response to the Layfield Committee's Report on Local Government Finance is published this afternoon as a Green Paper. Copies of the Green Paper are available in the Vote Office.
As the House will recognise, there are no quick or simple solutions to the problems of local government finance. We have, however, come to firm conclusions on a number of the issues raised in the Layfield Report, conclusions which will nevertheless need further detailed consideration. On other matters raised by Layfield we have narrowed the choices and made provisional proposals which will need further public discussion before we can determine what is the right course to follow.
Our main conclusions are as follows. First, we reject the Layfield Committee's basic argument that an improved relationship between central and local government can be achieved only by adopting either a system of strong central intervention or a system under which local authorities would be permitted a substantial increase in the scale of local taxation and thus to manage their own affairs with less control from central Government. The Government see central-local relations in a different light—neither centralist nor localist, in Layfield terms. They consider that the responsibilities involved in the provision of local services are inevitably shared.
Local autonomy must be preserved and encouraged, but at the same time central 713 Government must fulfil its economic responsibilities and ensure that its policy interests in locally provided services are safeguarded. The Government intend, therefore, to strengthen the present financial machinery to enable central and local government to fulfil their rôles more effectively.
Secondly, we are not convinced that it would be right, as the Layfield Committee suggested, to add local income tax to existing rates as an additional source of local revenue. But we agree with the Layfield Committee that the various other local taxes which have been suggested to supplement local rates—including local sales tax, local motor vehicle fuel duties and local payroll tax—have serious disadvantages, and we do not propose to pursue them.
We also agree with the Committee that it would be wrong to abolish domestic rates. We consider that to do so would be to impose unacceptable burdens on national taxation. It would mean increasing the basic rate of income tax by 4½p in the pound, or increasing the standard rate of VAT from the present 8 per cent. to 14 per cent.
Our third conclusion is, however, that the rating system needs substantial reform. We propose, therefore, to end the current rental basis for domestic properties. In its place we propose to adopt capital valuation. The impact of the change will be tempered by transitional measures and there may be a need for some more permanent modifications. Agricultural land and buildings will remain de-rated. Changes will be made to some other parts of the rating system to help small business in particular and to bring the system more into line with present-day circumstances.
Our fourth conclusion is that local authorities should be freer to determine their own priorities for capital expenditure. We therefore propose to discuss with the local authority associations a new system whereby, within general policy guidelines laid down by central Government, approvals would be given for capital expenditure on programmes rather than on projects.
Our fifth conclusion is that we should strengthen the machinery for helping local authorities and their electorates to obtain 714 greater efficiency and value for money. Efficiency is a matter primarily for local authorities, but the Government will see that more comparative and other value-for-money studies are undertaken. An independent advisory body will be set up to consider general audit matters.
Our sixth conclusion is that Exchequer grant should continue to be the most important source of revenue for local government and it should be distributed mainly as a block grant. But the form and method of distribution of the grant is the most important of those matters on which we believe there should be further and wider public debate.
We all would, I think, acknowledge that the present rate support grant system has defects and the Layfield Committee did discuss a new system—the unitary grant—which seems to us to go a long way to removing those defects. But the local authority associations have all told me that they are opposed to unitary grant, which seems to them to have grave defects. The question of unitary grant or alternatively of amendments to the present RSG system needs further discussion. Until these consultations have been concluded, the Government will not come to conclusions about the form and method of distribution of Exchequer grant.
In framing the Green Paper we have had four aims in mind. First, we seek to maintain and enhance the independence of local government; secondly, we seek to improve and encourage greater accountability of local government to its electorate; thirdly, we seek to establish an effective and proper degree of Government central control over the total of local government expenditure; last, but not least, we seek to make fairer and more equitable the methods of local taxation.
We now propose to hold urgently detailed consultations with the local authority associations on those matters on which we have reached general conclusions. We are also anxious to have discussions with the associations and to hear the views—by the end of September—of other interested organisations and individuals on the other important matters in the Green Paper.
This statement relates only to England and Wales. The detailed application to Wales will need to be considered in the 715 light of the implementation of Government policy on devolution and the need to consult the Welsh Assembly. My right hon. Friend the Secretary of State for Scotland is making a separate announcement about these issues as they affect Scotland.
Finally, I regret to say that, owing to the industrial dispute at Her Majesty's Stationery Office, printed copies of the Green Paper will not be available for hon. Members until the middle of next week, but typescripts are available now in the Vote Office.

§ Mr. Heseltine
Will the right hon. Gentleman recognise that the only proposal of consequence announced today is that the present unsatisfactory system of domestic rates, based on rental values, is now to be based on an even more unsatisfactory system of rates based on capital values? Does he not recognise the seriousness of paragraph 6.17 of his Green Paper, which admits not only that will the more expensive house bear a heavier burden regardless of the income of the occupier but that the cheapest houses will also be disproportionately hit?
Has he understood that his proposals are therefore specifically designed to single out for adverse treatment the inner urban area, the first-time buyer, the lower income groups and the council tenants? May I ask the right hon. Gentleman to confirm that it must follow that the anomalies of his proposed capital valuation system must become the basis for water rating?
Will the Secretary of State understand that the rating proposals that he has put forward are quite unacceptable to the Opposition, who believe that his announcement about rates, particularly in an economic climate of high inflation and high income taxes, will simply make the present bad system worse?

§ Mr. Shore
The hon. Gentleman's response and his questions to some extent surprise me. He says that there is an unsatisfactory system of rates. I think that all hon. Members on both sides of the House can level accusations and criticisms at the rating system. That is easy enough, but to say that there is no improvement in prospect by changing from what is now accepted as an outmoded method—it must be outmoded, because there is no serious basis of information on which a 716 rental assessment can be made for domestic rates—and that the present system is to be preferred to a shift to capital values is very surprising. It is not the view of virtually all those who have seriously studied the prospect of changing from rental to capital value.
All that I can say about the hon. Gentleman's comment on the impact of the changes is that it is far too early for him to deliver himself of that categorical judgment.

§ Mr. Heseltine
It is what the right hon. Gentleman is saying.

§ Mr. Shore
We are saying in the Green Paper that that might be the effect on the more expensive and less expensive houses, but it is untrue to say that it would necessarily have an adverse effect on poorer areas, including the inner cities, because it is the distribution of grants rather than the actual method of assessment of rates that determines whether those areas will do well or badly in terms of local authority distribution.
The hon. Gentleman says that the change is not acceptable to the Opposition. He has a duty to his party and to the House at least to make plain, if he says that the whole system is unacceptable, what he would wish to put in its place.

§ Mr. Arthur Bottomley
Will my right hon. Friend look again at the proposition that the domestic rate should be levied on capital value? Does not he agree that some people living in highly valued residences find it hard to make both ends meet, whereas others living in less highly valued homes could probably more easily afford to pay a higher rate? Will he look again at income as the best basis for levying rates?

§ Mr. Shore
I am not persuaded that incomes form the best basis for levying rates. I believe, on the balance of information that we have, that the advantage lies in moving to a capital system and away from a rental system, which is totally losing contact with reality. But, of course, if there are problems of the kind that my right hon. Friend fears, we have already made plain that we would have transitional arrangements, and, if need be, we could build in certain brakes and stops upon adverse movements should they be revealed.

§ Sir D. Walker-Smith
Looking back to …unhappy, far-off things And battles long ago", my recollection may be inaccurate, but was not the substitution of capital assessment for the hypothetical rent basis contained in Part IV of the Local Government Bill of 1948, and subsequently abandoned?

§ Mr. Shore
The right hon. Gentleman has an enviable memory of legislation in this respect. His experience is longer than mine. There was probably more historic reality behind the attempt to assess rates on rental values in 1948 than in 1977.

§ Mr. Stephen Ross
Is the Secretary of State aware that the Liberal Party sympathises with him about the problem of trying to make changes in the method of raising local government finance? It is a tangible problem. We regret that the Layfield Committee did not take on board our ideas about site valuation, largely because of the effect of the Community Land Act.
Is the Secretary of State aware that we also reject the idea of centrally collected taxes, because that would mean the end of local government as we know it, and that many of those who are high in local government also reject that idea? We agree with the Secretary of State that a system based on capital values would be better than the present system, but we regret that the right hon. Gentleman has turned down local income tax without further consideration. We welcome his remarks about the rate support grant, a system which many hon. Members believe goes much against the rural areas.

§ Mr. Shore
I understand the hon. Member's concern. The Liberal Party has traditionally had certain views about site value tax, but I do not believe that that would be appropriate now. I also understand his party's leanings towards local income tax. We do not reject this lightheartedly, but the hon. Gentleman is absolutely right to make the point that if local government is to flourish and have freedom of action, it is important that there should be a substantial local source of revenue from which it can derive the ability to finance expenditure. Proposals that would seek further to reduce the 718 proportion of revenue that can be raised locally would lead to more centralised control of an undesirable kind. That would stifle local democracy.

§ Mr. Blenkinsop
Does the Secretary of State's announcement about the publication of a Green Paper mean that the Government's refusal to bring in rating for agricultural land is a fixed and final view, or that the Government are open to further discussion on this matter, as they are on other matters? Does my right hon. Friend agree that the Opposition proposals—as we understand them—for the abolition of domestic rating without any clear indication of what they would put in its place is the most ridiculous proposition that the Opposition have ever made?

§ Mr. Shore
I note what my hon. Friend has said in the latter part of his supplementary question. There should be more information, because the country should be treated in an adult way and a real choice should be put before the country in this difficult matter of local finance. I regret that the Opposition have not contributed their view about how the problem should be settled. The Opposition cannot just go on calling for the end of a tax policy that produces £1,800 million in tax revenue every year. They will have to answer questions about it.
As for agricultural land, the Government's view is that it would not be helpful to bring such land within the rating system. I understand the argument in theory and the logic behind it but, nevertheless, at a time when we are most anxious to encourage agriculture and should be doing everything to avoid food price increases such a burden could not be added.

§ Mr. Arthur Jones
Successive Socialist Administrations have denied the quinquennial rating revaluation, although I am sure that the Secretary of State recognises what an enormous task that is. Will the right hon. Gentleman say something about the time scale for the introduction of this change? The Secretary of State must recognise the vast scope for different ideas on valuation. Does he realise that that will lead to a lag in the resources going into local government while there are disputes with the local authorities about rateable values? Does not the right hon. Gentleman realise that that happens even under the existing system?

§ Mr. Shore
On the matter of the timetable, legislation will obviously be needed. The revaluation that will be required would presumably come into effect in about 1981–82. That is the timetable upon which we shall seek to work. I accept a part of what the hon. Gentleman said about the quinquennial reviews. It is extremely desirable that they should be held, but successive Governments have not had a perfect record in seeking quinquennial revaluation. However, it would be helpful for all ratepayers if Governments stuck to them in future.

§ Mrs. Millie Miller
Is my right hon. Friend aware of the defect in the proposal that he has put before the House? There are many people who, because of the inflexibility of the housing system, are trapped in properties that are larger and more expensive than they would wish to occupy. What about the position of council tenants living in the most recently built properties that are likely to have higher valuations than some of the older owner-occupied premises?

§ Mr. Shore
We shall have more information once we get down to the task of evaluating the effect of the Government's policy on various properties in different parts of the country. I understand the point that my hon. Friend has made about people being trapped in properties that are too large for them, particularly older people. However, some rather surprising facts were brought out by the Layfield Committee showing that for people on lower incomes rates are a progressive tax. I was surprised at that myself, but it is so. Among the main reasons for that is that one of my predecessors, the late Richard Crossman, introduced rate rebates, and many poorer people also have the advantage of supplementary benefit.

§ Mr. Tebbit
Will the Secretary of State first deal with the question about the effect of this scheme on water rating, which he omitted to answer when replying to an earlier supplementary question? Will the cost of the administration of the scheme be lower than that of the existing scheme, taking into account initial costs? Why have the Government done nothing to spread the load of the costs of local government that are now directly borne by householders? Why is 720 it that single householders, whose means may be limited, will pay the full new rate whereas many individuals who are not householders will be excluded?

§ Mr. Shore
The last point that the hon. Gentleman made is slightly unreal, because although it is true—and I understand this—that rates fall on the occupier of a particular property and may be payable by one person or by two or three earning adults, the Government finance about 60 per cent. or more of local government expenditure through the rate support grant. That is financed out of general taxation to which other people contribute just as much as householders do.
I regret that the effect of the scheme on water rating was not covered in my statement and I shall have to give the hon. Gentleman a reply on that later.

§ Mr. Maxwell-Hyslop
By what criteria has the Secretary of State arrived at the conclusion that he has put to the House this afternoon? The new scheme is not related to benefit received or capacity to pay and it does not get rid of any of the collecting mechanism—especially when one considers that there will have to be a giant capital valuation carried out on every property in the country. By what criteria has the Secretary of State arrived at this astonishing conclusion, which is bound to result in greatly increased cost of collection? Does the right hon. Gentleman realise that a capital valuation carried out on all premises in the United Kingdom will produce a massive number of appeals?

§ Mr. Shore
Any change in the basis of valuation will lead to appeals. Revaluations lead to appeals anyway. The hon. Gentleman has put forward a remarkable proposition. He referred to a system in which people do not receive benefits, but I was not aware that our taxation system was geared to receipt of benefits. As to capacity to pay, the rating system has become, as a result of many changes that we have made, progressive on lower incomes and tends to continue to be progressive even on higher incomes, because the people concerned tend to occupy expensive houses.

§ Mr. Speaker
Order. I propose to call the hon. Members who have been 721 seeking to catch my eye since the Secretary of State finished his statement, but I hope that they will play fair with the other hon. Members who wish to speak in the following debate.

§ Mr. MacFarquhar
What does my right hon. Friend expect will be the percentage increase in the total amount of rates gathered as a result of this change? What does he expect to be the increase in the total amount of bureaucratic expenditure as a result of the changeover, including the processing of the changeover? What will be the impact in an area such as the East Midlands on a ratepayer in a house, whether council or private, valued at up to £10,000?

§ Mr. Shore
These are detailed questions that will become clearer as we have further discussions on the basis of the Green Paper. I cannot help my hon. Friend with his question about the effect on property-owners in the East Midlands. It is also too early to judge whether it will lead to an overall increase in the amount raised through the rates.

§ Mr. Heseltine
May I press the right hon. Gentleman on a remarkable gap in his briefing? He has announced a major change in the structure of local authority financing, but he has not been able to tell us what effect it will have on water rates. Does he realise that responsibility for water rating lies with his Department and that water rates can represent up to 20 per cent. of the cost of domestic rates? There will be profound anxiety that he is not able to tell us what is to happen to the basis of revenue raising for the water industry.

§ Mr. Shore
I do not see why what I have announced should affect the basic percentage rating in respect of water rates.

§ Mr. Heseltine
Is it based on the capital value of domestic properties?

§ Mr. Heseltine
That is a scandal.

§ Mr. Gerry Fowler
Is my right hon. Friend aware that some of us have continuing doubts about capital value rating, not least because of the distortions that it may produce in the house purchase market by depressing the prices of more expensive properties and raising the price of cheaper properties? Is it not time that we looked at local authority finances and the possibility of broadening their base in the context of the structure of local and perhaps regional government?

§ Mr. Shore
That raises much wider questions, but I take my hon. Friend's underlying point. Many people have rightly said that mistakes have been made in trying to decide different structures of local government without at the same time deciding what is to be the proper method of financing them.

§ Mr. Alan Clark
I know of the concern of the right hon. Gentleman and the Chancellor of the Exchequer for our heritage, so would not the right hon. Gentleman think it appropriate to look at the assessment of grade one buildings in order to avoid placing on them an indirect form of taxation that may defeat much of the legislation that the Government have put before the House to relieve them of burdens that will, in the end, otherwise destroy them?

§ Mr. Shore
I shall look further into that question.

§ Mr. Graham Page
Is the right hon. Gentleman aware that his proposals do nothing to relieve the injustice between citizen and citizen of the present domestic rate system? Has he no better proposal for spreading the burden of rates over those who receive local authority services and for payment to be according to means? Is he aware that it is no use trotting out the old argument about two-thirds of local government expenditure being met by the taxpayer when it is the other one-third that is the difficult problem and puts such a burden on the citizen?

§ Mr. Shore
It can be argued that all tax systems have an element of what the right hon. Gentleman describes as injustice. If we are serious about local government finance, we must look not just at one tax, but at alternative taxes and whether they are more just or their advantages outweigh those of the rates.

§ Mr McCrindle
May I be even more specific than my right hon. Friend the Member for Crosby (Mr. Page) and ask the right hon. Gentleman a question about something that I have evidently not taken on board, namely, what are the advantages of the new system over the current system to the widow on a fixed income living in her own property?

§ Mr. Shore
We shall get a fairer and more accurate assessment of the real value of the domestic property occupied by our citizens, and this will give us a better and more consistent basis for levying rates.

§ Mr. Michael Morris
Does the right hon. Gentleman realise that there will be total dismay among householders throughout the country that rates are to continue? May we have an assurance that there will be no further distribution of grants from the counties to the inner urban areas? Did the right hon. Gentleman's answer on water rating mean that he has stopped all direct billing, or will his statement in half an hour's time explain exactly what will happen to water rates?

§ Mr. Shore
I cannot help the hon. Gentleman on the last part of his question.

§ Mr. Heseltine
That is appalling.

§ Mr. Shore
The interventions from the Opposition Front Bench are such that I regret that I missed the second part of the question of the hon. Member for Northampton, South (Mr. Morris).

§ Mr. Michael Morris
I asked about grant distribution between the counties and inner urban areas. May we have an assurance that there will be no further diminution of the county grant in the coming financial year?

§ Mr. Shore
I can give no such assurance. I am consulting local authority associations as usual at this time of the year. We are at the beginning of the rate support grant annual cycle and it is only when these consultations have been completed that I shall be able to make an announcement.

§ Mr. Durant
Is the right hon. Gentleman aware that he has given no answer about costs? Is he aware that capital valuation fluctuates tremendously in the 724 market and a quinquennial review will not be sufficient to make the scheme work, so it will, therefore, be very expensive?

§ Mr. Shore
I do not believe that the new system will have those disadvantages. These are matters on which we shall become much better informed when we start to debate seriously the content of the Green Paper and have the comments of the real practitioners of local government to help us.

§ Sir George Young
Has the right hon. Gentleman estimated the cost of the mammoth task of revaluing the whole capital stock in this country? If so, can he tell us the answer? Can he also say how many extra staff will be needed for this work?

§ Mr. Shore
There is bound to be an increase in the number of staff required, but it is not possible to give an estimate of the total cost involved.

§ Mr. McCrindle
On a point of order, Mr. Speaker. In view of the inability of the Secretary of State to provide a very important answer in respect of water rates and his indication that he would be able to provide the answer in half an hour, has the right hon. Gentleman sought your leave, Mr. Speaker, to interrupt the debate on the Royal Navy?

§ Mr. Speaker
Not yet, and the right hon. Gentleman would be very lucky to do so.

§ Mr. Maxwell-Hyslop
Further to that point of order, Mr. Speaker. The Minister said that at seven minutes past five o'clock—that will be half an hour after he made that remark—he would say whether water rates were to be based on capital value. I think that we need to know whether he will make that statement in the House, in which case we should remain in the Chamber to hear him, or whether at seven minutes past five o'clock he will place a paper in the Vote Office. This is a serious matter. The right hon. Gentleman made this statement and we want to know in which form a further statement will be made so that we may know where we can get the answer.

§ Mr. Speaker
Obviously it is not a matter for me where the Minister makes 725 his statement, or whether he makes a statement or whether he does not.

§ Mr. Heseltine
Further to that point of order, Mr. Speaker. I appreciate that as you guide the House it is not a matter for you where or how the Secretary of State makes a statement. However, the fact is that the right hon. Gentleman has said that there will be a further statement in half an hour. Many hon. Members, together with those whose duty it is to inform the public outside about the proceedings of this place, are now on inquiry that the Secretary of State does not know how the financing of the water industry is to take place from 1982 onwards, despite the fact that responsibility for the industry lies within his Department, as does the domestic rating system. Perhaps it would be appropriate for the right hon. Gentleman to make a further statement now explaining exactly how we may be kept informed.

§ Mr. Shore
Further to that ludicrous point of order, Mr. Speaker. I think that the House deserves to be treated as though it were not a sixth-form debating society. The only reason that I deliberately refrained from answering the ques- 726 tion is that I wanted to be absolutely certain that I did not say anything that might mislead the hon. Gentleman. I have promised to make the information available, and I shall do so.

§ Mr. Heseltine
How?

§ Mr. Shore:
I shall send the hon. Gentleman a note.

§ Mr. Maxwell-Hyslop
How will others know?

§ Mr. Shore
I shall communicate with the hon. Gentleman as well.

§ Mr. Speaker
The Clerk will now—

§ Mr. Speaker
This must come to an end soon.

§ Mr. Heseltine
I apologise, Mr. Speaker, but this is a matter of wide public concern. It is not satisfactory for the Secretary of State to say that he will send a message to myself, or to my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop) and myself. The right hon. Gentleman should make public his views on this matter in half an hour's time by using one of the many, many processes available to him.