HC Deb 26 February 1982 vol 18 cc1082-100

Order for Second Reading read.

9.37 am
Sir Hugh Fraser (Stafford and Stone)

I beg to move, That the Bill be now read a Second time.

I hope that, as local government finance is a minefield as regards one's friends, relations and constituents, as well as the enemies that one may make on the Government Front Bench, I shall be permitted to stick closely to my notes. I must also warn the House that I propose to speak for a great length of time; those who wish to refresh themselves should perhaps leave the House at this early hour and return perhaps on a happier day.

Mr. John Heddle (Lichfield and Tamworth)

Next Friday.

Mr. Neil Thorne, South) (Ilford

My right hon. Friend will talk out his Bill.

Sir Hugh Fraser

The Bill seeks to abolish the powers of local authorities and water authorities to levy all rates on the present systems of assessment. It asks for reform to be brought forward within one year. I am glad to see my hon. Friend the Under-Secretary of State for the Environment on the Front Bench. I hope that he will teak back to the Cabinet the story that we believe that the Government have lost their resolve on rating reform despite the pledges of the Conservative Party since 1964 to make it a major matter of political import and action.

Although the short title of the Bill is the Rating System (Abolition) Act 1982, is it not similar to that passed by the Dublin Dail in the 1970s which abolished domestic rates altogether? Irish rates are very Irish and were based on revaluations last carried out between 1863 and 1865. Nevertheless, this Bill and my remarks are far more radical and controversial than anything in the Government's Green Paper, which states: the system of domestic rates has become particularly controversial as spending has grown in times of high inflation. That is an understatement. In my view, for industry and commerce, which enjoy no general rate rebate or abatement, the problem is even harsher. Indeed, commercial and industrial rates have become a far heavier impost than the whole of corporation tax and, in several industries, they now exceed profits.

The Bill goes wider than the Government's Green Paper "Alternatives to Domestic Rates" and includes all rating. However, so huge are the sums and so large the issues that these matters can be discussed only in the totality of local government finance. I go even further: so huge is the ask of raising the £30,000 million that local government now spends, and so difficult is the sum to find, that something must be said about the whole structure of taxation in Britain.

Over the past decade, the central failure has become clear and increasingly apparent. When local government was reorganised between 1972 and 1974, its basic financial reorganisation in an age of inflation was never properly considered. This House never even debated the Layfield report. The cart was put before the horse and has stayed there ever since.

Ever since 1975, when the late Anthony Crosland declared the party to be over, the daily battle of attrition between central and local government has intensified with the bemused and mystified taxpayers and local ratepayers both on the losing side.

When Neville Chamberlain introduced the Local Government Bill 1929, according to that great constitutionalist Sir Ivor Jennings, only one other person understood it—Mr. Sydney Webb. Many more are cognoscenti on these matters in 1982 but few of us can pretend to be experts or fully to understand the detailed application of either the old method of assessing the rate support grant on regressional analysis or even the latest model with its "clawbacks", "holdbacks", "grant abatements" and threats of "super holdbacks". I hope that the Under-Secretary, who is cognisant in these matters, will bear with me in these remarks.

I ask the House to consider the broad principles. The situation has never been more confused or critical. Seldom has the public been angrier or more bewildered; that becomes clearer every day as we learn about the rate assessments to be levied by the various local government elected representatives.

The first issue, of course, is the philosophical and political relationship on finance between central and local government. Central Government have an obligation to ensure that their general policies are pursued by local government. They must retain overall responsibility for national, economic and social objectives. The whole House can agree on that aspect. However, central Government also have an obligation to protect ratepayers suffering undue taxation from the vagaries, extravagances or follies of local government. We all know of such examples and observe the public affluence of new town halls in seas of private squalor and of the executives, responsible for local activities, having salaries raised in 18 months from £9,000 to £20,000 a year. Another example are the rate jumps—of no less than 66 per cent. in West Yorkshire, in Avon of 40 per cent. and in some of the West Midlands areas of well over 20 per cent.

The past relationship between local government and central Government has generally been harmonious. An exception to that rule was Poplar in the 1930s. That relationship is now violently controversial and they even contend in the law courts. I differ from the views expressed at the Labour Party's local government conference in Sheffield because centralism, with all its faults, is preferable to chaos. Of course, centralism can go too far. Local authorities must be given opportunities to exercise initiatives. It is difficult to balance the situation, but it is important that the enormous economic burdens that Government keep throwing on local authorities, without adequate finance, are better controlled.

That has been a political ploy, but from 1958 onwards, when more of the educational weight was placed on local authorities, the situation worsened. That weight is almost unbearable today. Examples of that are the minor antinuclear preparations, inadequate grants, legislation on children in the 1970s and the Chronically Sick and Disabled Persons Act 1970. Dozens more Bills, introduced by private Members, were pushed on local authorities without giving them adequate resources to deal with them.

The results of that policy are seen today. Police forces throughout the country have suffered from the cuts imposed on them by local authorities. The prime object of central Government—to ensure that their general broad policies are carried out—fails.

My first main point, therefore, relates to the abatement and reform of rates. The duty lies with Parliament. This House must no longer thrust on local government costs which should be met by the central Exchequer or decree extravagances which should not be permitted.

Secondly, if local government is to be properly understood and controlled, the situation, so well set out by that scarcely Conservative economist, Professor Wynne Godley, must be avoided. His pamphlet on local government finance said that the public has no means whatever of telling whether the level or rate of change in local authority expenditure and the burden of rates is a result of decisions by local government or impositions by the central authority. I beg the Government to do two things—first, to have a greater understanding and to clarify the so-called "unhypothecated" rate support grant so that the public is clear on the proper standards and the boundaries of discretion governing local authorities. That was not done, even after the 1980 Act.

Who are the public to inform if there are no pencils or school books? Are the LEA or central Government to blame? We are always told that it is central Government—whichever Front Bench one sits on—who are to blame. However, it is difficult for members of a rating authority to be fair or free judges because the information is simply not available. I much welcome the concept of an audit commission so that there can be comparison between expenditure in various authorities.

Some would resolve this problem by doing away with rates and local government. Strangely enough, it was a course contemplated by that benign individual Arthur James Balfour, who led and mystified my party at the turn of the century when county councils were only a few years old.

Mr. John Stokes (Halesowen and Stourbridge)

Philosophic doubt.

Sir Hugh Fraser


To some it is a course that has distinct appeal—for example, the French system of intendance. A Minister of the Interior or Minister of Education can look at his watch and say "At this very moment every child is studying geography". A return to the Cromwellian major-generals would undoubtedly rejoice the souls of the Foot family. A system of regional commissioners is another possibility. Such a system under the direction of the late Herbert Morrison ran Britain extremely effectively during the war years. There is the American system of town managers. The Dutch appoint burgomasters for life. A system of town bands and Whitehall management would, I am sure, be broadly rejected by the House.

There are the lesser iconoclasts who would abolish certain tiers of local government. I am sure that it would not be generally unpopular to consider the abolition of the GLC and ILEA. The GLC has recently proposed a doubling of its precept with what amounts to a 100 per cent. jump in rates. If responsibility for education were given to the London boroughs and responsibility for London Transport to the Secretary of State Transport, Mr. Livingstone would be left alone in his dreams of glory in a building that would be empty save for planners and protected only by the London fire brigade.

Mr. Christopher Murphy (Welwyn and Hatfield)

Sell it off.

Sir Hugh Fraser

The savings would be considerable.

Mr. Anthony Grant (Harrow, Central)

The building could be used as a London Tranport museum, perhaps.

Sir Hugh Fraser

There is a halfway stage, which is for local government to work on assigned revenues from central Government, as happens in Holland. That has been proposed by my hon. Friend the Member for Kensington (Sir B. Rhys Williams). That would mean that the cost of education, for example, would be returned to central Government, wholly or in part. The House has ordered that variations on that scheme be investigated. Apart from the burden that would be placed on central income tax, I suspect that each Member of Parliament would have to deal with issues such as where Nelly's daughter should go to school instead of such matters being dealt with by the local authorities. It would not be as cheap or as efficient as the present system.

Another possibility—perhaps a more effective way of saving money—would be to centralise the finance of all the police forces in a national police force, but that is perhaps not politically acceptable.

I regard the debate on the ratio between central and local taxation as somewhat academic. Too often central Peter merely robs local Paul or vice versa. We are faced with the unfortunate fact that Britain is beginning to run out of taxable resources.

For equalisation and control purposes, central support must be about 40 per cent. at the minimum. Members will note that recently rate support grant from central Government has been moving downwards. It has fallen from 66 per cent. in 1979 to 59.1 per cent last year and it is now 56 per cent. That means that, after specific grants have been deducted, the block grant to assist local authorities to meet their costs is about 42 per cent.

This is not a matter of surprise when we consider the level of central taxation and the Government's pledge to reduce it, and the lack of buoyancy in revenues, which even now is threatened in the oil sector. In so far as the move downwards has reduced local extravagance, it is to be welcomed. In so far as it has made local government more responsible, it is to be saluted. In so far as it pushes domestic and industrial rates through the roof, it is producing a crisis. The resolution of that crisis needs something far more fundamental and realistic than proposals for holding referendums on the rates. I am glad that the Government have abandoned that programme.

I am a believer in local government, but its preservation by making it more understandable and more answerable is an end in itself as well as being the only way in which local taxation can be broadened, and broadened it has to be. The burden is falling on too narrow an area. It is being placed on narrow shoulders that are now overweighed by it. This taxation must fall on more, or on all who benefit. They must make a contribution.

I think especially of two groups—in some instances bodies corporate—that are more or less immune, and certainly directly immune, from domestic rates. First, there are those who are earners but not occupiers.

Secondly, there are those who through ownership profit from the occupation of others. In the latter part of my speech I shall turn to the broad future and system of taxation. What I propose may seem radical and it will be unpopular with some of my right hon. and hon. Friends.

What can be done? In considering the answers we must turn to the Green Paper. It was introduced by the Government but it might have been introduced by Fabianus Cunctator himself. It is really a Fabian pamphlet that tells us that almost nothing can be done and that what can be done will almost surely be wrong. I salute the conversion of my right hon. and hon. Friends to the thinking of the extreme Left or middle Left.

Sir Ronald Bell (Beaconsfield)

Was not Fabianus Cunctator a rather successful general?

Sir Hugh Fraser

He was a successful general only at the end of a very long period, and time is short.

Mr. Douglas Hogg (Grantham)

He fought a delaying action.

Sir Hugh Fraser

It takes years even to move from central to capital value assessments. A reduction in central Government valuation machinery would take, according to the Green Paper, six or seven years. For a variety of good and bad reasons there has been no updating of rental values in England and Wales since 1973. We must deal with things as they are and try to improve the lot of industrial and domestic ratepayers.

I shall run swiftly through the possibilities that are contained in the Layfield report and in other reports before I turn quickly to the Green Paper. First, local authorities could raise more funds through fees and other charges and could reduce their own expenditure by privatisation of the sort that we have seen in Southend and other boroughs. The winning of expertise and the losing of layers of unnecessary management can be extremely valuable.

Leaving house rents out of these considerations, I believe that there should be a new liberalisation of the powers of local authorities to make charges based on local political decisions. The House will know that in certain areas local authorities are restricted. They should be set free from a number of statutory controls. The sums that could be raised are considerable. Such areas include education, policy and resources, social services, police, records and museums, fire, planning and probation. The House will be grateful to know that I shall not go into the details. The schedules for Staffordshire alone amount to about 130 pages of small print.

Secondly, there must be a broadening of the domestic ratepaying base. Anyone who benefits from local authority services should pay the full domestic rate. If they are to avoid such payments, that should be done by subsidies from central Government.

What I am about to say will be painful and unpopular. I believe that Crown properties, nationalised industries, charities, kindred bodies such as clubs and associations, voluntary organisations and, most controversial of all, farm buildings, which since 1929 have been exempted, should be subject to the valuation office. This will not be popular, but logic seldom is.

Mr. Heddle

That point may need some clarification, particularly as the hon. Member for Croydon, North-West (Mr. Pitt) is present, who no doubt will continue his romantic affair with site value rating when he speaks. Does my right hon. Friend agree that only agricultural land has received the privilege of derating since 1929, not productive agricultural buildings?

Sir Hugh Fraser

I understand that farm buildings were derated in 1929.

Mr. Ted Graham (Edmonton)

The hon. Member for Lichfield and Tamworth (Mr. Heddle) makes an important point. We are discussing the broad totality of how to spread the burden borne by domestic ratepayers as widely as possible. Surely the right hon. Member for Stafford and Stone (Sir Hugh Fraser) will refer to the possibility of bringing agricultural land into the rating system.

Sir Hugh Fraser

If the hon. Gentleman will wait, I will come to the most controversial part of my speech.

Some adjustments can be made between the rate support grant and the domestic element. Those are technical and are set out clearly in detail in the White Paper in chapter 4, paragraphs 18, 19, 20 and 21.

I note that the Government are considering a re-rating of industrial and commercial premises. I wonder why. I should have thought that it was a strange and dangerous expedient in an economy that is based on the "supply side" to consider that rather than the most important thing, which is that derating rather than re-rating should be the main objective of the Conservative Government.

At the moment all domestic rates are derated by 181/2 per cent.—even more heavily in London. There is no such advantage for industry, which is crying out for help. The CBI has been marching, petitioning and picketing the headquarters of the local authority in Avon with cause. I am sure that some parts of the CBI's memorandum on empty premises and some schedules in the 1967 Act could be adopted without undue harm to the Exchequer.

My hon. Friends will wish to discuss the various proposals for further tax in the Green Paper. The tax basis must be broadened. What I would most bear in mind after the unpopularity of such a move is the time factor. A limited sales tax or a poll tax would be the best and quickest starters with, of course, the abatements currently received by ratepayers. Putting a poll tax at around £50 per head per annum and allowing for supplementary benefit and the rest, the sum raised would be about £l1/2 billion. That would be fair and would at least ensure that domestic and industrial rates did not increase beyond the levels of taxation.

A greater question that the House must face is whether the forthcoming needs of this country for the maintenance of its effective basis of services, buildings and so on can be met from the present rating system or even the present system of national taxation. If local government is in a bad way, the environment is even worse off. Local government is burdened with debt and financial confusion and is running out of resources. The environment is entering a spiral of obsolescence and decay. What applies to urban areas is now becoming true of rural areas, particularly in facilities such as prisons, housing, canals, sewers, roads, railways and telecommunications. Government after Government for the last decade and more have cut billion after billion from capital expenditure.

I shall give some of the figures to show what has happened to local government's capital expenditure, excluding housing. In 1975 it was about £3 billion. Today, at 1975 prices, it is about half that amount. The task is enormous. To put that right needs new resources and a new national dedication.

Even if the Government succeed in their fight against inflation and even if local authorities reduce their expenditure by 10 per cent., the damage done and being done cannot be put right overnight, nor can the tax structure be changed immediately. We need a target for both.

In the past there have been efforts to meet some Government expenditure, although not, alas, capital expenditure, by the institution of various taxes on capital. They have fallen on the rich, not purely out of spite, malice and jealousy but on the higher argument that wealth and unearned income is the child of a whole nation's endeavour and a growing improvement of the environment. However, so far, all those efforts have proved futile, like the Labour attempts in the Town and Country Planning Act to tax development values or the Community Land Act, both of which follies have been rightly abandoned, because they were taxes in restraint of trade and produced little or nothing.

We are still burdened with one foolish Act, the Development Land Tax Act, which inhibits activity. We still have a capital gains tax, the yield of which is small and the impact of which is unjust and unfair and can be easily avoided. Apart from a modified capital transfer tax—it used to be called death duties—those taxes should be abolished as we look to a new and broader conception.

That conception is the idea of a new capital taxation that should be hypothecated to one purpose only, the redemption of our infrastructure to make England a pleasant, if not green, land. The conception, if not as old as the hills, for England at least is as old as the laws of the Norman Conquest. The property laws continue to be based on the Norman concept of tenure—that all land is in tenure from the Crown. Historians in the House will recall that over a period military tenure imposed by the Norman kings was modified to cash payments known as scutage. When that was abandoned the phrase "scot free" came into use. That did not refer to my compatriots but it enriched the language and the nobility by meaning that those people were free of paying scutage.

Mr. Douglas Hogg

They did not pay their debts.

Sir Hugh Fraser

The basic conditions of the law remain. Freehold means freedom from rent to the Crown. Today the Crown means the Crown in Parliament. The basis of my idea is that when the details have been properly worked out there should be a Crown rent on all land, whether privately or publicly owned.

Some hon. Members may call that proposal feudal and reactionary; others may call it revolutionary. I see shades of Henry George and Lloyd George with his cry: The land belongs to the people. However, the people and the national need have created basic values. Some will call my proposal a tax on land. One thing one cannot do is move land to the Bahamas, the Channel Islands or even the Isle of Man. Some trusts, pension funds, urban property owners and municipalities have become as rich and powerful as the medieval church and almost as free of tax as if the held land, as the bishops did, in tenure spiritual.

Mr. Douglas Hogg

Is my right hon. Friend proposing anything more than what I believe was called the old schedule 8 Act?

Sir Hugh Fraser

It is not dissimilar, but I am making it a good deal wider.

Often, property owners are like the monastic or clerical dead hand, with neither development nor movement, only perpetual accumulation. As a capitalist, I believe that the time has come for a new dissolution of these orders or monasteries and a shake-up of the system, and a wider spread of property, which is the true foundation of a property-owning democracy. That is, after all—I speak as a Roman Catholic—what the Reformation effected. It brought about an economic revolution and unleashed private enterprise on a scale never before seen. That cannot be done at one stroke. The assessment of values takes time. I am calling not for panic action but for orderly progress and consideration. Something of that kind should become a fiscal objective.

Ownership—not occupation, buildings or improvements—should he the main basis of property taxation. It is so broad that it is the only logical basis. If one takes into account the huge sums involved, running into hundreds of billions of pounds, the burden will not be so very onerous. The variations are immense. An acre in the north of Scotland or Wales is lucky to be worth a fiver, whereas in Holborn or Mayfair it is cheap at £5 million. The golden mile in the City, with some of its 32 million sq ft at £25 per sq ft, raises an astronomical sum for its 700 acres. Whitehall, too, must be worth a bob or two, unless some of the wild men of the Opposition get hold of the place, when the current use value for the House of Commons will drop to zero.

I view these proposals in a kinder light than merely that of taxation. It is a rent that we all owe to our past, to the people and to generations to come. Morally, there is no question but that it is the activities of the nation as a whole, its history and infrastructure and the advancement of our civilisation on this small over-populated island, which have created the intrinsic values of our land. Therefore, I ask for the proposals to be considered seriously.

For the benefit of the Opposition, I shall finish by quoting from a letter of resignation from a Labour Minister. It said: What I fear much more than a sudden crisis is a long, slow, crumbling through the years until we sink to the level of a Spain, a gradual paralysis, beneath which all the vigour and energy of this country will succumb. The Minister concerned was the late Oswald Mosley. For the benefit of my right hon. and hon. Friends who consider my proposals revolutionary, I shall quote from the inaugural speech of a man who was my friend, John Fitzgerald Kennedy: If free society cannot help the many who are poor, it cannot save the few who are rich.

10.14 am
Mr. William Pitt (Croydon, West)

Before entering into my love affair, if that is what it is, with site value rating, I shall quote from a speech by my noble Friend Lord Beaumont of Whitley who said: It is to the local government of this country that we must try to give as much independence as possible and as much opportunity as possible"—[Official Report, House of Lords, 10 February 1982; Vol. 427, c. 229.]

Mr. Barry Henderson (Fife, East)

On a point of order, Mr. Deputy Speaker. Is it in order for an hon. Member to quote speeches from the other place other than those by Ministers?

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

The hon. Gentleman is correct. I draw the attention of the hon. Member for Croydon, North-West (Mr. Pitt) to the fact that it is not in order to quote from speeches in the other place other than by Ministers.

Mr. Pitt

In that case, I shall not continue the quotation. I was near the end, anyway. I was merely quoting one sentence.

Those supporting the thesis of Lord Beaumont of Whitley cannot gain much hope from the Government's Green Paper that that thesis will be put into practice. After agreeing that local government has traditionally enjoyed some discretion, the Green Paper says, in paragraph 1.11: The Government, however, has overall responsibility for all public services, including those provided by local authorities, and for national economic objectives. As the right hon. Member for Stafford and Stone (Sir H. Fraser) said, the Government's Green Paper offers no comfort that we shall at last have a reformation of the rating system. I agree with much of what the right hon. Gentleman said.

If we are to examine how to levy local taxation, three important points should be borne in mind. First, the scheme must be practicable. Secondly, it must be fair. Thirdly, it must be cheap. Overall, it should foster accountability to the electors and taxpayers. Financing for local requirements should be drawn, as far as is practicable, from local people. Therefore, I draw attention to the proposals made by the Liberal Party to the Layfield committee.

The Layfield report was never debated and there was much in it apart from the Liberal proposals which would have borne consideration. I shall describe three of the more important proposals which the Liberal Party made to that committee and which were endorsed by the party council in 1975. First, it advocated the return to the local authority of a fixed proportion of revenue from income tax, to be distributed in accordance with needs—in other words, a local income tax.

Secondly, the present rating system should be replaced by a system of site value rating of all land. Thirdly—and this was perhaps the most important, and certainly the most radical step that the Liberal Party suggested—local authorities should be given the opportunity to raise additional revenue from specific resources such as tourist taxes, charges for the use of roads and amenities, and lotteries. In the event of what we hope will be an alliance Government, that income tax would eventually be levied by regional assemblies.

I shall deal with some of those taxes. First, there is the site value rating tax or, as some prefer to call it, the land value tax. Hon. Members may be aware of the Whitstable experiment, which was a success. Tax on site values or tax on land value, whatever one calls it, is a tax on the land occupied, not on the rentable value. It is no accident that there have been no rent assessments for many years. One reason why rent cannot be related to the rateable value of a property is that the amount of rentable property is declining so fast that it is now too small to be assessed. As the right hon. Member for Stafford and Stone said, the land is still there. I echo the words of Lloyd George: The land belongs to the people.

Mr. Heddle

Is the hon. Gentleman advocating nationalisation?

Mr. Pitt

The land belongs to the people, not to the State, which is what nationalisation would mean.

Considerable benefit would accrue from a tax on land by site value. I do not suggest that the land should be taxed at site value on a local basis, because that would be impractical and would impose a heavy bureaucratic duty. A national land value tax redistributed through local authorities would bring taxation from a tangible asset which is immovable and can be assessed always in relation to its capital value. It would not be a declining asset, as rents and the notional rent upon which rates are assessed now are.

Secondly, there are opportunities for local authorities to raise tax. That is not uncommon in capital cities in Europe. Many Western countries levy tourist taxes. I spoke the other day about a subsidised transport system for Greater London. One way in which that system could be subsidised would be a broader base from which local tax could be levied.

Local authorities could consider imposing tourist taxes and charges for the use of roads or amenities, although I do not entirely concur with that. I believe that we should be able to provide most of our roads from local authority taxation, but I can see conclusive arguments for large urban motorways being toll roads. The motorway system in France is effectively a toll road system and brings in considerable revenue. Those of us who travel through France regularly may complain about it, but it certainly benefits the people for whom the revenue is collected. I am not a gambler, and I find the thought of gambling abhorrent, but there is an argument for having lotteries for specific local authority promotions.

I agree entirely with all those who say that local authorities are rapidly losing their independence. Before I came to the House I worked for six and a half years for the London borough of Lambeth. [HON. MEMBERS: "Oh!"] I assure hon. Members that the borough of Lambeth is not so tyrannical as many people think. [HON. MEMBERS: "Just incompetent."] Whether it is incompetent is for others to judge. During that time I saw increasing erosion of the authority's independence to create a proper environment in the deprived inner city area of Brixton, in which I worked and of which I have considerable knowledge, because time and again it was hidebound by the taxation system of the Government. Local authorities must be sprung from that. They must be able to raise their own taxes and local income tax to provide a real income on which to build their independence. An interim measure to take some load off domestic rates could be introduced immediately, pending the introduction of regional taxation by a Liberal alliance Government.

Mr. Douglas Hogg

I am interested to hear the hon. Gentleman mention regional taxation. Is he implying a further reorganisation of local government? Very few areas are now big enough to meet their own expenditure through revenue from within their own boundaries, so the introduction of regional income tax must involve further reorganisation of local government. Is that alliance policy?

Mr. Pitt

I am talking about a radical reorganisation of the government of this country when the alliance takes control. [HON. MEMBERS: "Answer the question."] I have just answered it.

Local income tax could be introduced immediately at a low rate of 1 or 2 per cent., but it would be appropriate to set it at a level sufficient to cover about two-thirds of the expenditure of a needy district and all the expenditure of a prosperous district, the balance being provided by an equalisation grant from the Government calculated according to an objective statutory formula and not subject to ministerial fiat. Taken out of the somewhat complicated gobbledegook, that means that in a prosperous area such as Croydon local government tax could be taken from the whole population, because all of them can afford it. In areas which are not prosperous, and in country areas in which the population is sparse or incomes are low, Government intervention could make up, say, 30 per cent. by way of grant. Separately collected local income tax would provide a viable revenue source for districts and enable rates to be replaced by a land value tax, but I shall not burden the House further with my love affair with site value rating.

The right hon. Member for Stafford and Stone, who has, unfortunately, left the Chamber, referred to the derating of commercial premises. We, too, are concerned that a number of commercial premises suffer an increasingly heavy burden in their proportion of the rates. I entirely agree that they are suffering unduly from the large increase in rates, which results mainly from the activities of the Secretary of State for the Environment. The Liberal Party would support, in certain measure, the derating of industrial premises. This would greatly assist the profitability of many small businesses and the Government should consider it as a matter of urgency.

10.14 am
Mr. Barry Henderson (Fife, East)

I hope that the hon. Member for Croydon, North-West (Mr. Pitt) will forgive me if, in the interests of brevity, I do not directly pursue the points he made. We must all be grateful to my right hon. Friend the Member for Stafford and Stone (Sir H. Fraser) for introducing the Bill and for the manner in which he introduced it. The debate comes at an appropriate and helpful time for hon. Members to share their views on the subject, as I hope that the House will be taking final decisions before long.

In that context, it is unfortunate that so few Opposition Members are present. There is only one Labour representative.

Mr. Graham

If the hon. Member is saying that there are 11 Conservative Members present and more than 300 absent, I am happy for that to be placed on the record.

Mr. Henderson

When I counted at the beginning, there were 16 Conservative Members and only two Opposition Members. Interestingly enough, that is roughly the proportion in which domestic ratepayers contribute directly to the costs of local government. The ratio varies in different areas, but about £1 in every £6 of local government expenditure is produced by domestic rate. I do not think that most domestic ratepayers know that. With great justice, they groan under the burdens of high rates on many households, but they still meet only £1 in every £6 that local government spends.

Sir Ronald Bell

Perhaps we may carry the argument one stage further. Because they provide only one-sixth of local government expenditure, all the pressure from them is for greater expenditure, which explains why local government expenditure constantly increases. If they paid six-sixths we should not hear so many demands for greater expenditure.

Mr. Henderson

I am sure that my hon. and learned Friend makes a valid point. I hope to persuade the House of a different way to deal with these matters.

If we had no existing rating system and sought to invent a system of local taxation, I do not believe that we should devise the system that we now have. At one time, I was so incensed by the injustice of rates that I was prepared to abolish them at any price, even if the price were 100 per cent. rate support grant or its equivalent. I am still just as incensed by the injustice of rates, but I have had to modify my view for two main reasons.

First, it is essential that there should be a significant element of directly attributable local taxation in local government expenditure. Secondly, if we moved entirely to the central raising of finance that would have the disadvantage, as my hon. and learned Friend said, that people would not directly associate taxation with the expenditure that they demanded.

Let us consider taxation and representations as an aspect of the justice of the issue. Industry and commerce complain bitterly about the extent to which they, compared with domestic ratepayers, bear the rates burden. Let me give the example of Scotland in 1980. I shall not give the figures in detail. If the total estimated rate income in all regions of Scotland were 7, 2.6 was raised by domestic rates, 1.9 by commercial subjects, 0.8 by industrial subjects, and 1.7 from other sources. Thus, of the total income of the regions from rates of one kind or another, 2.6 came from domestic subjects, with commerce at 1.9—not very far behind. Nevertheless, commerce has no say in the administration of local authority policy. I do not suggest for a moment that we should go back to the business vote. That would be wholly wrong. It would be unjustified in democratic theory, and it would be of no consequence in decision making.

The second aspect of justice involved here is the burden of tax that is related to the ability to pay. Tax in rates was generally held to be a manageable burden for most families when I was a boy. Since then, the situation has changed significantly. Now it is one of the largest single costs of a family, not one of its lesser costs.

Having spoken about justice as an abstract consideration, important though it is, we must also think about the practicalities of the matter—for example, the cost of raising revenue against the income that is derived from it. We must also consider the identity of purpose. What is the tax raised for, and who does it come from? I have come to the view that there is no single solution to the problem. No one likes rates. Indeed, no one likes any form of taxation. Therefore, we should have a radical review of the overall requirement for money by local government and discover how, most reasonably and sensibly, that might be raised in current circumstances, not those of the nineteeth century.

We have become accustomed to rates, although that does not make us like them to any greater extent. If the rate burden were not as heavy as it is, people would thole it better. Moreover, many people who vote in local elections do not contribute to that taxation. If we accept that there will always be an input from central taxation towards local government costs, the proportion should be a matter of judgment at any given time. For my part, I believe that it should be between a minimum of one-third and a maximum of three-quarters. If there is to be an input from central taxation, and if we accept that the proportion from rates is at a reduced level of burden, rating can be a reasonable way of getting some of the income for local authorities.

A third element is required to balance the equation. I have in mind a poll tax. We should devise a formula—I shall not weary the House with the details, but I shall be happy to give to them to my hon. Friend the Minister—to provide on a generally agreed basis a proportion of local government income from central Government, and similarly from year to year a regularly quantifiable and foreseeable income for local authorities from the rating system. Where a local authority deviates substantially' here I am talking about the deviant local authority, not the normal local authority—from the norm, the extent of its deviation should not directly affect either the Government contribution or the rating contribution, but should affect most directly the poll tax contribution. The extent of deviation clearly becomes a matter on which the electorate can take a view. That would make the poll tax particularly valuable.

I accept that the poll tax involves difficulties. Some hon. Members will say that it has a regressive element and I agree. However, that argument is met by the balance of the three different elements of taxation in local government finance. If a substantial element of local income comes from central taxation, which by and large is progressive rather than regressive, that offsets the marginal argument of the regressiveness of a poll tax. We should set against that argument the element of justice long looked for. The justification for local government being locally organised and managed and responsible to its electorate has not and cannot be fulfilled unless there is a much more direct correlation between the local electorate and the extent to which it will pay for its decisions.

10.37 pm
Mr. John Cartwright (Woolwich, East)

I agree with much of what the hon. Member for Fife, East (Mr. Henderson) said, and I accept his analysis of the need for local accountability. I am not quite so attracted to his solution to the problem, as I shall explain later.

I am sure that we are all grateful to the right hon. Member for Stafford and Stone (Sir H. Fraser) for giving us this opportunity to debate such an important issue. I am sad that so few Opposition Members are present.

There is an attraction for a Social Democrat in debating this issue, because it is one of the few issues in which Social Democrats are not in a worse position in terms of policy than either of the other parties. On virtually every other policy the existing established parties can wheel out conference decisions, but when it comes to local government finance they are in as much of a quandary as the rest of us. The Conservative Party has been committed to the abolition of domestic rates since 1974, but has still not discovered what to put in their place. The Labour Party set up the Layfield committee in 1974, but did not take much account of its findings and, again, has not produced an alternative view.

That underlines what the hon. Member for Fife, East said, that in this difficult area there is no ideal solution. In a sense, we have been looking for the philosopher's stone by which we could give local authorities a buoyant and vibrant source of income which would provide a painless way of paying for services. We must tell our constituents that there is no painless way of paying for those services and that the costs have to be met.

Perhaps I should declare an interest. Originally I was a member of the Layfield committee, although I resigned when I was elected to this House. One of the problems in our approach to local government finance—it emerged in an earler intervention—is that we have tended to look at local government structure in isolation from local government finance, and then at finance in isolation from structure. In an ideal world we should look at the two together, because what makes sense in revenue terms for one sort of structure does not make sense for another.

Politicians seldom have that ideal world. It may be difficult to persuade electors to go for another wholesale reform of local government, even though there is a great deal of evidence that the 1963 reorganisation in London, and the 1972 reorganisation outside London, have not worked. They have complicated local government and led to duplication, confusion, bureaucracy and waste.

The problem of local accountability was underlined by the hon. Member for Fife, East. The dependence of local authorities on Government grant has done more than anything else to undermine the freedom, autonomy and independence of local authorities. We must devise a system that weans local authorities away from that dependence on the great exchequer in the sky which they expect to produce money for all their local services.

Five times as much local government spending comes from sources of income that are not under its control as from the one tax that it controls—the rating system. Not everybody pays rates directly. Only about 8 per cent. of local government income comes from ratepayers who vote in elections. That underlines the need to increase accountability and interest in what goes on in our town halls.

A responsible local authority must not concern itself simply with how it spends money. It must address itself to how to raise money to pay for the services that it wants to provide, and how to persuade its electors to vote for higher levels of taxation in order to provide those services. That is not a comfortable situation for local councillors to be in. However, I do not believe that people in local government can have it both ways. They cannot have autonomy and freedom to do what they want if the bill is being met by somebody else. They must understand that there must be a more direct relationship between providing services and paying for those services.

That is why any system of reform in local government finance that provides genuine accountability must be based on two major factors. First, there must be a reduction in the level of Government grant. Ideally, the grant should be reduced to provide an equalisation mechanism—something which addresses the wide disparities in terms of resources between individual local authorities. Secondly, there must be a local tax which is borne directly by local electors in each local authority.

Mr. Douglas Hogg

That is an interesting point and I am sympathetic to it. If the hon. Gentleman wants a tax to produce a sufficient product to reduce Government support to the kind of proportion that he has put forward—as I asked his hon. Friend the Member for Croydon, North-West (Mr. Pitt)—will he not have substantially to widen and enlarge the local government areas? That means a further reorganisation of local government. Does the hon. Gentleman not find that an awesome prospect?

Mr. Cartwright

I touched on that point earlier. I said that in an ideal world one would want to relate the taxation base to the structure of local government. In an ideal world I would want regional authorities to provide overall regional economic planning. functions, and so on. In an ideal world, I would want a single tier, rather than the current two-tier system, of local government. The reform of local government finance will be much easier in that ideal world.

I shall try to explain a little later how, short of that ideal, we might have a reformed structure which would meet some of the aims I have set out in terms of accountability. Again, I underline the point that we will not come up with an ideal solution to this problem. If there were an ideal solution, some Government would have stumbled upon it by now. In a sense, one is looking for the least unacceptable solution to those problems.

Because of the need for a local tax source that would be borne directly by the voters, such things as sales taxes, petrol taxes and so on are ruled out. They would be confusing to the electors who would not know where their taxes were going. They would produce a complex jungle of taxation which would go directly against the clear line of responsibility between those who pay and those who spend the taxes which I want to see. That is why one is forced back, however one looks at the problem, to Layfield's basic finding that a local income tax is the only new source of local taxation worthy of further consideration. The major arguments against a local income tax are ones of practicality and administration rather than of principle.

Mr. Heddle

The hon. Gentleman has touched upon the Layfield proposal for local income tax. He referred to the fact that he was a member of the Layfield committee before his election to the House. Will he confirm that the Layfield committee did not advocate the abolition of the rating system and its replacement by a local income tax? What it said was that a local income tax should be considered as a supplement to the existing rating system.

Mr. Cartwright

The hon. Gentleman prejudges what I am going to say. I will take that into account. There is no one system that can sweep away the existing rating system and replace it with one simple straightforward tax. There is a variety of reasons. If local income tax replaced the whole of the income from domestic and non-domestic rates, the burden of direct taxation would be much too high. Therefore, there is a case for retaining the rating system but in a different form.

A number of hon. Members have said that the problem is that too much of a burden is placed on the rates. Too much strain is being put on the rate base. Rates could be reformed fairly simply—I do not necessarily agree with my hon. Friend the Member for Croydon, North-West (Mr. Pitt) about site value rating, although I would not rule it out—by using capital values rather than notional rental value. There is a good deal more information to support valuation on a capital basis rather than on a notional rental basis, which often confuses ratepayers, particularly when the valuations are out of date.

If we gave up a system of property tax—which is what rates are—which is fairly simple to administer and fairly cheap to collect, and has a guaranteed product at the end of the day, it would not be long before the Government saw it as a marvellous source of taxation and reinstituted a property tax. Most Western countries have a property tax of some sort. There is a strong case for retaining the rating system on a reformed basis at the lower level of local government but introducing something different at the upper level.

A poll tax has much support from Conservative Members. However, I am hesitant about a poll tax. It would be regressive unless it were allied with a system of rebates. To have a rate system plus rate rebates, and a poll tax system plus poll tax rebates, would be a recipe for a considerable extension of bureaucracy and all the problems of administration involved in a rebate system. As practising politicians, we should be careful before we erect any barriers which deter people from registering themselves as electors on the electoral register. A poll tax might have that effect on potential local electors.

I return to the question of local income tax. The argument in favour of a local income tax is that it would tap 5½ million people who pay income tax but who do not contribute towards rates in a direct way. The Layfield committee suggested that the Revenue would administer the tax, but that the level would be set by the local authority, and that is probably the best model to examine.

Mr. Henderson

Is the hon. Gentleman suggesting that the locally defined income tax would be raised as part of the centrally raised income tax? Otherwise, there would be a substantial new cost for administration on a vast scale. However, if it is done by means of central taxation, is there not a great danger that no one will see the difference between them?

Mr. Cartwright

Conservative Members are one jump ahead of me every time—[Interruption.] However, I was just about to make that point. I said that I would argue for a local income tax that was administered by the Revenue, in order to cut administration costs, and that the local authority would set the rate in order to guarantee local accountability, but I was about to say that the element of local taxation must be clearly placed on the pay slip. In that way people would know how much they paid each week or month to central Government and to their local authorities. Contrary to the present system, people would know how much was being deducted from their incomes for the payment of local services.

I am passionately in favour of reducing the pain threshold, so that people know how much is being taken out their pockets to pay for local services. That is the only way to achieve more involvement in local government. Local income tax would not be directed towards replacing the rating system and would certainly not replace a reformed domestic rate. It would aim to reduce dependence on Government grant and on the non-domestic rate. The non-domestic rate is not a proper local tax. It is an accident whether a local authority has a high level of non-domestic rateable value. As has been said, local industry and commerce are not involved in the way in which the money is spent.

Therefore, there may be a case for saying that the income from the non-domestic rate should go into the national Exchequer to provide the income for some of the grant from central Government, which pools and equalises the variations in local tax bases. Although there are political problems in having two different local taxes, such a system has much to commend it. It would overcome the problem of precepting. I have always been a member of the lower tier of local government and I feel that there is a strong argument for getting away from the nonsense of precepting, which enables the upper tier of local government to precept the lower tier. Ultimately, the electorate knows only that they are paying to the lower tier and they do not understand how much goes to the upper tier.

Mr. Douglas Hogg

I simply wish to clarify the hon. Gentleman's point. He is obviously contemplating the idea that two sources of revenue should be available to local authorities—local income tax and rates. Is the hon. Gentleman arguing that the lower tier should derive its income exclusively from rates, with no precepting requirement?

Mr. Cartwright

That is exactly my point. I recognise that there is a political danger, because many will argue that we would then have two levels of local government taxation instead of one. However, the strength of the system would be that people would know what they were paying to the lower level and as a result of their tax deductions would have a clear understanding of the amount that they were paying to the upper tier. That would avoid the situation in London, where cuts are being made in borough services to accommodate the increased spending of the GLC and the Inner London Education Authority. People would understand the amount that they were paying for the proportion of individual service.

Sir Albert Costain (Folkestone and Hythe)

Can the hon. Gentleman explain why the hon. Member for Croydon, North-West (Mr. Pitt) spoke and then walked out of the Chamber as soon as he rose to speak, and why another Liberal Member came into the Chamber and the walked out? Do they not agree with the hon. Gentleman's policy?

Mr. Cartwright

I do not know whether they agree with all my policy. There is a fair measure of overlap. The hon. Member for Croydon, North-West said that he had another pressing engagement and, as the hon. Member for Folkestone and Hythe (Sir A Costain) will know from his long experience, that is not unusual on a Friday. The hon. Member for Isle of Ely (Mr. Freud) made sure that I would be all right on my own. I assured him that I would be and that I did not need his valuable moral support. Therefore, there is nothing untoward or suspicious about the disappearance of those two hon. Members.

A quotation from Layfield underlines the issue: There is a strongly held view amongst us that the only way to sustain a vital local democracy is to enlarge the share of local taxation in total local revenue and thereby make councillors more directly accountable to local electorates for their expenditure and taxation decisions. That is crucial. It is far better that local electors—and not the Secretary of State—should sort out overspending councillors.

Layfield concludes: On balance, we consider that the administrative cost involved in introducing a local income tax for this purpose would be justified. After many decades of uncertainty in the realm of local government finance the time has come for a choice on the issue of responsibility. Before we decide which system of local tax we want we must first settle the issue of responsibility. Do we want a centrally controlled and directed system, or do we believe in local accountability? I believe in the latter.

10.55 am
Mr. Anthony Grant (Harrow, Central)

I support the hon. Member for Woolwich, East (Mr. Cartwright) in one respect. He said that the number of Labour Members attending a debate on such an important matter was deplorable. Admittedly, the Labour Party has sent three of its Members into the Chamber, but throughout the debate only one Labour Member has been present. That is not good enough, and the hon. Gentleman confirmed that.

Like other hon. Members, I thank my right hon. Friend the Member for Stafford and Stone (Sir H. Fraser) for having given us an opportunity to hold a wide-ranging debate on a subject of immense concern both to us and to our constituents. In my constituency, rates are a matter of burning concern. Harrow did badly last year out of the rate support grant, and, by an arithmetical quirk, it has done extremely badly this year as well. Recently too we have had to suffer what can only be described as the GLC "Livingstone lunacy" of a 100 per cent. increase in GLC rates. Therefore, we are most concerned.

Many years ago rates were of little concern. In those days the amount of work undertaken by local authorities and the amount of money raised was relatively small.

Approximate rough justice was done by rating and extracting money on the basis of property ownership. However, as time passed, more and more demands were made. People began to say that the authorities must help them from the cradle to the grave. The House placed ever greater burdens on local government. As time went on the inequities became more glaring.

We can now no longer tolerate a system in which two adjacent houses are exactly the same and rated equally yet one of those houses is occupied by a fairly impoverished old-age pensioner who lives alone, while the other is inhabited by four wage earners—or even four dole receivers—whose income is much greater. They pay the same for their local services. That is not rough justice—it is just roughness.

The long-suffering ratepayers are not prepared to go on with the system for ever. Manifesto commitments are one thing. I have never believed much in them. They are more for far Left fanatics than for realistic and pragmatic parties. However, long-suffering ratepayers are not prepared to go on for ever with the present system. It is fundamental that there is no substitute for good housekeeping by a local authority. As my hon. Friend the Member for Fife, East (Mr. Henderson) said, in an ideal democracy irresponsibility by a local authority is punished at the local elections, but the absurd situation has almost been reached, certainly in parts of London, where those who pay rates have no vote and those who vote do not pay rates. That makes local democracy an empty shell.

What are the alternatives? Since I came to the House there has been much debate on the subject. We have had the Layfield report and a Green Paper.

It being Eleven o'clock, MR. SPEAKER interrupted the proceedings, pursuant to Standing Order No. 5 (Friday sittings).