§ Order for Second Reading read.3.42 pm
§ The Minister for Local Government and Inner Cities (Mr. John Redwood)
I beg to move, That the Bill be now read a Second time.
The Bill will freeze business rates in real terms for a further year. It honours the pledge given by my right hon. Friend the Chancellor of the Exchequer in his Budget speech on 16 March to protect businesses from the most serious consequences of the 1990 revaluation. A similar measure, which we introduced last year, was welcomed by the House, and I hope that the Bill will be equally well received.
Under the current law, business rates cannot rise each year by more than the rate of inflation if the property's valuation stays the same. The Government's success in tackling inflation means that the rises this year will be no more than 3.6 per cent. following increases of only 4.1 per cent. last year—and, of course, inflation is now lower again.
For 30 per cent. of the businesses, however, the 1990 revaluation implied larger annual increases last year and this year. Although the increases were being phased in gradually, some businesses would still have faced real-terms increases of up to 20 per cent.
Bearing in mind the effects of the recession, the Government decided last year not to add to the burden on businesses. The 1992 Act therefore froze all rates increases in real terms for 1992–93. Last year's measure was intended as a one-year respite. However, although the economy is now recovering, a full resumption of the transitional arrangements would be premature, so the Bill extends the freeze on transitional real increases for a further year.
About 250,000 shops and offices, mainly in the south of England, will benefit from the measure to the tune of more than £190 million. About 85,000 factories and warehouses, mainly in the north of England, will benefit from reductions worth more than £30 million. A further 165,000 properties will gain relief worth £120 million. Businesses in Wales will save about £9 million. The total savings for business will be £350 million this year and £225 million next year.
§ Mr. John Maxton (Glasgow, Cathcart)
I am aware that the Bill does not cover Scotland, but can the Minister tell a good Scottish Member such as myself what the Scottish Office is doing by way of an equivalent to the Bill?
§ Mr. Redwood
I am happy to oblige the hon. Gentleman. As he says, there are different arrangements in Scotland. Through regulations, a comparable reduction of 2.6 per cent. in rates bills overall—the English level—will be achieved in the 1993-94 rates poundages, at a cost of £32 million. Derating has not been adjusted in line with reduced poundages, so the ratepayers will get the full benefit. I hope that that satisfies the hon. Gentleman.
The benefits in England come on top of the benefits of last year's freeze, which was worth £1,250 million over the years of its impact on its rates hills.
854 Many of the businesses that fared worst as a result of the recession were those facing the largest increases following the 1990 revaluation. In the six months following that revaluation, 633,000 ratepayers appealed against their valuations. I want the backlog of appeals to be cleared, as I am sure the whole House does. Of the initial 633,000 appeals, more than 525,000 have now been settled, and I am told that valuation tribunals are well on target for clearing the remainder by the end of the current year. I am sure that the House will welcome that.
In 1995, a new revaluation, based on the property market at 1 April this year, will come into effect. Rental values in depressed sectors are likely to be significantly lower than they were at the time of the previous revaluation. If that is so, the rateable values concerned will fall. That means that, as I promised last year, some businesses still in transition may never have to face the full rates liabilities implied by their 1990 valuations. I am sure that that will be most welcome to many businesses, especially the small businesses that faced the largest increases.
§ Mr. Michael Ancram (Devizes)
I am grateful to my hon. Friend, and I am sure that many businesses in my constituency will welcome what he has said. However, does not what he has said reveal one of the difficulties of the present non-domestic rating system, in that what a business pays effectively depends on the general economic situation, and therefore on the value of the property in which it operates, rather than on anything to do with the nature of the business itself?
Not immediately, but at some time in the future, will my hon. Friend examine the basis of local taxation of businesses to find out whether there is a fairer way of assessing what they should pay for local services?
§ Mr. Redwood
I am afraid that I cannot promise any immediate action along those lines. We are happy with the basis of property taxation for some element of businesses' tax bills. Of course, businesses also contribute to the national exchequer through VAT and through the income tax and national insurance that their employees contribute, which businesses originally pay in employee remuneration. We feel that there is a balance in the taxation affecting businesses, their employees and their turnover. That is Parliament's and the Government's chosen method of taxation to support local authority expenditure.
However, my hon. Friend has a good point when he says that problems were caused by the 1988 valuation. The main problem arose because that valuation took place at the peak of an extremely active property market, especially in the south, and especially for shop and office properties. We trust that the valuations based on 1993 values, which do not allot such extreme relative values as between different types of properties, will remedy that.
I hope that the results will be more acceptable across the country than the results were when they were based on the high values of certain properties in 1988. A further pause in increases this year should help to smooth any changes to bills resulting from the 1995 revaluation.
We believe that the Bill will provide another valuable fillip for many businesses, and will give a further boost to 855 our economic recovery. My hon. Friend the Under-Secretary of State will be happy to deal with any issues that arise in the debate when he winds up. I have great pleasure in commending the Bill to the House.
§ 4.9 pm
§ Mr. Doug Henderson (Newcastle upon Tyne, North)
The Opposition support the general thrust of the Bill, and we shall not oppose Second Reading. However, we are concerned that businesses are becoming dependent on artificially held-back increases in rates.
Since the revaluation in 1988, which was implemented in 1990, businesses have, in addition to the original transitional limitations in 1990–91 and 1991–92, been protected by a further limitation in 1992–93. The Bill proposes another limitation in 1993–94. Businesses potentially face a large hike in business rates when the transitional arrangements expire and the next revaluation takes place in 1995.
The late Lord Ridley, who was Secretary of State for the Environment at the time, announced in 1989 the terms of the original transitional arrangements which were intended to be self-financing.
§ Mr. Roy Thomason (Bromsgrove)
Does the hon. Gentleman agree that, in referring to the 1995 revaluation as potentially increasing the liability of the business rate payer, he is assuming a continuing increase in rental values, because the rates are based on rental values? In fact, most business rents have been stagnant over the past few years; consequently, the increase in valuation which is likely to take place in 1995 should be quite limited. The hon. Gentleman's point therefore has a limited validity.
§ Mr. Henderson
I do not accept that. If I replied at this stage, I should have to do so at some length. I shall give the hon. Member a flavour of what I propose to say later. Whether businesses face a hike after the implementation of the 1993 revaluation in 1995 depends very much on what happens elsewhere.
It depends on whether the real level of local authority expenditure is maintained. It depends on whether the rate poundage, as originally outlined in the Local Government Finance Act 1988, is maintained in relation to inflation. It also depends on what happens to businesses that have already had their rates bills artificially held back—I support this—because of the recession over the past two or three years.
The answer to the hon. Gentleman's question is that it very much depends on what the Government do between now and 1995, and on whether the revaluations in 1995 are based on what people actually pay in rates or on what they would have paid if there had been no transitional arrangements. I shall develop that point at a little more length later. If more hon. Members had wished to catch your eye, Madam Speaker, I might have restrained myself a little on the matter. In the circumstances, it may help the hon. Gentleman and his colleagues to be a wee bit more appreciative of some of the difficulties that they may face in the near future.
I return to what the late Lord Ridley said. He believed that the original transitional scheme would be an incentive to many businesses to flourish in the late 1980s. I realise that he had no more access to the future than any of the rest of us had. He said:The Local Government Finance Act provides for a uniform business rate in England and in Wales and for a 856 revaluation of non-domestic property … This will provide a welcome incentive for businesses to expand in the currently less economically buoyant areas."—[Official Report, 15 February 1989; Vol. 147, c. 315.]It is clear that he did not anticipate the economic events of the post-1989 period. Indeed, he predicted the opposite of what has transpired: he argued that northern business would be helped by rate reductions that could stimulate the more depressed parts of the country. The late Lord Ridley did not foresee the depth and length of the recession that would sweep through the country at the time that the business rate was introduced.
The year 1990 was a bad one for the economy, with 28,935 businesses collapsing. In 1991, the position was even worse, with 47,777 business failures during the year —an increase of 65 per cent. on the previous year. The pace of collapse quickened in the last quarter of 1991: from 900 collapses a week to 995, or 199 business collapses each working day.
All parts of the country suffered. The south-east recorded 9,722 business failures that year—an increase of 68 per cent. The east midlands recorded 2,189 failures—an increase of 79 per cent.—and the south-west had 5,415 failures—an increase of 76 per cent.
The position grew even worse in 1992 as the recession deepened, with business failures reaching an all-time high. A total of 62,767 businesses failed—a 31 per cent. increase on the previous year. London and the south-east were the areas worst hit by the hurricane of collapsing business. The south-east recorded 14,000 business failures during 1992— a 46 per cent. increase. In 1992, 9,132 bankruptcies took place and liquidations increased by 20 per cent. to 5,000 plus.
The eastern region also recorded a dramatic increase in business failures—a 22 per cent. increase on the previous year. In London, there were 9,121 business failures in 1992–15 per cent. of the total for the country.
Despite all the self-congratulation from the Government Front Bench, 1993 has continued to be a disastrous year for business. In the first quarter, 15,444 businesses collapsed—a rate of almost 1,300 a week. A total of 5,297 limited company liquidations were recorded, and there were 10,000 individual insolvencies, compared to 9,200 in the same quarter last year.
Dun and Bradstreet pointed out that the latest overall figures represented a 4 per cent. increase in business failures on the same period last year. London and the south-east are still suffering the worst. But beyond this region, the record of failures has also worsened, despite the soothing words of Ministers on this matter. For example, in the west midlands, there was an increase of 5.5 per cent. in the number of business failures compared to last year. In the south-west, there was an increase of 9 per cent. compared with the same period last year. In my own region, the north-east, 1,176 business failures were recorded—an increase of 3 per cent.—but bankruptcies increased by 8 per cent.
Not only did the late Lord Ridley get wrong the level of aggregate demand in the economy: he and the Government completely failed to predict that the 1990–93 recession would hit the southern parts of the country worse than the north. Yet many areas in the south face the largest increases in business rate bills arising from the introduction of the national business rate in 1990.
The original transitional release scheme was therefore wholly inappropriate in the economic circumstances of the 857 country. The limitations and reductions of rate bills in the north acted against northern-based companies holding on in the recession because they needed the full stimulus of any reductions. Even with the original limitations contained in the original transitional arrangement scheme, the increases in the south served to put great pressure on many companies which faced extremely serious problems and could ill afford even the limited increase.
I want to be fair to the Minister by saying that, during the Second Reading of the Bill on non-domestic rates which was before the House last year, he recognised that the Government had allowed the country to sink into a deep recession and that, as a consequence, the original transitional scheme was wholly inappropriate and therefore had to be modified. He told the House on 19 May:I know that the recession has created difficulties for many businesses and some of those that would have faced the largest increases this year have been particularly hard hit in the recession. The Government have therefore decided that their costs this year should not be worsened by any real increases in the business rates."—[Official Report, 19 May 1992; Vol. 208, c. 204]The Minister's proposals to limit increases in rates to inflation will be welcomed by businesses throughout the country. Businesses look to that assistance to help them recover from the battering that they received from the recession. They also recognise that the net cost to the taxpayer will not be as has been suggested in the accompanying papers, for every business that is saved by the measure will continue to contribute rates and other taxes on which the Exchequer depends. The multiplier effect in local economies will help other companies.
The Minister's proposals might excite the ashes of John Maynard Keynes. However, to save the hon. Gentleman's blushes among his erstwhile friends and colleagues, I shall not press the point too far. I would hate to be responsible for any provocation that might compel the hon. Gentleman to renege on his conversion or to make his task of getting the Bill through another place more difficult, even if it receives the support of the House of Commons.
As the Minister knows all too well, some noble Lords and at least one right hon. and noble Lady in the other House currently delight in opposition to Maastricht but might re-focus to delight in opposition to the Non-Domestic Rating (No. 2) Bill. I am sure that the business community, the Government and the Opposition would not want to incite such opposition to the Bill.
Another worrying impact of the recession is the general and projected decline in business rate revenue. That partly addresses the point raised by the hon. Member for Bromsgrove (Mr. Thomason). The aggregate business rate revenue fell from £12.4 billion in 1991–92 to £12.3 billion in 1992–93. In 1993–94, according to the Government's figures, it will fall to 11.6 billion. Does the Minister agree that that has serious consequences for Government revenues in general?
Does the Minister acknowledge that, if local authority resources are to be maintained, one of several things must happen? The shortfall must be made up by central Government grant, by raising more revenue from council tax or by increasing the poundage beyond the rate of inflation to compensate for the impact of the narrower 858 business tax base—that avenue might create additional problems—or the books will have to be squared by forcing a cut in local authority resources.
Does the Minister agree that there are, indeed, severe potential major problems ahead? Does he agree that, if there is to be stability in the business community, it is important that the Government state their future policy well in advance, so that business can plan accordingly?
In his statement on local authority finance to the House in November last year, the Secretary of State said that there would be no cuts in services if councils were run efficiently. The Minister and I discussed the matter at some length only a week last Friday in a debate in the House. There were arguments about whether services were cut by councils which were efficient or only by councils which were inefficient.
Setting aside that argument, I said in that debate, and I repeat today, that cuts were made by councils in many parts of the country, and severe cuts were made by some Conservative authorities. Even if the Minister has been unable to meet his stated policy this year, can he give us some assurances for the future?
§ Mr. Redwood
Clause 2 makes similar arrangements to those last year, to ensure that the rates pool does not suffer from the decision to forgo the extra increases on properties suffering from the revaluations. So we have made our position clear. The rates pool will be compensated through that mechanism. But is the hon. Gentleman saying that it is Labour party policy not only to support that compensation but to urge higher real rates increases for businesses in order to allow higher local authority expenditure? That would be interesting, and the House should know.
§ Mr. Henderson
It is always interesting to be questioned about Labour party policy. I do not intend to detain the House all afternoon, but I shall mention Labour party policy later, and I shall consider the local determination of rates—a method which, as I shall demonstrate, is supported by some Conservative Members.
The basic issue is what the Government's policy will be if cuts are made. Can the Minister assure the House that the Government will maintain the real level of local authority expenditure as a proportion of our gross domestic product? If so, will he assure the House that, if business rate revenue continues to fall, as the Government's own figures predict, the Government will increase their subventions to local authorities in one way or another to compensate for that shortfall?
If the Minister cannot give that assurance, is he prepared to commit himself to making that argument to the Chancellor, with a view to a relevant announcement in the joint Budget and expenditure statement in the autumn? Will he stress to the Chancellor the need to maintain the real level of local authority resources?
If there is a shortfall as a result of the existing way in which revenue is gained and as a result of a fall in business rate revenue because of the recession, will the Minister make proposals to allow the Government to compensate for any subsequent losses?
On the question of the transitional arrangements covering business rate increases, will the Minister give a commitment that there will be no sudden elimination of 859 the limitation on increases? Does he accept that, if that were to happen, many companies, especially in the south, would face a sharp hike in their rates?
If the Minister accepts the case for a stable and predictable business rate, which is especially important to the small business community, is he prepared to say how the 1995 revaluation in the business rate will be approached? The small business community considers such stability to be crucial to its economy, and I hope that the Minister will accept the strength of its argument, which is frequently presented to politicians and others, and rightly so.
I hope that the Minister will recognise—if he does not, his officials certainly will—that, even if the transitional arrangements had been allowed to work through, about 160,000 businesses would still have had the increase in their rates deferred until the end of 1994–95. The Association of Metropolitan Authorities estimates that, following the two-year freeze in real increases, which the Labour party supports, about 350,000 businesses will not even pay full rates under the 1990 revaluation when the new 1995 revaluation comes into force. The London Chamber of Commerce and Industry has stressed that point, and noted:The Uniform Business Rate still presents enormous problems for London businesses, particularly when the new valuations are brought in.Can the Minister tell us whether there will be transitional arrangements after 1995? Are the Government prepared to contribute additional funds to the national business rate pool to assist businesses that face sharp increases? If transitional arrangements are intended after 1995—this relates to what I said in answer to the hon. Member for Bromsgrove—will they be based on the actual rate payments made under the various schemes in 1994–95 or will they be made on the basis of what the bills would have been had the full effects of the 1990 revaluation worked through the system?
That also relates to the point that the Minister tempted me to discuss when he intervened, and what was said by his hon. Friend the Member for Devizes (Mr. Ancram), who is sitting to the rear and left of the Minister—perhaps that hon. Gentleman is to the left of the Minister in all senses: he certainly used to be when he was on the other side of the border.
Is the Minister prepared to review the system? Is he prepared to consider giving local councils full responsibility for setting the business rate? Over the past two or three years, it has sometimes been suggested that anyone making such a proposition must be off his head and would not receive the support of the business community. But that is not really what the business community believes. It recognises that there is considerable advantage in. the business rate being determined by local councils.
I do not want to detain the House for too long, but I have quotes from two representative business organisations. I do not necessarily concur with their views on other matters, but I think that they speak much sense on this issue. In its recent submission on local government affairs, the Institute of Directors said:We consider that on balance there is more to be gained than lost by reverting to non-domestic rates being determined by the individual local authorities".In its submission on local authority policy, the London Chamber of Commerce and Industry states:The Chamber would like to see a return to local revenue raising and accountability for at least 50 per cent. of all local 860 government expenditure. This could be done if both the council tax and business rate were controlled locally. The voice of business could then be heard, and in a real sense accountability could be reintroduced … Changes along those lines would ensure that locally raised rates were spent in the areas of need, and reflect the local economy … the Chamber strongly recommends that the Government includes a fundamental reassessment of the present arrangements as part of its overall view of local government finance.It is not only Opposition Members who subscribe to the cause of determining rates at local level. Conservative Members who are closely associated with such organisations make the same submissions, and many in the business community have made it clear that they do not want to be determined by central Government, but want to allow reasonable local discretion.
Does the Minister agree that it is advantageous to allow local councils to make decisions, as they know more about their business community, and they know how much the business community can afford to pay in rates? It would be extremely stupid of them not to take that into account when setting the rates. It would be counter-productive in economic terms, as, if they made the rates too high, companies would run into difficulties, which would produce a lower net revenue. That would be a pointless exercise, and local government would be stupid to make such a mistake—indeed, it is not doing so.
Not long ago, the Minister was praising the way in which local government approached many issues. He has done so at political conferences, in press releases and elsewhere. Some of us have sometimes been tempted to question the authenticity of his apparent conversion to local government. Setting that aside, the Minister—and, indeed, the Prime Minister—have made the case for local government.
The Opposition support the measure, but would it not be wise to consider the longer term to discover whether there are better and more flexible ways of determining business rates, so that local communities and local business needs can be taken into account? The London Chamber of Commerce and Industry also referred to democracy. If local democracy is to mean anything, local people must have the ability and right to determine the level of services they want, and how much the business community should contribute to them.
It is clear that the Government are intent on pressing on with seemingly endless changes in the rules governing local authorities. It is no surprise to me that the business community is still subject to the unstable business rate levels caused by the Local Government Finance Act 1988. It is also clear that the House will face further requests to support further legislation to change the rules relating to the business rate.
I am clear that a return to the local determination of business rate is a more democratic policy and will, in the long term, reduce the involvement of the House in such matters. But until then, business will need assistance in shielding itself from severe hikes in business rates. If the Bill gives a measure of support, it has our general approval.
§ Mr. Roy Thomason (Bromsgrove)
I had not intended to participate in the debate until I heard the hon. Member for Newcastle upon Tyne, North (Mr. Henderson) say that Opposition Members intended to support the Bill. I was immediately filled with suspicion, bearing in mind their 861 long history of changing policies, but always opposing the present rating system for businesses. I was minded to intervene on hearing that change of tack emerging from the Opposition.
The hon. Member for Newcastle upon Tyne, North referred to the former Secretary of State for the Environment, Nicholas Ridley, and compared the differences between the rates charged in different parts of the country and the adjustments that would take place between north and south. Perhaps the hon. Gentleman forgot the horror that many business people felt when they saw their rates bills before the new legislation was introduced.
Perhaps the hon. Gentleman forgot, for example, that in Conservative-controlled Kensington and Chelsea, the rates for a business similar to one in Labour-controlled Sheffield would have been 117p instead of 347p in the pound. There was by no means a level playing field. A considerable additional burden was placed on businesses in a Labour-controlled authority such as Sheffield compared with businesses in Kensington and Chelsea and that situation could be replicated throughout the country. There was a wide variety of business rates.
The reason for that was the old valuation. The difference of two, three or even four times the amount of rates in the pound charged was related not to the ability of a business to make payments in relation to its turnover or profit. It followed that there was gross unfairness between businesses in different parts of the country as to what they were paying in local authority business rates and the amount that they were reasonably able to pay as a proportion of their gross profit. The issue had to be resolved.
Labour Members have said in the past that they wished to introduce a form of property tax and that they did not want the sort of measure that is now before the House. They said that their new property tax would be based on capital values and would be handed over for local government to determine levels of payment. For many years, as a former chairman of the Association of District Councils, I defended the role of local government and viewed with concern the removal of its right to determine business rates. But I concede that the change, made necessary by the wide discrepancies to which I referred, has been a success.
Under the old system, in many Labour-controlled authorities the majority of ratepayers were in receipt of benefits, which meant that they were cushioned from the charge, so the business proportion of the community bore a much heavier part of the rate charge. Would the Labour party advocate a return to that system?
The Liberals suggest that we could overcome the problem not by adopting the type of measure that is before the House, but by introducing site value taxation. How would that work? That question cannot adequately be answered because site value taxation is a totally unworkable proposition. For example, take a corner sweet shop and a large tower block adjacent to it, value the site of those two units, which per square foot might be identical, and charge a rate based on that site value. The little corner shop might be occupying an old building of limited capital value in total, whereas the office block 862 might be a substantial and expensive block. But under the Liberal scheme they would both pay an identical amount of business rates on a square foot basis.
That is nonsense. It bears no relationship to ability to pay or to the use of the land and it often bears no relationship to the potential use of the land. The corner sweet shop may be occupied by a lessee who cannot redevelop the land and thereby release the capital values to justify the payment of a higher business rate.
It follows that there is no easy solution to the problem of business rates. There is no quick answer to the problem of how businesses should contribute, justly and equitably, to the costs of the local community. We need to find a fair and reasonable solution. The one before us is the best to date.
I am concerned that the Labour party's proposals will go back to the bad old days of greatly varying charges according to the accident of a local authority's political control. The hon. Member for Newcastle upon Tyne, North quoted with approbation various business organisations which had said that they wanted to participate in local government and saw the payment of locally based taxes as the answer. I question that because there is no connection between the charge and elections. There is no proper accountability if it is not electorally based.
A business man or woman may have business premises in one local authority, but be a council tax payer in a different authority, so the local authority in which his business is based will not be democratically accountable to him or her. The proposal to charge a business rate on their premises gives them no say or opportunity to participate in the decision making of the council of the authority in which their business premises are situated. That is a grave weakness of the Labour party's present position.
I welcome any proposition that will allow businesses to participate in local government. That must be a way ahead. But I am worried that democratic accountability may no longer be maintained through the ballot box. If the hon. Member for Newcastle upon Tyne, North was proposing that business people had some business vote and that councillors received their franchise by virtue of the business rate, that might be an argument to be listened to, if not in the end supported. But he has not pursued that to its proper conclusion.
I am therefore left with concern that some authorities that have clearly shown themselves to be anti-business would use any new proposal to weaken the economic strength of businesses within their community.
It is true that some in the Labour party have belatedly appreciated the importance of a thriving business community. Sadly, that is not always reflected on Labour benches in council chambers throughout the country. A movement away from the present system must therefore be undertaken with great care.
I started by describing the important link between the rate paid by businesses in different parts of the country. I mentioned in an earlier intervention that the 1995 revaluation was not a factor that should be taken into account in assessing to any great degree the levels of business rates. We had to assume that there would be no substantial difference between the 1990 and 1995 values put on properties owing to stagnant rent levels.
There is of course the question of how much the Government should properly contribute to local government expenses by virtue of the lower yield that that will 863 produce from business premises. It would be of assistance to those in local government if, in replying to the debate, or, more appropriately, on some future occasion after consultation, my hon. Friend the Minister could let us know the Government's long-term views on creating a balance between the yield from the council tax, grant and the business rate in supporting local government services.
There is no doubt that the yield from the council tax is excessively small as a proportion of local government income. Therefore, the gearing can create distortions and the element of democratic accountability to which I referred earlier may be weakened when such a large part of the total local government income is generated by resources outside those determined by people elected to their council. However, those are wide issues and perhaps it would not be appropriate for me to spend long on them this afternoon, although there may be some who would prefer it if I did.
In joining colleagues in all parts of the House in supporting this measure, I hope that in future the Opposition will take a more realistic and fair approach to businesses and their relationship with local government. We commend the Government for once again protecting the interests of businesses this year at a time of critical importance to them. I trust that the measure will receive universal support.
§ Mr. Paul Tyler (North Cornwall)
I, too, am glad to welcome the measure, but I am particularly glad to welcome the terms in which the Minister introduced it. Unlike some of the cuckoos of spring from whom we have heard so much in the past 24 hours, who have been bawling the fact the whole economy is now on the road to recovery, the Minister was frank enough to say that a full resumption of UBR increases would be premature. He made it quite clear that, as far as the universal business rate and its impact on businesses were concerned, recovery has not taken place, is not taking place and is not likely to take place in the near future. I welcome the more realistic, if slightly more pessimistic, way in which the Minister introduced the measure.
This is our annual occasion to take stock of where the uniform business rate has led us and I shall touch on three aspects, the first of which is accountability. That was mentioned by the hon. Member for Bromsgrove (Mr. Thomason), who was a notable leader of the Association of District Councils.
I recall a criticism of that body, the Association of County Councils and the Association of Metropolitan Authorities at the time of the introduction of the non-domestic rate, the uniform business rate and the poll tax in 1990 in the interests of accountability. It was claimed that the link to the electorate was destroyed because so much of the decision-making was centralised in London and so little was left to the council chambers of which the hon. Gentleman was such a spendid ornament. That argument must bring us to the test of how the average elector, an individual or from a business, actually influences the UBR for his or her area.
Next week there is to be an election in all the shire counties of England and Wales. Can the elector, by putting his cross against a particular candidate, influence the level of UBR?
864 Of course not. He cannot make any difference to the way in which that particular council approaches the problem of raising revenue from the business community. The only thing that he can do next week—the Government may regret this—is to demonstrate his contempt for that inelastic system by voting against the governing party. If the elector considers that the system is unfair or is being misused, that is the only way in which the elector can fight back.
The system was introduced because of the ludicrous antics of a small minority of loony left Labour councils. The idea was that businesses needed to be protected against a minority elected under the first-past-the-post system, which then abused their majority position.
The accident of political control mentioned by the hon. Member for Bromsgrove (Mr. Thomason) is entirely the product of low turnout and an inefficient, non-proportional election system, but to use the UBR and centralised control as a way of getting back at the vast majority of conscientious local authorities which are run by Conservatives, Liberal Democrats, or the saner parts of the Labour party—or a combination of them—seems an extraordinary way of using a sledgehammer to crack a particularly cracked nut.
§ Mr. Redwood
Does the hon. Gentleman agree that a vote for his party is a vote for site value rating, which means slaughtering our high street greengrocers, bakers and butchers by forcing them out of business by inappropriately high levels of tax, because their sites would be more valuable for other uses? What does the hon. Gentleman have to say about that? Does he agree that our proposals are much better for the business community, which is why people will vote Conservative?
§ Mr. Tyler
There will be in my own. As an elector, I shall have a clear choice between electing representatives of the three main parties. One party's candidate supports the status quo, as represented by the measure before us, but we have no way of amending, altering ameliorating or changing the application of that policy in our area. My party is prepared to fight for more local accountability —not just for businesses but for the whole community. I will not be drawn into the argument about site value taxation. The hon. Member for Bromsgrove—who has left the Chamber—knows full well that he was talking nonsense when he said it was impossible and impracticable. He denied not just the evidence of professional local authority valuers who have made sure that it would be possible to introduce the scheme, but the experience of many countries, including New Zealand and parts of the United States, which operate it most effectively. It is nonsense to suggest that the system would have the effect he claimed.
§ Mr. Redwood
If the Liberal Democratic party is interested only in local issues, why does its manifesto for the county elections devote a great deal of time and energy to making the case for proportional representation and local income tax—which are clearly national issues that 865 the hon. Gentleman's party is trying to influence? Why will not he come clean about the Liberal Democrats' proposals for small businesses which would be deeply damaging to many small firms that provide excellent services in the high streets of this country?
§ Mr. Tyler
If I launched forth on a restatement of our manifesto, I would be called to order. We have made it clear on successive occasions in House and outside that the main basis for local authority funding at local level should be based on a local income tax.
We do not believe that the current system—be it the council tax, or the wholly discredited poll tax that the Minister and his colleagues foisted on the country on a minority vote—is appropriate. Our system would be much more appropriate. In addition, land value taxation is a much more effective system for identifying the benefit given to the individual, commercial ratepayer by the council services and planning consents given. If there is no outstanding planning consent giving an enhanced value to a particular property, it does not release that value and engage the land value taxation at a higher level. It is nonsense to suggest that the system would squeeze out small shopkeepers.
I also wish to refer to the anomalies in the present system. I am especially concerned with the holiday industry, having some responsibilities for the matter in the House and in my constituency. It is extraordinary that, since the introduction of the uniform business rate, the inflexibility of the system has meant that hotels and guest houses which have been pushed by the recession into reducing their months of opening find that there is no change in their rate burden. If an hotel in Newquay was operating on a 12-month basis in 1988, employing people and letting its rooms all the year round, but has now, as a result of the recession, had to cut back and close for perhaps eight months of the year, such is the absurdity and inflexibility of the UBR system that the hotelier still pays the rate for the full 12 months' opening.
The argument, in case the Minister thinks that I have not heard it, goes thus. Because the hotelier is in theory sitting beside his telephone in January waiting for a booking to be made for July, August or September, it is suggested that the whole hotel is therefore in business and must still be rated at the full valuation set in 1988 and introduced in 1990. It will be obvious that in such circumstances the relationship to his ability to pay—his profitability, turnover or whatever may be the test—is absolutely nil. There is no connection whatever.
The hotelier's attempts to appeal against the system, based on experience in our area, seem doomed to failure. The only way in which some change may be made is if there is a material change of business. I know of a case in my constituency of someone who has had a tea room in the front room and, in days gone by, was able to operate it every week of the year has now decided that, because of the recession and the consequent reduction in the disposable income of visitors, the room will be used for domestic purposes during the winter months. There is then a possibility of some form of appeal. Otherwise, the inflexibility of the system is extraordinary.
Another anomaly has been brought to our attention by the Confederation of British Industry, usually very 866 supportive of Government policy. It points out in its current brief that the setting of half rates on empty shops and offices in England and Wales is absurd. It says:The rationale behind this practice is flawed, going against the principle that rates are a tax on beneficial occupation. Moreover, in current market conditions its application is penal. Many businesses, in all sectors, are facing empty rates bills amounting to about £450 million in addition to other onerous costs of holding properties which they are trying to rent or sell, hitherto with little success.Another cause for serious concern across all parties, as far as I know, is the arrangements for hardship relief. Last week the Federation of Small Businesses, whose policy chairman hails from Torquay in the south-west of England, pointed out that huge numbers of smaller businesses have been badly affected by the uniform business rates that they have been called upon to pay and that the response of local authorities has been exceedingly patchy, to say the least, because the system is not fully funded by the Exchequer, is not fully understood and, as a result, is not fully operational.
The Minister will agree, I think, that section 49, on hardship relief, is not being adequately used by local authorities largely because, in very constrained times, when all their resources are restricted, even the limited contribution that they must make—which they must get from their council tax payers or by some other means—is considerable. As hon. Members know,remission … on grounds of hardship should be the exception rather than the rule".I quote from the Department's "Non-domestic Rates Discretionary Rate Relief- practice note on the subject. As hon. Members also know, not only must the individual ratepayer prove that he is suffering hardship; but if the uniform business rate were imposed in all its rigour, the wider community—council tax payers in the area—would also suffer hardship. The example often quoted is that of a post office which, if the uniform business rate were imposed to the full extent, would disappear—and perhaps the only shop would go with it—and the whole community around it would suffer. That is a valid case, and I will come back to it in a moment.
At present, the hardship restrictions are being so narrowly drawn that many local councils are not using them at all. I note that authorities of all political colours include both the best, at the top of the league, and the worst, at the bottom. This is not a party political point and I hope that the Minister will look sympathetically at how the hardship relief can be more effectively defined so that all parties in local government can use it to better effect.
The Minister referred to appeals. That is my next "A". The Department was able to give my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith) some figures. It is a staggering fact that there are nearly half a million outstanding uniform business rate appeals. I was pleased to hear the Minister say in his introduction that he is determined to remove the backlog by the end of this financial year. I am sure that many hon. Members will want to hold him to that.
The appeals system is extraordinarily cumbersome and very narrowly defined. I do not know if I am alone in the House—I suspect that I am this evening—but, just before the general election, I fought an appeal, not on behalf of a constituent but on behalf of a postmistress who ran a tiny post office at Trekenner, which is in Lezant, just outside my constituency. The experience of that appeal is 867 one that I will never forget. I have never been subjected to such an extraordinary surrealist exchange of non-information.
Let me illustrate it for the benefit of the House. The valuation officer produced a splendid tabulation of a number of comparative premises—post offices and shops from different parts of Cornwall—and it was on the basis of those calculations that he was proposing the entry in the rating list of some £300 for one room. The room had previously been the dining room of the postmistress and her husband. They had decided, in the interests of security, that it was no longer sufficient to use the dining room table and that, for obvious reasons, they should have some form of protection. They therefore decided to erect a screen and a counter, although the room still had in it the deep freeze, their records of dog and sheep breeding, and parish council minutes and other information. It was still, to all intents and purposes, part of the domestic premises.
Because there was a screen that could not be taken down at night, and therefore they could no longer have a dinner party there even if they wanted to, it was suggested by the valuation officers that that one room was effectively a business premise.
Our first argument that a post office which opened only for limited hours was hardly a business, but rather a social service, was kicked out by the tribunal—not because it was unsympathetic, but because of the inflexibility of the system. Our second argument was that, despite the position of the counter, the premises were still largely for domestic use and could be used for domestic purposes when the post office was not open. That, too, was thrown out.
I am shortening the long proceedings in the interests of brevity—I know that many Conservative Members wish to speak. The final session of the tribunal hearing was devoted to the actual figure to be applied to the premises and a schedule of different figures for similar premises was produced in evidence. I noticed in one column of the criteria to be used the magic initials "SPOT". I am not a professional valuer or an advocate—I am a mere politician —and I wondered whether I should draw attention to this form of description. I imagined that it meant "scientific and professional objective test", or some such.
I screwed up my courage and said to the chairman of the tribunal, "I do not understand what SPOT means. No doubt you and the other members of the tribunal fully understand." The chairman took counsel from his clerk, as was appropriate, and from other members, and they said, "Mr. Tyler, we have to confess that we do not know either." After a great deal of humming and ha-ing, the valuation officer admitted that SPOT meant that he had made it up on the spot. Nevertheless, I obtained a reduction.
The basis of the valuation and the inadequacy of the appeal system causing tremendous anxiety, confusion and anger in the business community. The fact that it is still taking so long to get a hearing and an answer—despite the Minister's assurances—makes the position worse.
To show that I am by no means parochial, I shall refer to an example from another part of the country, arid go from north Cornwall to Newbury. It is a random example, but it may be of interest to members of other parties.
Newbury was an area of considerable economic success, but small businesses in Berkshire are suffering, as in many other parts of the country, from the delayed reaction to the effects of the recession. As a result, 868 registered unemployment has risen from 861 in February 1990 to 4,033 in February 1993. It is clear from the continuing business failures in the area that a large number of newly unemployed come from the small business sector. We cannot be sure of the exact numbers of small businessess that are now failing in the Newbury constituency, but the local chamber of commerce reports no let-up whatsoever in the recession in the past few weeks. Its monitoring suggests that 16 local firms went under in February this year, compared with an average of 10.5 in 1992.
Councils throughout the country have been trying to mitigate the worst effects of the uniform business rate and I am delighted to note that Newbury district council—which, like my own in north Cornwall, has a strong Liberal Democrat presence—has used the hardship relief to the full. But how much more could be done if it were more effective than it is at present?
We all look forward to the revaluation and the effect that it will have on the 1995 figures, but unless the three As— accountability, anomalies and the appeals system—are addressed, we may end up with just a revamp of the present system. Meanwhile, the lack of local flexibility, the lack of willingness to tackle the sort of anomalies I have described and the continued lack of realistic assessments in the valuation and appeals procedure are doing great damage to small businesses throughout the country.
§ Mr. James Hill (Southampton, Test)
I have taken on board much of what hon. Members on both sides of the House have said about how the business man should be represented in local authorities. In the mid-1960s, there was a local government vote for business men. It seemed to work very well and I have no criticism of it. I fought a ward in which local business men voted. I was not elected. Nevertheless, they exercised their democratic right to pay rates and at the same time influence the local authority. That influenced the local authority in many ways, although it did not disregard local business men completely.
It is a totally different story now. My Labour-controlled local authority definitely disregards local business men. It has many schemes afoot. Behind closed doors, it formulates economic and planning policies without consulting the local business hierarchy. For years, the Southampton chamber of commerce has said that it would like more representation in the civic centre, but it just does not get it. However, there will come a day when business men rise up and say, "If we are expected to pay a considerable uniform business rate, we must have a voice in what is being planned by the local authority."
As we know, the introduction of the uniform business rate came as an extreme shock to the business community. It came in at a very high level. Business men were shaken to the core. It was introduced halfway through the recession, so it was impossible for them to find the additional money. I am pleased that the Chancellor of the Exchequer has listened to the pleas of various chambers of commerce, the Confederation of British Industry and other bodies such as the Institute of Directors, with the result that, for the second year running, the uniform business rate has not been increased.
That is very satisfactory for business men who run small businesses. I am not so concerned about the 869 multinationals that can open or close factories at the stroke of a pen on paper, but I am very concerned about the man who runs the local greengrocery or newspaper business. To him, the uniform business rate is another heavy burden of taxation.
The Chancellor in his wisdom has relieved the burden on such businesses in England by £329 million. Taken together with the help in last year's Budget, nearly £1.8 billion has been provided to help to reduce the bills of business ratepayers. Much of the help, I am pleased to say, is going to businesses in the south of England, which has been hit particularly hard by the recession, for unemployment in the south is well over 10 per cent.
Under the Bill and the transitional arrangements, the bills of 530,000 properties will rise by no more than 3.5 per cent. in 1993–94. When the Government decided to grasp the nettle, they found that the bone of contention was that the old rating system was unreliable. Councils used the business rate to subsidise increased spending, at no political cost to themselves, and obscured from voters the true cost of local authority expenditure.
Business rates were also unfair. Neighbouring properties with equivalent rating valuations but in different authorities, found that their business rate bills were not the same. That led to the complete distortion of trading competition. Business rates increased dramatically year by year, often at short notice. Notice amounted to only a few weeks and the business rate bore no relationship to the services provided.
I hate to say this, but Labour councils that set high business rates drove businesses and jobs from areas that could not afford to lose them. I have figures for Labour-controlled councils, but we do not want to get involved in that debate, because in this one we ought to congratulate the Government on ensuring that the uniform business rate is to be held at a level that businesses can afford.
Businesses in England will, overall, pay £800 million less in 1993–94 than they would have paid if business rates had risen in line with council spending, as they did before the introduction of the uniform business rate. I hope that I have got that point over to the media. In 1990–91, savings amounting to £1 billion were made; in 1991–92 they amounted to £850 million. If business rates had risen in line with council spending—I must admit that my council is probably one of the worst councils to which to refer business bills since 1990 would have amounted to more than £2.5 billion extra. Business rates nationally rose by some 37.4 per cent., in real terms.
Market rents and rateable values are inextricably linked. No one can get away with saying, "I can pay a high uniform business rate and a low rent." It is amusing to note that the Southampton, Test Conservative association headquarters paid far less in rent than it did in uniform business rate. That was the position at the beginning, but the two are now beginning to square up.
As we have heard several times during the debate, local authorities have the power to reduce or remit rates when businesses face hardship but, dare I say it, some councils, or even individual councillors, have no great liking for business. They exploit the poor. They take money out of the pockets of those who earn and put it into their own. 870 The very smell of business makes them adopt a very poor attitude towards it. We must ensure that local councils implement the hardship provisions to the full.
Today we have heard something about the policy of the Liberal Democrats. I do not know why, but there is an enormous burst of Liberal Democrat propaganda at the moment. I cannot understand it. The Liberal Democrats virtually go to sleep for four years between each general election, but they are wide awake again now. Site value rating was a nonsense. It was proved categorically, even to a Liberal Democrat council, that the Institute of Fiscal Studies and the Institute of Revenues, Rating and Valuation have explicitly rejected site value rating as unworkable and have warned that,as with rental revaluation, there may be little market information on site values in some areas.If a tobacconist's shop has a rather large garden, one can say with certainty that its site value is not the same as that of a factory that has a rather large garden alongside.
The expansion of a business depends on the capital that the business can expend. A small business man cannot explain to his bank manager that, if he would only give him another £250,000, he could develop the land on the site, so the site value rating system is particularly unworkable and, after a short time, would be regarded as completely unfair.
I have had strong dialogue with my local chamber of commerce, which is very aware that the difference between profit and loss could be in the rating system itself. It is not possible for businesses always to make profits of several hundred per cent. or, indeed, anything like that amount. Many small businesses could be teetering on the edge of bankruptcy simply because of high uniform business rates.
We have made a good stab at solving the problem. The Chancellor has made an excellent effort to control it, and it must be controlled. Local authorities must use the hardship provisions available under their mandate and all councils, whether Labour, Liberal Democrat or Conservative, must appreciate the fact that chambers of commerce and business men should be involved in all dialogue about plans whether for the city centre or for the transportation infrastructure.
The proposals are excellent, and I shall have no hesitation in voting for them.
§ 5.1 pm
§ Mrs. Angela Knight (Erewash)
This is an appropriate debate for today, as the headlines in so many newspapers are telling us that the recession is over. Indeed, the figures for sales, output, productivity and growth all point in that direction. Unemployment is also down, not only in my constituency of Erewash but in Newbury.
§ Mr. Simon Burns (Chelmsford)
Has my hon. Friend had the opportunity to read the Newbury declaration of the right hon. Member for Yeovil (Mr. Ashdown) in which he states that the Liberal Democrats wish for honesty in politics, among other things? I am not sure whether the hon. Member for North Cornwall (Mr. Tyler) deliberately sought to mislead the House or whether he merely made a mistake. In his catalogue of gloom and doom, which was aimed not at the Chamber but down the road in Berkshire and Newbury, he quoted an unemployment figure of 4,033. It was typical of the Liberal Democrats because that was the figure for February. March's figures show a fall in 871 unemployment of 77 to 3,956 in Newbury, which is a bit of good news that the hon. Gentleman was not prepared to share with the House.
§ Mrs. Knight
My hon. Friend makes an excellent point, and I hope that the hon. Member for North Cornwall (Mr. Tyler) will withdraw his remark.
§ Mr. Tyler
I am sorry that the hon. Lady has been so misled by the hon. Member for Chelmsford (Mr. Burns). The change from March 1990 to March 1993 is almost precisely the same figure as that to which he referred, so my argument stands. If the hon. Gentleman makes the comparison, he will see that I am right. There has been a substantial increase in the past three years. The figure may have marginally decreased over the past month but, as Ministers keep telling us, one month does not make a whole year.
§ Mrs. Knight
The hon. Member for North Cornwall has made it clear that he does not welcome a fall in unemployment, whereas my colleagues look forward to further falls in Newbury, Erewash and elsewhere.
In the east midlands, companies, institutions and organisations—be it the Confederation of British Industry, the chambers of commerce or the businesses themselves—have quietly been saying for some time that the recession is over. In my constituency, lace manufacturers, car component and iron pipe manufacturers, and the retail and housing sectors are all improving. They now have fuller order books and they are anticipating continuing improvements in the economy.
I listened carefully to the speech by the hon. Member for North Cornwall and I was sorry that he did not elaborate on his party's site valuation proposals. My hon. Friend the Member for Southampton, Test (Mr. Hill) made it clear why the hon. Gentleman had kept quiet. It is very important to consider those valuation proposals carefully because, under the Liberal party's system of site value rating, smaller businesses could be charged the same rate for a one-storey shop as a multinational corporation will be charged for an office block. If the same rate is charged for an economically under-utilised site such as a garage as for an office block, which the Liberals propose, it will create a strong incentive to overdevelop land. That is not what I would wish to see, and I suggest that the Liberal Democrats re-examine their proposals more closely.
I should like to consider UBR from another angle. I represent an area that has made substantial gains as a consequence of the introduction of the uniform business rate. Companies in the midlands and the north were very highly rated for many years because of the way in which their local authorities chose to levy excessive rates on local businesses. Often, companies in the midlands and the north despaired of anything being done to prevent such excessive rates being levied, and when the late Lord Ridley introduced the uniform business rate, they welcomed the fact that it would enable them to expand in the historically more depressed parts of the country. Last year, there were accelerated gains for the gainers, and companies in my constituency and across the east midlands welcomed the changes.
I have a personal interest in these matters because of the many years I spent working in industry. I have a further interest because I come from the north and now represent a constituency there. It is not an exaggeration to say that, 872 for many years, businesses in that area were badly affected by high rates or that companies were leaving and taking with them the jobs that they would otherwise have created.
My hon. Friend the Member for Bromsgrove (Mr. Thomason) gave some examples of the variations in rates between one authority and another. However, the problem was not only the rates themselves but the fear of what would happen next year. Local authorities would decide how much they wanted to spend and, once they had decided that, would levy a high rate, much of the burden of which would fall heavily on the business community. That meant that the business community was unable to plan ahead properly. Of course, the high-rated areas were Labour controlled, so the move to the uniform business rate was absolutely essential.
I was very worried by the proposal by the hon. Member for Newcastle upon Tyne, North (Mr. Henderson) that the business rate should once again become the responsibility of local authorities. He presented his case in a moderate, reasonable and restrained manner, but many of his colleagues in local government are not reasonable or restrained individuals. Those people, whose actions penalised companies, cannot be allowed to regain control of the business rate and therefore over the economy of the local area.
The hon. Member for North Cornwall—[HON. MEMBERS "Where is he?"]—has sadly seen fit to leave the Chamber rather than listen to the debate on the rating system proposed by his party.
§ Mrs. Knight
My hon. Friend makes a good point. The Liberals' absence shows the contempt with which they treat business.
The hon. Member for North Cornwall said that all local authorities should not be condemned because of the failings of a few. He has now returned to the Chamber, and I tell him that it was not just a few local authorities that failed. Too many failed their areas by levying too high a rate. In any event, what would the hon. Gentleman's proposals, or those of the Labour party, do for companies in areas where the local authorities continue to penalise companies in that way? They would leave companies to suffer the sort of interference and penalty through high rates, which would prevent businesses from expanding. It is essential that the business rate be kept independent of local authorities.
I shall examine briefly local authority expenditure in my area.
§ Mrs. Knight
The hon. Gentleman has deliberately chosen to mislead the House by misrepresenting my argument. I shall return to the subject of local authority expenditure in my area.
§ Mrs. Knight
If I may expand my argument for a moment, I shall give way later.
What exercises my constituents and other residents of the county is their concern for the way in which the county council spends money on education or; in some parts it fails to do so. They are also worried about the way in which the local police force has been hampered in the excellent job that it does by the county council's failure to give it the funds that it requires. That is what is happening now, and that is why business rates should not be put back into local authorities' hands.
There are many competent local authorities in this country but, sadly, there have been too many excesses and too much mismanagement.
§ Dame Elaine Kellett-Bowman (Lancaster)
Does my hon. Friend agree that the county council's policy of paying for nuclear-free zones is of no advantage to business men in Lancashire?
§ Mrs. Knight
My hon. Friend makes an excellent point. We all know how well she speaks for Lancashire, how supportive she is of local people in that county, and how well she exposes the failings of Lancashire county council, as she has just done.
In an ideal world, everyone would have a say in local government and in how money raised locally should be spent. However, we all know that that is not the reality. In practice there are low turn-outs at election time and many areas have been held year after year in the grip of the same group of councillors. I do not believe that the House could seriously propose to leave business to its fate under local authorities, as the hon. Member for Newcastle upon Tyne, North (Mr. Henderson) has suggested.
I do not think that there is any such thing as welcome taxation. Surely no one would put up his hand and ask to be taxed more heavily. But in local taxation as in national taxation, there has to be fairness, and there is fairness in the uniform business rate, which has been seen across the midlands and the north of England. If one talks to the business community and to business organisations, as my hon. Friends and I do, they tell us that their overheads must be kept down. They say that interest rates, too, must be kept down, and the Chancellor of the Exchequer has achieved that over the past few months. Business men also want their rates bills to be frozen, which is what the Bill proposes.
§ Mr. Mudie
Does the hon. Lady agree that those same business men are the first to criticise, vocally and in the press, the standards of the children coming through our education system? Are they not the first to say that those standards should be improved? Yet the same business men who criticise the education system are those who tell the hon. Lady that although they want standards to rise, not only will they not contribute more, but they wish to contribute less.
§ Mrs. Knight
The hon. Gentleman is correct to say that the business community criticises education standards; that is why it is so important that tests take place this summer in our schools for seven-year-olds such as my son and for 14-year-olds. I hope that the hon. Gentleman will support his business community and join my hon. Friends and myself in urging all the teaching unions to forget 874 about the boycott and to get on with testing those children. However, we had the education debate last week, so I must return to business rates.
It is stability in the rating system that is so important to businesses. That gives them the opportunity to plan for their future. It is important to ensure that there are no big increases, and no big changes year after year in companies' business rates. The UBR and the changes proposed today make an important contribution in that respect.
§ Mr. Paul Murphy (Torfaen)
I am pleased to be able to say that the Opposition will support the Government on the Bill, and I am pleased, too, that The Parliamentary Under-Secretary of State for the Environment, the hon. Member for Hornchurch (Mr. Squire), is present, as he was a year ago almost to the day, when we dealt with the Non-Domestic Rating Act. I suppose that this is his annual foray into matters Welsh. I shall not go too deeply into such matters, but I shall make one or two general points about what has occurred in this interesting if short debate.
My hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson), and the hon. Members for Southampton, Test (Mr. Hill) and for North Cornwall (Mr. Tyler) all, rightly, referred to the recession and to the fact that small businesses—and, indeed, other business —had been seriously affected by it over the past few years. The newspapers this morning all say something along the lines of, "Recession is over—official".
However, in Wales there are still some 50,000 young people unemployed, we have lost 30,000 manufacturing jobs, unemployment costs us £1.2 billion and there are 17 claimants chasing every job, and businesses have gone under at an alarming rate—there were 2,425 business failures recorded during 1992, which represents an increase of 26 per cent. on the 1991 figure, and there were 1,728 bankruptcies, which represents a 38 per cent. increase. I fancy that, if the journalists came to Wales and wrote headlines saying that the recession was over, the idea would be seen to be nonsense.
None the less, we welcome the Bill, as we welcomed last year's Non-Domestic Rating Act, because it will ease the burden on small businesses. But we must ponder the amount of money that will be made available. For example, the Government can now find £9 million this year and £5 million next year to make up the shortfall to local authorities. That contrasts significantly with the statements and debates that took place in the Chamber some months ago when we debated the revenue support grant settlement for Welsh local authorities.
The counties and districts in Wales agree that that was the worst settlement ever. There have been cuts in education, in social services, in the police force and in all the services that are vital to the business community—and vital too, of course, for inward investment.
The hon. Member for Erewash (Mrs. Knight)—[Interruption.] The name of her constituency is as difficult to pronounce as the name of my own. The hon. Lady mentioned stability. Businesses in Wales are yearning for stability in the local government system, yet stability is the very thing that we have not had in local government finance. In 1988, the Under-Secretary of State and I served 875 on the Committee that considered the poll tax during its three-month passage through the House. We agreed then on the issues—as, in a sense, we agree today.
There have been enormous changes to local government finance in just a few years. The hon. Member for Bromsgrove (Mr. Thomason) referred to changes that my party might want to introduce in local government financial institutions. When we consider the huge change that occurred as a result of the fiasco of the poll tax, any change that we might bring about would pale into insignificance. Billions of pounds were squandered on having first to prop up the poll tax and then to replace it altogether.
My fear is that the local government financial system in Wales, and in Britain generally, is becoming discredited. In Wales especially, but also in England, one aspect is the so-called "gearing" effect. It means that local councils can do virtually nothing unless they increase their local taxes dramatically. That has distorted local government finance, and has meant that local authorities no longer have a proper revenue-raising function. In Wales, a 1 per cent. increase in expenditure means an increase of about 9 per cent. in the council tax.
Yesterday, for the first time ever in the Principality, the Secretary of State for Wales announced his ideas about which local authorities should be capped. Only one authority out of 45 in Wales has been capped and it is the authority of the Minister of State, Welsh Office. It is an authority that is not controlled by any one political party. The decision has meant that the whole subject of capping has been discredited in Wales, as has the fact that the Secretary of State is having to take Gwent county council to court over its budget. The whole thing is a sorry mess, and the sooner we get some stability in local government finance, the better for businesses and the better for our communities.
In many parts of the country, business rate arrears are high. Local authorities find it increasingly difficult to collect business rates. There is an increasing gap between business rate payers and council tax payers. In Gwent, for example, business rates over the past three years have increased by 1.6 per cent., whereas local council tax payers have had to face a 53 per cent. increase.
The chief question, which has exercised the minds of hon. Members who have contributed to this short debate, concerns the nature of the business rate and what we want it to be. It is not a local business rate; it is a national business tax. It bears no relation to the way in which rates used to operate, or to the way in which the council tax operates.
I believe that there is a vital link between local businesses and the local community, and that the link has been broken by the new business rate. All local authorities provide for businesses an educated work force, roads and infrastructure. In Wales, local authorities play an especially important role in economic development and inward investment. All my experience in 15 years as a member of a local authority was that local authorities and the business community saw great advantages in that direct link.
Large multinational companies in my own constituency agreed tremendously with what the local authorities were doing. They were very much involved in local authority matters, including the sponsorship of council activities. The sooner the link between business people and local authorities disappears, the worse it will be for democracy.
876 The business rate is no longer related to commercial activity or to a particular district. There may be a great steelworks or a massive factory in an area. It may provide employment, but it may also disturb the area. The fact that the business rate is now collected centrally in Cardiff or in London means not only that there is no link between business and the community, but that there is no link between commercial activity and the business rate.
The business rate should relate to the ability of business people to pay it. There should be a system of rebates related to the profitability of businesses with an annual turnover below a specific level. We are firmly of the view—
§ Mr. Simon Burns (Chelmsford)
I have listened carefully to the hon. Gentleman speaking up for businesses. The Labour party speaking up for the interests of business is about as convincing as Herod being in charge of a nursery.
§ Mr. Murphy
All I can do is describe my experience over many years, since local government organisation, of the relationship between my local authority, whether the county council or the district council, and the businesses in the area. I believe that the relationship has been healthy. That experience may not be repeated throughout the length and breadth of the country, but local government and local democracy are all about diversity. The great harm that has come from having a uniform business rate is that individual local authorities cannot determine their rate locally; they cannot set it, and they cannot collect it.
I am not the only person who makes that point. Sir John Banham, for example, said recently that the present systemreflects neither the ability to pay nor the level and quality of the local services businesses receive.He has a role to play in local government reorganisation in the months ahead.
§ Mr. Thomason
Does the hon. Gentleman agree that it was this Government who introduced a consultative procedure on local authority budgets with businesses, and that that procedure was opposed by many in the Labour party?
§ Mr. Murphy
Opposition comes to different things in different ways. The Under-Secretary of State was a firm opponent of the poll tax when it was introduced in 1988. The Government saw the error of their ways and rightly appointed the hon. Gentleman to be a very good Minister. There are differences in view on all these matters across the country.
As I said, it is healthy for a diversity of views to be held on these matters by local authorities in England and in Wales. That is what local accountability and local democracy are all about. Businesses play a vital role in our communities, and that is why we support the Bill.
The Secretary of State for Wales acknowledges that belief, because he appoints many business people to quangos in the Principality. The White Paper on Welsh local government reform is the only indicator of how the Government intend to develop their ideas on the future shape of local government. They propose a system of unitary local authorities which will be responsible for raising their own revenue.
When the Secretary of State for Wales reforms local government, he has a golden opportunity to set an example to the rest of the country, and to have another 877 look at the system of local government finance. I am not saying that the Government must change the council tax —they will not—but there are changes to be made. The simplification of the grant system would be something that hon. Members on both sides and members of local authorities throughout Britain would welcome.
There is a case for the business rate to be examined, as my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) said, and to be brought back into the local community. That opportunity should not be wasted. I urge the Secretary of State for Wales and the Government generally to rethink the whole question of local government finance when the reforms are introduced.
We support the Bill, but we recognise that it is a short-term expedient. It does not answer all the problems that face the country and local government in terms of how to finance local government, and it does not explain what the relationship between businesses and local authorities should be. I hope that the Government will address those matters in the months ahead.
§ The Parliamentary Under-Secretary of State for the Environment (Mr. Robin Squire)
It is a great pleasure to follow the hon. Member for Torfaen (Mr. Murphy). As he said, we have followed each other for several years both in our previous role as Back Benchers and as "Box and Cox", or whatever the phrase is. It is nice to do so. He raised points to which I shall refer in my speech, as have other hon. Members.
I shall start by reminding the House that the Bill will provide a further £350 million boost to businesses this year on top of the £1.25 billion package that was introduced last year. We calculate that it will ease rate bills for some 400,000 small business premises and 100,000 larger ones.
As with the changes we made last year, local authorities will not suffer from the reduction in non-domestic rate income brought about by the Bill. The Government are committed to refunding the national pool to the extent of the estimated loss. We will also allow local authorities to net off their reasonable costs of re-billing from their national non-domestic rate payments.
We will need a short period—about a month—after enactment to introduce regulations governing the adjustment of rate bills that have already been issued and to enable local authorities to recalculate their contributions to the non-domestic rating pool. We will bring the Act into force in parallel with those regulations. Once in force, the Act will have retrospective effect to 1 April and authorities will be required to give refunds to ratepayers who have overpaid instalments in the meantime.
The debate was interesting, and I shall refer to some of the earlier speeches. The first Opposition speaker, the hon. Member for Newcastle upon Tyne, North (Mr. Henderson), highlighted some of the sad realities of the recent recession. There is no division between Conservative Members and Labour Members on that. The recession has had a terrible impact on a number of businesses and on many individuals.
In the context of the Bill, let us not forget—as some of my hon. Friends rightly reminded the House—that before the uniform business rate, many businesses were being hammered year after year by Labour councils up and 878 down the country. The figures are clear. Between 1979–80 and 1989–90—the last year of the old system—locally set non-domestic poundages rose by 37.4 per cent. more than inflation on a compound basis nationally. Some of my hon. Friends who spoke today were councillors in opposition and saw that at first hand. My hon. Friend the Member for Erewash (Mrs. Knight) immediately comes to mind.
By replacing locally set non-domestic rate poundages with uniform national poundages which cannot increase faster than inflation and by pooling and redistributing the proceeds of the business rate on a per capita basis, it is no longer possible for authorities to increase expenditure, knowing that businesses will meet much of the extra cost.
§ Mr. Squire
I shall willingly give way to the hon. Gentleman when I have finished this point. Although he has just come in, we would not like to disappoint him. If the uniform business rate had not been introduced, businesses would have paid £842 million more in 1992–93 and £797 million more in 1993–94.
§ Mr. Turner
I shall simply make this point. It is the height of cheek and hypocrisy for Conservative Members and the Minister to blame Labour local authorities for increasing rates during the period to which he referred, when in fact it is a direct result of the Government's failure properly to fund local government. The Minister should tell us how much was lost to local government in rate support grant settlement over that period. Every year, your Government cut support for local government. When Labour and Conservative local authorities had to increase rates, it was a direct result of your Government's policy.
§ Mr. Deputy Speaker (Mr. Michael Morris)
Order. It is the hon. Member's Government, not "your" Government or my Government.
§ Mr. Turner
Indeed, I am referring to the Minister's Government. How can the Minister use such cheek to imply that it was Labour local authorities' fault that rates increased during the period he quoted, when he knows that it was a direct result of his Government's failure properly to fund local government?
§ Mr. Squire
The hon. Gentleman was entertaining but not factually correct. I recommend that he go to the Library. He will find that the amount of support for local government during much of the period to which I referred increased rather than decreased. To help him a little more, I suggest that, if he looks under S for Sheffield, he will find a prime suspect in the area to which I was referring.
§ Mr. Henderson
I refer the Minister to his figures about the savings to business as a result of the introduction of the business rate. Does he accept that those figures must be put in the context of a subsidy from central Government and taxpayers generally? During the debate on the Non-Domestic Rating Bill on 2 June 1992, the Minister for Local Government and Inner Cities made it clear that the cost to the central Exchequer of protecting the business community from the introduction of the national business rate was £1,250 million, which is almost greater than the figure that the Under-Secretary of State claimed was saved by the business community. What has happened is that, 879 generally, the taxpayer has subsidised the business community. I do not necessarily disagree with that, but the figures must be put in that context.
§ Mr. Squire
That is an interesting interpretation. I think other hon. Members will agree that there is a significant difference between the amount of Exchequer support which we are debating now, and which we debated on an almost identical Bill last year—the hon. Gentleman quoted the correct figure—and the tendency, until recently, for a number of local authorities to let rip as far as the private sector was concerned. That is the context in which I am speaking.
Before I leave that aspect of the debate I shall refer to the democratic argument. I note that Labour Members want to revert to such a system and suggested that in some way it would bring greater accountability. Frankly, I do not accept that. My hon. Friend the Member for Southampton, Test (Mr. Hill) has said that there is no such thing as a business vote—nor is there any intention of introducing one. In the absence of such a vote, the concept of accountability as I understand it would be sadly lacking if such a proposal were entertained.
§ Mr. Murphy
It is important to understand the point that we made earlier about the gearing effect. Having taken control of the business rate away from local authorities, the amount of money that is left for local authorities to control is limited. That distorts the local government finance system.
§ Mr. Squire
It is an arithmetical fact that there is a gearing effect in England, Wales and Scotland—I cannot deny that. That does not, in itself, deny the advantages which the concept of the uniform business rate has brought to businesses in general.
I was referring to the speech of the hon. Member for Newcastle upon Tyne, North. I welcome his welcome for the measure, which was echoed by hon. Members on both sides of the House. He rightly said that the measure would be welcomed by businesses across the country. He then tried to get me to estimate the national non-domestic rate for 1994–95. His tongue might have been slightly in his cheek at the time. He knows that it is unrealistic to estimate that rate at present. Obviously, we must continue to be guided by the state of the economy and the impact of residual increases on big and small businesses. The hon. Gentleman will know that, under legislation previously passed, the maximum will be limited to the inflation rate, rather than the impact of past revaluation.
It is a little early to say what transitional arrangements may be needed to phase in the results of the 1995 revaluation. We have always said that we will examine the outcome of the revaluation before deciding whether transitional relief will be needed. By April 1995, many businesses will not have reached their full bills under the 1990 rating list, as the hon. Gentleman said. That is one factor that we will need to take into account, although many businesses may well find that their post-1995 bills are much reduced, reflecting relative changes in business rates between the valuations.
I can reassure the hon. Gentleman on his specific point. If any business which faces an increase under the 1990 revaluation does not reach its full payment, any increases under the 1995 revaluation will be by comparison with the amount paid in 1994–95 rather than the amount that would have been paid if protection had not been available.
880 The hon. Member for North Cornwall (Mr. Tyler) referred to the fall in business rate revenue. The distributable amount of business rates has fallen since 1991–92. That is, indeed, partly the result of the recession, which has led to an increase in empty property relief. A second factor which is equally important is the effect of rating appeals. Increasing numbers of appeals are now being decided, as my hon. Friend the Minister for Local Government and Inner Cities said.
Repayment of rates following appeals may relate to the whole period from 1 April 1990, but the entire cost falls in the year in which the repayment is made. Therefore, the yield of business rates is likely to rise again once the peak of appeals has passed. Any changes in business rate yield will, of course, be compensated for by revenue support grant pound for pound within the published plans for external finance.
My hon. Friend the Member for Bromsgrove (Mr. Thomason) spoke with all the experience of a former senior local authority councillor. I assure my hon. Friend that, notwithstanding his nervousness at the appearance of support from the Opposition Front Bench, he is right to support the Bill. He pointed out how much impact the measure would have and how welcome it would be to business ratepayers in general.
My hon. Friend was the first hon. Member in the debate to highlight the failings of site value rating, which subsequently became almost a separate debate in itself. I wish to put on record just some of the reasons why site value rating would be a poor system and a poor substitute for the current system which is the subject of the Bill.
Site value rating would be a tax on a small number of owners rather than on many occupiers. It would be a hidden tax on the latter through rents. We would need a register of beneficial owners. Site value rating would involve indentifying the development potential of each and every parcel of land. It would require detailed evidence of land sales and prices in each area. It would be unfair to owners if existing convenants and contractual arrangements meant that land could not realise its development potential.
Perhaps as importantly, if site value rating was limited to where planning or zoning permission had been obtained, any competitor, other developer or business could apply for planning permission on someone else's site. The consequence could be to drive the business out. That seems a strange way to encourage business. I urge the Liberal party to rethink.
§ Mr. Tyler
I am grateful to the Minister and his colleagues for paying so much attention to my party's policies. That is a new experience for me. I wish to pursue the Minister's last point because I know something about planning. Is he aware that it is now widely regarded as unacceptable for someone who has no interest in land to be in a position to make a planning application for it? If that is the Minister's main objection, as it seems to be, does he accept that there is in any case considerable anxiety about that feature of the planning system?
§ Mr. Squire
I listed several reasons why site value rating was inadequate. On the hon. Gentleman's specific point, he will be aware that it is likely that more than one person will have an interest in any site, land or property. It could be a tenant, the landlord or a putative purchaser. A range of people could have an interest. The hon. Gentleman 881 described the existing law. I was simply interpreting his remarks. It was not clear whether in the event of a Liberal Democrat Government being elected—the House should not hold its breath—site value rating would be introduced.
I am grateful to the hon. Member for North Cornwall for welcoming the measure, in company with the other hon. Members who spoke. However, it was a bit rich, virtually in his first minute and the day after quarterly GDP figures were announced showing an increase for the first time in three years, for the hon. Gentleman to suggest that my hon. Friend the Minister had denied a recovery. It is simply untrue. My hon. Friend not only highlighted it, but put it in context, as a re-reading of Hansard will show.
It is possible that the recovery is badly timed for the Liberal Democrats whether in the context of the county council elections or that of the Newbury by-election. However, the hon. Gentleman will understand if I say that the vast majority of people welcome the recovery notwithstanding any difficulties that it may give the hon. Gentleman.
The hon. Gentleman said that it was interesting that, out of all the figures for Newbury, we mentioned the figures for only one month. But the figures have fallen for two months and Newbury's rate of unemployment at 7.1 per cent. is well below both the Great Britain and EC averages. I shall be delighted if the hon. Gentleman's speech is widely circulated in Newbury in the next two weeks. It will not add one vote to the Liberal Democrats' likely haul.
§ Mr. Tyler
Of course we all welcome any reductions in unemployment, even if they are only in one or two months. I wish that we had a dramatic reduction in unemployment in my constituency, but sadly that is not the case. In my speech—I am sure that the Minister was paying careful attention—I compared the position of small businesses before the introduction of the uniform business rate in 1990 with now. That is why I picked 1990 and 1993. I made a comparison over a three-year period. I know that the Minister is an honourable, honest and fair-minded man. He will accept that over a three-year period there has been a substantial increase in business rates, whether one takes February, March or any other month.
§ Mr. Squire
I am not sure whether I should continue with my modest, up-beat comments based on fact or look backwards to what has happened in the past three years. I judge that on balance most people prefer to look forward rather than back, so I shall keep going with my speech.
The hon. Member for North Cornwall made some comments about tourism. Seasonality of use is taken into account in rates assessments. If a holiday resort is open for only a limited period in the year, that will be reflected in rents and hence in rateable values. Any change in economic circumstances such as a shorter summer season is taken into account at revaluation. Any change made within the life of an existing list would cause a loss of revenue from rates which would have to be made up elsewhere in the tax system. That would be unfair.
The hon. Member for North Cornwall correctly pointed out that several local authorities under all forms of political control had been rather slow in applying section 49 and providing hardship relief. I underline from 882 the Dispatch Box that hardship relief is available where there is genuine hardship. I was not sure whether the hon. Gentleman suggested that because the take-up had been low, the Government should centralise hardship relief. I hope that he was not suggesting that. If he was, it runs counter to the actions of the Government in devolving decision making to local authorities. It also runs against what his party normally stands for.
§ Mr. Tyler
I am grateful to the Minister for giving way yet again. As he seems to be so interested in my speech, I hope that he will forgive me for interrupting. The point that I made was clear. If the Government were prepared, within the criteria, to fund hardship relief 100 per cent., clearly local authorities would feel a great deal less inhibited in providing the hardship relief which he and I agree should be available.
§ Mr. Squire
The whole point of the system—I know that the hon. Gentleman knows this—is that it gives local authorities discretion to determine hardship. If we provided 100 per cent. support, we would do precisely what I thought that the hon. Gentleman would not support and take the decision into central Government. Hardship is better determined by a local authority. I join the hon. Gentleman in urging its wider use by local authorities.
My hon. Friends the Members for Test and for Erewash made strong speeches, drawing on their experience of small business and local government. They correctly spelt out the gain that businesses will make under the measure.
The hon. Member for Torfaen spoke, as I expected him to do, about the gearing effect and the relationship especially in Wales between central and local government support for local government expenditure. He will know that prior to setting the levels of total standard spending and aggregate external finance for 1993–94, the Secretary of State for Wales took account of the view expressed by Welsh local authority associations that the proportion of revenue raised locally in Wales should be increased. The lower level of increase in the additional aggregate external finance of 1.7 per cent., relevant to that of the total standard spending, means that Welsh local authorities are able, on average, to raise about 10 per cent. of their income from the council tax, which represents an increase of more than 1 per cent. on the figure for 1992–93.
The hon. Gentleman also raised the spectre of further reform of local government finance. I beg the hon. Gentleman as a Minister and as an individual, although I am not allowed to hold a separate view, to ignore that siren call. The hon. Gentleman and I have sat on many Committees and we know perhaps better than other hon. Members just how difficult it is to reform that system. I believe that the system now in place for the collection of local business and personal taxation will last and will be welcomed by the overwhelming majority of people.
The overall effect of the Bill is that no business will end up paying more rates in real terms this year than it did last. The Bill is important and worth while. It is well targeted on those businesses that have borne much of the brunt of the recession and I urge the House to support it.
§ Question put and agreed to.
§ Bill accordingly read a Second time, and committed to a Standing Committee, pursuant to Standing Order No. 61 (Committal of Bills).