FINANCING OF LOCAL GOVERNMENT IN WALES (Hansard, 15 June 1994)

§ Mr. Wigley
I beg to move, That the clause be read a Second time.
New clause 6 deals with an essential aspect of local government: finance. I tabled the new clause very much as a probing new clause because in our discussions so far on the Bill we feel that the question of financing local government in Wales has not been adequately dealt with.
As hon. Members will see, under new clause 6 the Secretary of State would, within six months of the Act coming into force, report to Parliament on methods of restructuring the financing of local government in Wales. The new clause looks specifically at three aspects: first, the possibility of raising a local income tax and taking a proportion of value added tax or corporation tax within Wales; secondly, a levy on second homes; thirdly, the abolition of council tax and the uniform business rate.
I do not apologise for pressing this matter at this stage, because I had thought that we might be moving towards coherent consideration of local government financing as well as structures when on 5 December 1990 the then 724 Secretary of State for the Environment made a statement to the House and mentioned doing away with the hated poll tax. He made it clear when discussing that tax that he believed that there was an argument for considering the structures of local government along with its financing, which appealed to us very much.
Back in the 1970s, we gave some substantive evidence to the Layfield committee when it considered the financing of local government. In paragraph 3 of our evidence, we stated that finance should not be considered in isolation from local government boundary structures or functions … we believe all these aspects of local government to be interdependent. We warmly welcomed the Government's comment in 1990 that they were considering finance and intended to consider structures and functions at the same time.
9.45 pm
Thinking back to Layfield in the mid-1970s, it is worth noting that the committee came out in favour of a local income tax. On page 281 of its report, it stated that local income tax is a feasible source of local revenue for non-metropolitan counties, metropolitan districts, Scottish regions and islands authorities, and possible London boroughs. If that was possible in the 1970s, how much more practical and possible is that source of finance for local government now, with the move to the computerisation of so much information? If the argument was valid then, it is even more valid now.
Let us consider the pattern in other countries. Many of them source a good proportion of local government revenue from taxation on income and profits. In Sweden, Finland, Denmark, Norway, Switzerland, Luxembourg, Germany and Belgium, more than 80 per cent. of local authority income comes from taxation on income and profits. My figures are from the late 1980s and may have changed a little during the past few years. That is a far more acceptable means of raising income for local government as it is more progressive.
We all know about the anomalies of the council tax system. It may not be so bad as the poll tax system, but it contains serious anomalies and causes serious hardship. To make the system in any way acceptable, the Government have had to move more and more to financing local government in Wales from the central Exchequer so that only a small proportion of Welsh local government income comes from its variable, independent source of finance—the council tax. I shall give the figures in a moment.
The freedom of local government is eroded if it does not have the financial freedoms and responsibilities which go hand in hand. One of the problems is that if one moves to a system where up to 90 per cent. of local authority income comes from a central Exchequer by way of rate support grant, revenue support grant, or whatever the terminology may be at the time, it enables central Government to put stringent conditions on the money which goes to local government and necessarily takes away its freedom.
Our new clause, which ensures that the Secretary of State will report on other possibilities, suggests that a certain proportion of the value added tax raised in Wales should go, as of right, to Welsh local authorities. After all, the tax is highly geographically definable because it arises at a certain point which, in computer terms, can be cross-coded to postcodes and easily identified with local authority areas. Of the 17.5 per cent. raised in VAT, a certain proportion—perhaps 3 percentage points—should 725 go automatically to local authorities. Likewise, a proportion of corporation tax—10 per cent., or whatever —should go to local authorities.
By ensuring that those proportions of central taxation go to authorities as of right, and by ensuring flexibility in local income tax, we could do away with the council tax and the uniform business rate. There is no doubt that the uniform business rate is a severe burden. It is an overhead which in times of recession can pull down businesses which would otherwise be viable. It is a fixed cost, whereas a proportion of corporation tax—or, if it is a non-incorporated business, a local income tax—is variable with income, so if income goes down it is not a fixed cost which pulls down the whole viability of the business. I believe that those questions deserve attention and that attention should be in the context of the structures, boundaries and functions of local government.
I mentioned the dependence in Wales on grants from the central Exchequer. I shall look next at the council tax as a proportion of the total income of local authorities in 1993–94. We must bear in mind the fact that the council tax is the only independent income that we have of any significance. There may be sundry and miscellaneous incomes, but those are usually very small.
In Mid Glamorgan, the council tax represents only 9.5 per cent. of the total income of the authority. In other words, 90.5 per cent. comes from sources outside that authority, and the freedom of that authority has been severely eroded. The figure in Powys is 12 per cent, in Gwynedd 14 per cent., in Dyfed 14.4 per cent. and in Clwyd 15.2 per cent. The average for all Welsh counties is 12.5 per cent.
With districts, the position is even more grotesque. In the Rhondda, the value of the council tax as a proportion of total income is 5.3 per cent., which means that some 94.7 per cent. comes from other sources. We cannot have genuine local freedom in local government when the variable proportion of the income is greatly limited.
As for the overall position in Wales, the total 1993–94 figures of all incomes for district and counties in Wales combined is £2,452 million, of which the council tax provides £297 million. That emphasises the point.
If 3p of the 17.5p in the pound of VAT came as a right to local government, it would generate about £300 million in Wales. If 10 per cent. of corporation tax came through to local government, it would generate £100 million. A local income tax of something like 4p in the pound—that would be the variable element, because the other two are parts of central Government taxation, although we feel that they should accrue to local government—would generate £400 million. That would give something like £800 million as of right, compared with the figure of just under £300 million which we are talking about now.
That £800 million would be unfettered income and would not be subject to the stringent controls which inevitably must come from a Government who have the opportunity to put conditions on the grants that they pass out. Such considerations should be taken on board at this stage. I believe that it is irresponsible for us to be setting up structures and functions of local government without looking at the finances.
If local government is to provide genuine local democracy, it must have the responsibility and the freedom to undertake policies in line with the needs of any area. Clearly, there are poor areas in Wales and there must be an equalisation function coming through from the central 726 Exchequer, via the Welsh Office. I accept that any variable independent sources of that kind would probably never be more than 30 to 40 per cent. because of the importance of maintaining standards in areas of deprivation.
In allocating grants to areas, there needs also to be a close scrutiny of what criteria are used and what considerations come into play for the allocation to meet the local circumstances. For example, there clearly has to be consideration of deprivation, sparsity and demographic factors in any area and these possibly need to be fine tuned. We are always playing with them, and they are complex in the model that we have at present, but something needs to be done to make sure that money is going by way of equalisation to the areas that really need it, and that areas generally have much greater freedom with regard to their finance.
In moving the new clause and in calling for a report, we are in no way undermining the Bill. The suggested time scale to assemble thinking on the restructuring of local government finance is not unreasonable. If we do not provide for such a rethink in the Bill, the Government will have no other chance to reconsider in depth local government finance in Wales. Given the nature of the Bill, and at this stage in its proceedings, I realise that we cannot do any more than I have suggested, but my suggestion is well worth consideration. The relevance of such a report goes beyond Wales, but it should certainly be considered in the context of Wales.
Given the spirit in which I have introduced the new clause, I hope that the Government will be prepared to take on board my suggestions and will find some positive way to respond.

§ Mr. Murphy
The hon. Member for Caernarfon (Mr. Wigley) has rightly raised the issue of local government finance, which was dealt with rather perfunctorily on Second Reading, in Committee, and now on Report.
The new clause presents the Government with an opportunity to reconsider some of the anomalies of the local government finance system. They should consider returning the business rate to local authorities, and in the short term they should certainly examine the number of bands in the council tax. They should, unquestionably, reform the system of standard spending assessments to make them more intelligible. They should also abolish the capping of local government.
I hope that the Minister will be able to answer one specific question about local government finance. It arises from a written answer from the Parliamentary Under-Secretary of State for the Environment published in Hansard today. It refers to the remuneration of members of local authorities. We should consider capping in conjunction with the remuneration of councillors. I understand that a letter has been sent to all the local authority associations asking for their views on the Government's proposal to change the way in which members of local authorities are remunerated—and about time, too.
The Labour party entirely agrees with making a change for the better because many people are discouraged from 'being local authority members because of the appalling remuneration that they receive. If the proposed change means, however, that a local authority has to pay every single penny of the remuneration, that could mean that it is penalised under the capping regime.
727 Does the consultation process on remuneration apply to Wales, bearing in mind that we are in the middle of a reorganisation? What are the Minister's views about the possibility of capping as a result of the remuneration of councillors under the new proposed regime?

§ Mr. Gwilym Jones
Other than under a deeply philosophic guise, I cannot agree with the hon. Member for Caernarfon (Mr. Wigley) that this is the right time to introduce a report on the restructuring of local government finance, even if it is designed only to initiate the first stage of such a review. As the hon. Member knows, we are not proposing any changes to local government finance in the Bill. The arrangements will continue unchanged from the current councils to the new ones. I therefore do not think that it is appropriate to pursue this probing new clause and I suggest that the House should not accept it.
I should like to take the opportunity to say that I believe that the council tax has been well accepted by the council tax payers of Wales. It combines fairness with simplicity of administration and it overcomes those aspects of the rates and the community charge that were most criticised. It achieves accountability through a clear link between what councils spend and what local residents pay. In turn, under the uniform business rate, businesses benefit from certainty and stability. Increases in the poundage cannot exceed the increase in the retail prices index and businesses pay rates on a common basis. That has been a great step forward and underlines the desirability of making no change to local government finance.
The hon. Member for Torfaen (Mr. Murphy) asked about consultation and capping. I believe that the consultation exercise would give him the opportunity to pursue his questions. We look forward to studying the hon. Gentleman's detailed views on all those points, which will be taken fully into account when we consider the matter.

§ Mr. Murphy
With the permission of the House, Mr. Deputy Speaker. Local government in Wales needs an answer on what the Under-Secretary of State for the Environment said today. Does that consultation process now apply in Wales? Given that local government is in the process of reform, will our Welsh associations be asked specifically for their comments, and will whatever occurs in England in terms of remuneration of councillors apply also to Wales?

§ Mr. Jones
Yes, it certainly will. I look forward to hearing the views of the on those important matters