LOCAL RETENTION OF RATES

HC Deb 05 March 2003 vol 400 cc821-37

'(1) In Schedule 8 to the 1988 Act (non-domestic rating: pooling), in paragraph 4 (rules for calculating authorities' non-domestic rating contributions), before subparagraph (5) there is inserted—

"(4A) The rules may include provision for such deductions as the maker of the rules thinks fit for the purpose of enabling an authority to retain part, or all, of so much of the total payable to it in respect of the year under sections 43 and 45 above as exceeds an amount determined for the authority by or under the rules.

(4B) Subparagraph (4A) above shall not apply in the case of a special authority.

(4C) Subparagraph (2) above shall have effect subject to subparagraph (4A) above.

(4D) The consent of the Treasury is required to the inclusion in regulations under this paragraph of provision under subparagraph (4A) above relating to England."

(2) In paragraph 5(6) of that Schedule (contribution to be calculated after end of year and certified by Audit Commission)—

1. (a) before the word "and" at the end of paragraph (b) there is inserted—
1. "(ba) if it is an authority in England notify to the Secretary of State, and if it is an authority in Wales notify to the National Assembly for Wales, the amount of any deduction that in accordance with provision under paragraph 4(4A) above is made in calculating the amount mentioned in paragraph (a) above," and
2. (b) in paragraph (c), for "and the amount" there is substituted ", and the amount or amounts notifiable under paragraphs (b) and (ba) above,".

(3) In paragraph 5(6A) of that Schedule (Audit Commission to send copy of certification to Secretary of State or National Assembly for Wales), after "the amount" there is inserted "or amounts".

(4) In section 99 of the 1988 Act (regulations about English billing authorities' collection and general funds), after subsection (3) there is inserted—

"(3A) The Secretary of State may by regulations make provision—

1. (a) for the sharing among a billing authority and major precepting authorities, in accordance with prescribed rules, of an amount equal to all or part of any deduction that, in accordance with provision under paragraph 4(4A) of Schedule 8 below, falls to be made in calculating the billing authority's non-domestic rating contribution for a financial year;
2. (b) for requiring a billing authority to inform, within a prescribed period, any major precepting authorities of any amount that falls to be shared under provision under paragraph (a) above and of the effect of the rules governing its sharing;
3. (c) as to the manner in which any payments which fall to be made by a billing authority by virtue of any provision under paragraph (a) above must be made;
4. (d) as to the period within which, or time or times at which, any such payments or instalments of such payments must be made; and
822
5. (e) as to the recovery (by deduction or otherwise) of any excess amount paid by a billing authority in purported discharge of any liability arising by virtue of any provision under paragraph (a) above.

(3B) The rules that may be prescribed under paragraph (a) of subsection (3) above include (in particular) rules that require a billing authority, when making an estimate under that paragraph, to disregard amounts that fall to be shared under provision under subsection (3A)(a) above."

(5) In section 97 of the 1988 Act (English billing authorities: principal transfers between funds), after subsection (4) there is inserted—

"(4A) Where in accordance with regulations under section 99(3A) below a billing authority is required to share any amount, it shall transfer from its collection fund to its general fund so much of that amount as, in accordance with the regulations, it calculates to be its share."

(6) In section 99(1)(b) of the 1988 Act (regulations about liabilities of English billing authority under section 97(1) or (3) to transfer sums from its collection fund), for "or (3)" there is substituted ", (3) or (4A)".

(7) In section 38 of the Local Government (Wales) Act 1994 (c. 19) (council funds for principal councils in Wales), after subsection (9) there is inserted—

"(9A) The National Assembly for Wales may by regulations make provision for the sharing among a new principal council and major precepting authorities, in accordance with rules specified in the regulations, of an amount equal to all or part of any deduction that, in accordance with provision under paragraph 4(4A) of Schedule 8 to the Local Government Finance Act 1988 (local retention of rates), falls to be made in calculating the council's non-domestic rating contribution for a financial year."

(8) In subsection (10) of that section (provision that may be included in regulations under subsection (9))—

1. (a) for "The regulations" there is substituted "Regulations under subsection (9) or (9A)", and
2. (b) in each of paragraphs (d) and (e), after "the liability mentioned in subsection (9)" there is inserted "or any liability arising under subsection (9A)".

(9) In that section, after subsection (11) there is inserted—

"(12) In subsection (9A) "major precepting authority" has the meaning given by section 39(1) of the Local Government Finance Act 1992.".'.—[Mr. Raynsford.]

Brought up, and read the First time.

12.39 pm

The Minister for Local Government and the Regions (Mr. Nick Raynsford)

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

Mr. Speaker

With this it will be convenient to discuss Government amendments Nos. 19 to 23.

Mr. Raynsford

New clause 10 will provide for local authorities to retain some or all of the growth in business rate revenue for their areas. The proposals will allow us to introduce a scheme along the lines that the Chancellor announced in his 2002 pre-Budget report. The scheme will increase the incentives for business and local authorities to work in partnership, to maximise local economic growth and regeneration, while at the same time governing additional resources to address local priorities.

Any scheme introduced will generate additional revenues from increases in the tax base generated by local authorities successfully encouraging growth and not from increasing the tax on existing business. The money raised would be genuinely additional to local authorities and they will be free to decide how to spend it. The scheme will allow local authorities to keep only revenues associated with any growth in the business rate tax base and will not replace the current business rate pooling system. The business rate pool acts to reduce the unfairness of business rates and to ensure that revenues are distributed more equitably.

New clause 10 provides for a scheme in England, with rules set by the Secretary of State, and for Wales, with rules set by the National Assembly for Wales. The provision also allows the Secretary of State to implement arrangements for sharing the retained rates revenue between different tiers of authority. That will allow us to balance the need to furnish incentives to encourage business development with providing additional resources to the tier of authority that faces increased cost following business development. It is not the Government's intention that the new scheme should serve to reward only authorities that are already doing well, at the expense of declining areas. We are looking at a range of options to get the best distributional fit, with each local authority receiving an incentive that is relevant to them, while keeping the scheme as simple as practical.

We have also made it clear that local authorities will not bear the downside risk of a declining business rate tax base. We are considering options that will allow local authorities to benefit from the scheme, even though they are in economic decline, should they manage to slow the pace of that decline.

Mr. Edward Davey (Kingston and Surbiton)

On that point, will the right hon. Gentleman explain how on earth the Government will be able to measure relative economic decline and whether the actions of a local authority have managed to slow it?

Mr. Raynsford

The hon. Gentleman anticipates what I am about to say. We shall be consulting on the options, including the distributional consequences, in the summer. These are important issues and it is right that they should be considered by a range of people. We certainly expect there to be full and thorough consultation before detailed arrangements are put in place. There are technical points and issues of fairness that need to be addressed, as the hon. Gentleman rightly highlighted.

The provision is sensible and will allow for a new introduction—a new arrangement that will incentivise local authorities and help to build a better relationship between local authorities and business.

Amendments Nos. 19 to 23 are all consequential. I commend the provisions to the House.

Mr. Philip Hammond (Runnymede and Weybridge)

If my interpretation is correct, new clause 10, as the Minister for Local Government and the Regions has presented it, is an attempt to give local communities a stake in economic development in their areas. However, we should make it clear that, although the phrases "economic regeneration" and "economic development" were used in the ministerial statement published last week and in the Treasury document, we are actually talking about new buildings—new physical development and infrastructure.

The provision takes a new and interesting approach to fighting nimbyism by recognising the contribution to that syndrome of a lack of immediate fiscal benefit to the community from new developments. The Government are taking an interesting initiative, which is broadly welcome.

However, the new clause is only a small beginning. Will the Minister explain whether the Government intend to extend the principle? If I correctly interpreted the real underlying purpose of the provision, which the Minister may not have heard because he was busy conferring with his colleagues, and it gives communities that suffer the burden of new development some fiscal stake in the benefits from that development, are the Government considering extending that principle to council tax receipts? Could new housing development add to the fiscal benefits enjoyed by a community? That might make it easier for the Government to secure the support, or at least the acquiescence, of local communities in their attempt to impose the housing objectives that the Deputy Prime Minister has outlined over the past few weeks.

Regulations will determine the detail of the measure, and I was expecting the Minister to be rather more forthcoming in his opening remarks. I was expecting to be scratching through my notes with a blue pen because the Minister had answered the questions that I had intended to put to him. The House is being asked to add the new clause while knowing almost nothing at all about the detail of the proposals.

12.45 pm

Mr. Edward Davey

I might be anticipating the hon. Gentleman's speech, but does he agree that it is probably not appropriate to make this tax change using secondary legislation?

Mr. Hammond

The hon. Gentleman will remember that the Minister gave a pledge on Second Reading that the Government intended to make draft regulations available to the Committee before the regulation-making powers in the Bill were considered. The Minister has made no apology to the House for the fact that there are no draft regulations in this case, although we are of course considering the new clause for the first time. Indeed, I place on record the fact that, by and large, the Minister lived up to the commitment he made on Second Reading, and the Committee received a continuous supply of draft regulations, which greatly informed and enlightened the debates on those regulation-making powers.

Mr. John Bercow (Buckingham)

My hon. Friend will know that I was not one of that privileged, small group of hon. Members who were considered suitable to serve on the Committee, and I am anorakishly but legitimately concerned about the opportunity for all right hon. and hon. Members to debate such matters on the Floor of the House. Does he agree in that context that we need to know whether the regulations will be subject to the affirmative procedure or to its negative counterpart?

Mr. Hammond

My hon. Friend—who would, indeed, have been a fine addition to the strength of Standing Committee A—takes a great interest in the distinction between the negative and affirmative procedures, and it would be extremely useful if the Minister could clarify that point in responding to this short debate.

We are dealing with a slight gap in the armament of scrutiny, as we have had the benefit of the regulations only in relation to other parts of the Bill. The Minister talks about a consultation exercise in the summer, but it is simply not good enough that the House is being asked to agree to the new clause without any draft regulations or explanatory notes and, therefore, any indication of the Government's intentions. Are we talking about 5, 50 or 95 per cent.? Once again, we are being asked to vote for a pig in poke in agreeing to the new clause. Will the Government make anything available before the Bill is considered in the other place?

I should like to pick up two points from the very limited information that we have at the moment, which consists of the Treasury's pre-Budget statement, last week's ministerial statement, which repeated a chunk of it, and the Minister's contribution today, which repeated a chunk of that. It is clear that local authorities will retain a portion of new non-domestic business rates, but the statement refers to growth in the business tax base. It is not clear to me whether the Minister is contemplating that only a portion of that growth in the tax base attributable to new buildings will be included in any percentage to be retained, or whether he expects that revaluation increases—perhaps representing a general uplift in an area's economic tone—will be included in the amount from which a proportion will be retained.

I should like to understand a little more about the phrase "additional increases", which was used in the Treasury statement and, I think, repeated in the Minister's statement. I understand the term "additional non-domestic rates"; I understand the term "increases in non-domestic rates", but I do not understand the term "additional increases in non-domestic rates". I suspect that the Minister has in mind that there will be an amount of increase that the local authority must first achieve without receiving any retained percentage, and that only the addition above that increase will attract the retained percentage. Those are the kinds of things that we need to understand if we are to make an informed judgment about what the Minister proposes. Without draft regulations or any statement of Government intention, it is simply not possible for us to form a clear opinion.

Nevertheless, on the face of it, any empowerment of local authorities to keep even a portion of the non-domestic rate is welcome, and, I might say, in stark contrast to the Government's approach on capital receipts, which reduces the flexibility of local authorities. On a closer reading of the ministerial statement, however, I have one or two concerns about how straightforward the process will be.

Mr. Davey

Before the hon. Gentleman moves to a detailed analysis of this proposal, will he clarify that, in principle, the Conservatives are in favour of part of the increase in the business rate being kept locally? Can he explain how that is consistent with previous Conservative policies? It may be, but, for the benefit of the House, will he elaborate the exact Tory position?

Mr. Hammond

The hon. Gentleman and I have had these enjoyable exchanges on many occasions during proceedings on this and other Bills. It is our position that increasing local autonomy is right, and that genuinely community-based local government is the right approach. To the extent that it can be prudently done within the overall fiscal framework, the maximum possible autonomy should be accorded to local authorities.

The phrase in the Minister's short written statement of 25 February that has given me concern is the following: We are looking at a range of options to get the best distributional fit, with each local authority receiving an incentive that is relevant to them, whilst keeping the scheme as simple as practical."—[Official Report, 25 February 2003; Vol. 400, c. 9WS.] Anyone who has looked at a Government scheme relating to local government finance will know that "as simple as practical" must have a different meaning from the one that it would have to the layman. Could what at first looks like a welcome devolution of power back to local authorities, to allow them to keep a tiny fraction of their non-domestic rate income, be a complex system of specifically tailored incentives to local authorities to deliver on a specific Government agenda—in this case, facilitating the development of business property and infrastructure in the area? If that is how it works in practice, with different targets, thresholds and criteria for different councils, it will effectively be another piece of ring-fencing whereby local authorities get an additional slice of money only if they comply with a specific Government agenda and deliver on specific Government targets. The Minister shakes his head to imply that that is wholly wrong, but we simply do not know, because he has told us virtually nothing about this measure. We need to know how it will work, and how we can know that it will be fair and not just another mechanism for redistribution to the Government's favoured authorities.

Mr. Bercow

It certainly appears that the fog of confusion descending on this subject is becoming deeper by the moment. If moneys are to be shuffled back and forth in an uncertain way and in accordance with a labyrinthine formula, what assessment has my hon. Friend made of the principles on which calculations of entitlement to interest will be made?

Mr. Hammond

I can tell my hon. Friend with absolute honesty that I have made no assessment at all of that matter.

Mr. Bercow

Has the Minister?

Mr. Hammond

I suspect that the Minister, with the substantial resources available to him, is also not in a position to make any such assessment, precisely because we lack many of the relevant details about how the scheme will work.

Let me pick up on something that the Minister said in his brief contribution at the outset of this debate. To paraphrase, he said that this was genuinely new additional money and was not intended to interfere with the existing pooling system for national non-domestic rates. I do not profess to be an expert on local government finance. Indeed, one of the Minister's predecessors many years ago once remarked to me that only one person in his Department genuinely understood local government finance, and he was about to retire.

Mr. Bercow

It is like the Schleswig-Holstein question.

Mr. Hammond

As my hon. Friend says, it is like the Schleswig-Holstein question, often posed and never resolved.

The Minister says that this additional money will not interfere with the pooling system. I presume, however, that there is only one pot, and money that does not go into that pot because it is effectively top-sliced to the retaining local authority will not be there for distribution to other local authorities. That could have several consequences. The amount of NNDR received by all other local authorities that do not achieve the Government's threshold may be reduced, and Government grant, under the formula grant process, may be increased to make up the gap. If that is the case, perhaps the Minister could say so clearly. If that is not the case, taking anything out of the NNDR pot must reduce the amount for redistribution to other authorities.

The only other alternative is that there are no other authorities, and the so-called incentive scheme is so structured—or tailored, as the Minister calls it—that every authority gets to retain a slice of its NNDR, in which case the effect may be minimised, although that will make it difficult to see the benefits of the scheme. Can the Minister give a pledge, here and now, that grant will make up the shortfall in the NNDR pot available for redistribution as a result of top-slicing for retention by local authorities? The grant that is retained will therefore be genuinely additional to the total amount of money—council tax receipts, plus formula grant, plus NNDR redistributed—that that authority would have received had it not been for the top-slicing that the scheme involves. If the Minister can give that assurance, he clearly has the details of the scheme in his mind, if not on a piece of paper. Why has he not been able to share those details with the House?

I turn to a specific question, which I apologise for asking, as it is the kind of question that one would ask properly in Committee. When the Government introduce new clauses on Report, however, we must ask such questions on the Floor of the House. Proposed new subsection (3B) of subsection (4) of the new clause, which inserts new words into section 99 of the 1988 Act, refers to rules that may be prescribed under paragraph (a) of subsection (3)". I take that to mean subsection (3) of section 99. I have obtained the intranet print of the Local Government Finance Act 1988, and, although I find subsection (3) in it, I find no paragraph (a). Is that a typographical error? Does it mean to refer to the proposed new subsection (3A) to be inserted by the new clause? Perhaps the Minister will clarify that specific point when help comes to hand.

The principle of local retention is welcome, but it must be a genuine additional resource and not just a redistribution from one authority to another. The Government have said that no authority will suffer from negative business rate growth, but they have not said that none will suffer from the reduced size of the total NNDR pot for redistribution. Will the Minister give that assurance today?

The Treasury document and the ministerial statement have sounded alarm bells, and we need to see the regulations before we know whether their sounding is justified. I hope that the Minister will be able to explain why he cannot provide even an indicative outline of the Government's intentions in the way that he has done for some other clauses. Will he make a commitment today that such an outline will be available when the Bill reaches the other place?

1 pm

We will not oppose the new clause, but I hope that a substantive debate on the issues will be possible in the other place or, if for any reason that is not possible, when the regulations are laid. I still hope that we will be able to persuade the Government that the provision should involve a small first step to devolution of financial autonomy back to local authorities. The rest of the Bill certainly does not deliver that.

Mr. Edward Davey

The new clause puts me in a bit of a quandary. I want local authorities to have extra autonomy for their spending and local taxation, so allowing local authorities to retain part of the growth in the business rate is clearly a welcome step. However, the sheer complexity of the scheme that is likely to emerge from the consultation is mind-boggling, and not just in terms of working out how the increase will be measured but, as the Minister has acknowledged, in terms of working out how we will assess the relative economic decline of an area that does not have a growing business rate tax base. We will also have to assess whether there had been a reduction in the pace of that decline because of local authority action. All that shows just how complex the proposal is.

We should give credit to the hon. Member for Runnymede and Weybridge (Mr. Hammond). He talked about how the policy would sit alongside the pooling of the uniform business rate. If the Minister answers the hon. Gentleman's question in the affirmative and if it appears that grant will be paid back into the pool to compensate for any loss of rate proceeds, the grant side of the scheme will also be complex. One can imagine the regulations that will have to be introduced. We now realise why they were not ready for consideration by the House today.

We should be worried about complexity in taxation matters. The Government have made the whole tax system far more complicated, and that has put huge extra compliance burdens on businesses and individuals. The provision will place an extra compliance burden on local authorities, and we must try to work out whether the extra financial autonomy that will be gained as a result of this timid devolution of financial power is worth the extra complexity. The House and local authorities will have to consider that balance. Our conclusions will depend on their assessment of whether the proposal is a sensible way forward.

Because of the complexity, I wonder where on earth the scheme came from. As the hon. Member for Runnymede and Weybridge pointed out, it appeared in the Chancellor's pre-Budget report, so does that mean that it came out of No. 11 Downing street and the Treasury? It is a fiendishly complicated and clever scheme of the type that the Chancellor is very good at dreaming up. Did a certain Ed Balls help the Chancellor to dream up the scheme in the back of a cab or in a pub? It has that sort of feel. It does not appear that the policy has gone through rigorous analysis in the civil service. It is rather bizarre.

I am glad that the Government are committed to consulting widely with the Local Government Association and many other stakeholders. The consultation will have to be pretty extensive and involve the consideration of detailed proposals. I hope that we will have an early sight of any draft regulations before we scrutinise them in the House.

As I said in an intervention on the hon. Member for Runnymede and Weybridge, I am concerned that, because we know so little about the proposal's eventual form, the House will be asked to provide primary legislative agreement and will be able to consider the detail only in a Statutory Instrument Committee. The proposal will probably involve hundreds of millions of pounds, and the figure is likely to grow over the years. Therefore, one would normally expect to debate such a matter in a proper Standing Committee. Since I became a Member of the House, I have had the fortune or misfortune to serve on more than seven Finance Bill Committees. They consider tiny and minor tax changes, and we spend hours in a full Standing Committee debating the merits of tax change that is worth just a few million pounds. Although the Minister pumps this up as a major tax change, he says that it will be suitable for consideration in a Statutory Instrument Committee. I have problems with that, so I hope that he will try to convince me that this is the right route for the House to take.

I also want to probe the logic behind the Government's proposal. It seems that the Conservatives have now changed their position, so we can now all agree that it is right that local authorities have, to an extent, more control over business rates in their areas. Would it, therefore, not be logical to go further than the Government propose? Ever since the Government nationalised the business rate, Liberal Democrats have argued that there is a case for denationalisation and for handing back the control of rates to local authorities. We would do that fully and completely and not in the partial and minor way envisaged by this proposal.

Will the Minister reflect on our suggestion? He may try to keep his counsel, but he will know that the Government have set up the balance of funding review. That review is relevant to the debate, because it will examine how much of a local council's budget should be raised through local taxes and how much should come from central Government grant. The presumption is that the review will try to shift the balance so that more of a local authority's revenue comes from local taxes. Clearly, this proposal would be a small step in that direction.

Mr. Hammond

And the 55 per cent. council tax rises.

Mr. Davey

The hon. Gentleman refers to the huge rises in council tax, and he is right. Unfortunately, they may be part of the shift, though not a very welcome one. It is such an unfair tax.

However, before I am called to order, Mr. Speaker, I shall move on to the point that I was about to make. The Government have set up the review and, if they wish to change the balance, surely the business rate is one of the ways they could do that. Businesses are often in two minds about such a suggestion. In the past, they were worried that some local authorities would behave unwisely, levy too high a business rate and undermine economic activity. I presume that is why the Tories nationalised the business rate. I suspect that the proposal is framed in such a complex manner in an attempt to avoid that problem.

Other business people—and sometimes the same business person in the same conversation—will argue that, since the business rate was nationalised, their links with the local authority have been weakened. The dialogue between businesses and local authorities has been significantly reduced. That is certainly the experience in Kingston, the borough containing my constituency. Although local authorities have tried to overcome the problem of reduced dialogue, the fact that we no longer have a locally raised business tax has got in the way of an important partnership.

The Government talk about building up that partnership. Given the logic of that and of this provision, will the Minister tell us whether the Government have contemplated going even further to the full denationalisation of the business rate? It could be a local business rate that is based on properties or, as the Liberal Democrats propose, it could be based on land values. I commend our proposal because by widening the tax base to include undeveloped land, we would reduce the business rate burden on existing businesses.

I hope that the Minister will explain why he is taking a partial route. We are minded to support the new clause because it will give a little extra financial autonomy to local authorities, but we want to see the details before we sign up to it in the other place and agree to the regulations that will follow.

Mr. Raynsford

We have had a useful debate on an important issue. I appreciate the generally positive response of the hon. Members for Runnymede and Weybridge (Mr. Hammond) and for Kingston and Surbiton (Mr. Davey). I agree with the hon. Member for Runnymede and Weybridge that it is right to explore ways in which we can give greater freedom and flexibility to local government. In fact, that is one of the great themes running through the Bill. Therefore I was a bit disappointed at his churlish remarks about other freedoms, such as borrowing, trading and levying charges on discretionary charges, all of which are included in the Bill. The hon. Gentleman's Government took more from local government than any other in recorded history. He should surely recognise and acknowledge this Government's steps to give greater discretion to local authorities. However, I welcome a sinner who even partially repents and I am delighted that he feels able to support, at least in principle, our proposal to allow some measure of local discretion over additions in value, created through either development or local authority actions, to enhance the non-domestic rate base.

Mr. Hammond

The Minister emphasises the word "additions". I hope that he will say what is meant by additional increases. He also refers, however, to actions that are due to the local authority. Will some Government official determine which bits of economic growth are due to the work of the local authority and which are due to the work of the market?

Mr. Raynsford

I will deal with those matters. Let me start with the philosophic principle behind the policy. We do not believe that those areas where there is an increase in the non-domestic rate base should automatically get the full benefit; nor do we think that those areas that have a much harder task to retain industry and investment and to attract new investors should not get the benefit, because they face far greater difficulties. It is right to have a regime that genuinely rewards additional increases to non-domestic ratepayers but does not penalise those authorities that succeed in stemming decline when an authority would otherwise face economic problems. The issue is difficult and we have not yet finalised our proposals.

We have not published regulations because the scheme is in its early stages. I am grateful to the hon. Member for Runnymede and Weybridge for his kind remarks about our willingness to try to make regulations available on all other matters covered by the Bill, but the scheme's proposals have just been made, following the Chancellor's announcement, and we intend to hold a full and thorough consultation, beginning in the summer, on how it will operate. The scheme will inevitably be complex. Difficult issues need to be addressed and we want to ensure that there is a full debate.

Mr. Edward Davey

I agree that areas that are experiencing a relative economic decline with a falling business rate tax base should not be penalised and that the system should be asymmetric, but I cannot get my head around trying to measure different speeds of decline and what actions have been taken by whom—the market or the local authority—to change those speeds of decline. I understand why the Government want to help those areas, but is that the right mechanism?

1.15 pm

Mr. Raynsford

It is the right way to help those areas. Authorities should have an incentive. The hon. Gentleman mentioned the importance of creating closer links between business and local authorities. We are keen to do that in many ways. He knows that the business improvement district arrangements are a specific attempt to create closer links between business and local authorities. We believe that the incentive scheme will do exactly that. It would be perverse, however, as I think he acknowledged, if those authorities that have a much harder task to attract new investment and to expand their non-domestic rate base were prevented from benefiting from the scheme, especially if any huge effort that they put into encouraging good relations with business and attracting new investment is offset by a general trend of decline in the area's economic prospects.

We want a scheme that allows such efforts to be rewarded. I accept that that will be difficult. A baseline will need to be established which is founded on principles that will be the subject of full consultation. It will need to reflect the starting point against which any increases or reductions can be measured. The mechanisms will need to be agreed and the measurements will also be the subject of fairly detailed discussion.

Mr. Hammond

Can the Minister clarify whether he means a growth in the tax base, by which I mean the base of property, some of which may be empty, that has rateable value, or growth in the rates received? In other words, does an empty factory that is filling up and starting to pay rates count as growth?

Mr. Raynsford

The hon. Gentleman raises an interesting question. We relate growth to the rate base. We do not want short-term variations, as a result of premises being empty for a short time, to distort the arrangements. There will clearly need to be rules to govern what should happen if there is a significant increase in the tax base but no overall increase in the rates derived.

Before I go into the detail, let me explain how we will ensure that information about the proposals is made available in the most comprehensive way to help discussion. We will provide notes for consideration in the other place, setting out our broad policy intent. They will outline a number of options on the scheme's detail. They will not take the form of a draft set of regulations because it would be premature to draft regulations before the consultation is complete, especially as the consultation is designed to tease out some of the complexities that may have to be addressed and to enable us to reach the right formulation. We intend to provide Members of the other place with more detailed information about our policy. I hope that the hon. Gentleman will recognise that that is in keeping with the spirit that we have adopted throughout the Bill's consideration.

The hon. Member for Runnymede and Weybridge asked whether we would extend the principle to the council tax. The answer is no, because the council tax is raised in such a way that the local authority receives the revenue raised. It would be bizarre to have an incentive when there is no question of them not receiving whatever council tax is due to them. The scheme is a response to his Government's action to ensure that non-domestic rates are not locally available other than in exceptional circumstances. As I said, we want to provide an incentive to local authorities to attract additional investment. The scheme will give them an additional bonus and it would be inappropriate to apply it to council tax.

The hon. Gentleman also asked whether regulations would be made by affirmative or negative resolution. We intend to make them by negative resolution but, to pick up on what the hon. Member for Kingston and Surbiton said about statutory instruments, that will only take place after a full discussion that is based on the consultation. That will allow the issues to be examined in great detail not just by Members of Parliament, but by a wider public. We all recognise that it is important to have full consultation on the scheme.

Mr. Hammond

I am disappointed that the Minister said that the regulations will be made by negative resolution. Can he assure us that if they are laid before the House and are prayed against by the Opposition he will use his influence with the business managers to ensure that a proper debate on such a negative resolution is held?

Mr. Raynsford

I know that the Opposition tend to pray against almost any regulations, but it would be right and proper to have a full debate on those particular regulations. I would use any influence that I may have to assist with that aim, as there is every reason to debate those important matters. I hope that the hon. Gentleman will approach the matter in the spirit of constructive engagement that has characterised previous exchanges, and will seek to improve the scheme and ensure its effective implementation.

Mr. Edward Davey

I do not understand why the Government do not want to introduce the regulations using the affirmative procedure. Is there a reason why they cannot take that route, as it would appear to be the most appropriate one, even though there may have been prior consultation with groups outside the House?

Mr. Raynsford

I do not believe that it would be appropriate or precedented. I repeat that there should be a full discussion during the course of the consultation. I extend to the hon. Member for Kingston and Surbiton the undertaking that I gave to the hon. Member for Runnymede and Weybridge—if Opposition Members are concerned about the detail of the regulations and would like an opportunity for debate, I shall certainly use my influence to ensure that that is possible.

May I move on to the important issues raised by the hon. Member for Runnymede and Weybridge? He asked for clarification of our intention that there should be growth in the tax base. He is right that the key is growth in the non-domestic rate base. If that were just the result of a general uplift, as I have suggested, it would just be a buckshee gain for authorities that may have done nothing at all or even have pursued policies that worked against business investment in their areas. That would not be fair or appropriate if other authorities with much greater difficulties put huge effort into trying to attract business to their areas. Equally, if the scheme was limited to areas of new development, areas that have great difficulty in attracting new development would be penalised, so it must take account of authorities' ability to maintain investment and retain and enhance businesses that might otherwise have left their areas. The scheme would certainly not be restricted to new development, although that would obviously qualify, as it would bring additional rate value to the area.

I should make it clear that the increases are additional—it is not a question of simply top-slicing the existing national non-domestic rate. A baseline will be important in ensuring that we are talking only about additions that are available under the scheme. If the whole national non-domestic rate pot was treated as a basis for the scheme and top-sliced, irrespective of whether there had been enhanced value, that would diminish the value of the scheme. The aim is to establish an agreed baseline; to continue with the national non-domestic rate and pooling arrangements, as I have already said; and to allow the additional value achieved through the kind of initiatives that I have described to be reflected in the scheme, permitting authorities to retain that additional value.

Mr. Hammond

I am not entirely sure how the scheme will work. My understanding is that all national non-domestic rates went into the pot for redistribution, so I am not sure how the Minister will ensure that the pot is the same size after he has allowed some authorities to retain some non-domestic rates. Will he explain that again for those of us who have not been quick enough to grasp it the first time? Is he saying that there will be an annual ratchet? Does a local authority that scores a bit of additional tax base and retains 10 or 20 per cent. accumulate a certain sum forever, or does the ratchet mean that next year it has to run further up the escalator to get anything? Finally, is the Minister saying that there will be no losers, and that every authority will either be in the same position or will be a winner?

Mr. Raynsford

The answer to the last question is yes. I have already said that there is no intention to penalise authorities. This is an incentive scheme designed to give an additional benefit to authorities that have either successfully enhanced their non-domestic rate base through positive initiatives or have been able to stem the decline in that base through effective partnership with the private sector.

The hon. Gentleman asked some interesting questions about the period for which the benefit lasts. We are discussing those issues ourselves at present, and they will be the subject of consultation. There are some interesting policy issues. When there is a revaluation, a rebasing will obviously be needed. If an authority has the prospect of getting the benefit immediately after a new revaluation, but would lose it if the addition came before the revaluation, that would be a perverse incentive. We certainly do not want perverse incentives to affect the timing of schemes to attract new development. Our aim is to ensure that there is a reasonable time in which authorities can derive benefit from the addition, but clearly it cannot be indefinite, as that would involve a curious change in the tax base over a period of years. If any increase accumulated at any point in time there would never be any rebasing. We believe that there must be a rebasing; there must be a period in which authorities can secure the benefit; there must not be scope for perverse incentives. All of that, as hon. Members will understand, will be the subject of full consultation.

Mr. Hammond

As the Minister attempts to answer my questions, it is becoming apparent that the scheme will be an incredibly complex mechanism. Can he give the House an order-of-magnitude figure for the sums of money we are talking about? I would caution him against going down a complicated route if, in fact, we are talking about small sums of money. Can he give us an idea of the budgeted figure for the total amount of retained national non-domestic rates?

Mr. Raynsford

The hon. Gentleman is making the mistake of assuming that the scheme has already been worked out in fine detail. I have made it clear to the House that it is an exciting proposal introduced by the Chancellor towards the end of last year. It has considerable benefits and advantages, which Opposition Members recognise, and we are keen to ensure that there is a full and thorough consultation during which the scheme can be discussed, refined and improved before we introduce regulations giving effect to it. There is no rush—we are not rushing to introduce the scheme in the near future, and do not anticipate it being in force before 2005, so there is plenty of time for the full discussion and debate that we should rightly have. If we had not proposed the scheme now, and if there is not an appropriate legislative vehicle in the next couple of years, that opportunity may have been lost. It was therefore right to make provision for it in the Bill. At the same time, we accept that the scheme is in its early infancy and needs to be developed and refined.

As with all matters of local government finance, we will need to establish an appropriate balance between fairness and complexity. If the scheme becomes too complex, it simply will not be worth the candle. On the other hand, if it is seen as rough justice and some of the downsides that we talked about earlier seemed likely to happen, that would undermine confidence in the scheme. That is why we will need arrangements that give the incentives that I described and give a local authority a reward for a reasonable period, but do not produce a distortion over time or perverse incentives. Those are the kind of issues that we will need to explore in the consultation.

1.30 pm

Mr. Hammond

I understand the need for consultation and the fact that these are complex matters, but I find it alarming that the Chancellor is proposing a scheme of incentivisation, apparently without any idea of what sum has been budgeted to pay for it, so the Minister can give the House not the faintest idea whether we are talking about £10 million, £100 million or £1 billion across all local authorities. Could that rather casual approach to the public finances be the reason why the Chancellor will have to borrow £24 billion in the corning year and £35 billion the year after?

Mr. Raynsford

The hon. Gentleman is in danger of getting away from the subject of the Bill. As a result of the prudent management of the country's public finances, we are able, uniquely among major developed countries, to undertake the substantial investment in public services that the Government are delivering. It is sad that the Opposition are committed to a 20 per cent. cut in public service expenditure, which would decimate the public services that we are discussing.

Mr. Edward Davey

This seems to be a little debate about some new power that may never be used, as it is such a dog's breakfast. Let me pose another problem to the Minister, so that it can be considered even before the consultation document is written. The business rate tax base could suffer from a cyclical effect: some businesses could come into an area, pay rates for two or three years, and then move out. There is a degree of variability within a particular valuation period, adding further complexities to those that we have discussed. There is a final complexity with which the Minister failed to deal in response to an intervention from the hon. Member for Runnymede and Weybridge (Mr. Hammond) with respect to the central pot. Although it may not be top-sliced, it will lose additional funds because they will go into the scheme under discussion.

Mr. Raynsford

If the hon. Gentleman thinks about it, he will realise that if there is an appropriate mechanism—I shall not anticipate what precisely that might be, because as I said, these are issues that need to be discussed and finalised following consultation—to avoid the short-term cyclical effects that he describes, and to ensure that there is genuine reward for effort to achieve an increase in the tax base without short-term fluctuations, that will make the scheme simpler. If it followed all the short-term movements that he describes, it would be an inherently more complex scheme. The contradiction that he thinks he has found does not exist. It is possible to have a scheme that is relatively straightforward—not totally simple; I accept that these are complex matters—which removes unnecessary complexity and which has the advantages that I described.

The hon. Member for Runnymede and Weybridge asked about section 3A(a) of the Local Government Finance Act 1988. I am pleased to tell him that there is a section 3A(a), and I shall read it to him. It states: The Secretary of State may by regulations make provision as regards any financial year— (a) that a billing authority must estimate at a prescribed time in the preceding financial year and in accordance with prescribed rules whether there is a deficit or surplus in its collection fund for the year and, if so, the amount of the deficit or surplus".

Mr. Hammond

Does the Minister happen to know when that was inserted into the Local Government Finance Act 1988? Alarmingly, given that we have to depend on these things, the intranet edition of that Act was prepared on 20 September 2000, so I must assume that the provision to which the Minister refers was inserted subsequently.

Mr. Raynsford

I shall ensure that the hon. Gentleman gets a full answer to that question. I can assure him that section 3A(a) exists.

The hon. Member for Kingston and Surbiton began by saying that he was in a bit of a quandary. That is a normal place for Liberal Democrats to be. Let me reassure him that he just about got there in the end, recognising that the measure is positive and deals with devolving greater financial responsibility to local authorities. We do not agree that there is a case for devolving the entire national non-domestic rate to local determination, for a number of reasons that we can explore on another occasion. We have already debated the matter.

The balance of funding review that we are initiating soon will look at a range of issues, and I have no doubt that some people may wish to raise the issue in that context. No doubt the hon. Gentleman and his colleagues will continue to press the matter, but there are not just serious technical issues relating to fairness because of the considerable disparity in the non-domestic rate values area by area; there are genuine worries on the part of business, which is not at all attracted by the idea of relocalisation. I have stressed that we are keen to encourage good working relationships between local authorities and business, and we see our proposals as one way of achieving that. I hope that the necessary new clause and the appropriate amendments will be added to the Bill.

Question put and agreed to.

Clause read a Second time, and added to the Bill.