LOCAL GOVERNMENT FINANCE (Hansard, 12 February 1957)

§ THE EARL OF MUNSTER
For the purpose of making a statement to the House on local government finance, I should like at this stage to move that the House do now resume.

§ THE EARL OF MUNSTER
My Lords, the statement which I shall make to the House now is similar to that which is being made in another place by my right honourable friend the Minister of Housing and Local Government. The statement is as follows:
Her Majesty's Government have completed their review of local government finance: and my right honourable friend the Secretary of State for Scotland and the Minister of Housing and Local Government are now ready to enter into discussions with the representatives of local authorities. In making this announcement of the broad conclusions which we propose to put before the local authorities I am, at the request of the Secretary of State, referring to Scotland as well as England and Wales.
680 The Government's proposals for the reorganisation of local government in England and Wales, which I hope will be discussed by the House as soon as possible, are designed to strengthen the local government system. In doing this it is essential to improve the financial relationship between the central government and local authorities. The ratio between Exchequer grants to local authorities and their revenue from local rates, which thirty years ago was 1 to 2, is now 6 to 5. Not only has this remarkable shift reduced the financial independence of local authorities and their degree of direct responsibility to their own ratepayers; in addition, much of this Exchequer aid is on a percentage basis towards the expenditure incurred on specific services, Percentage grants, whatever their merits, carry two disadvantages. First, there may be danger of an excessive degree of detailed central supervision over the spending of the money. Secondly, there is no certainty from year to year what the Exchequer may be called upon to contribute.
My right honourable friend is sure that the greater the independence of local authorities in the raising and the spending of their money, the better for the good health of local government. The Government, after a thorough investigation, do not think it practicable to devise a satisfactory new source of local revenue. Nor do they believe it right to earmark for the direct benefit of local authorities any tax that is now levied nationally. Rates are in this country a well-established instrument of local taxation. There are some difficulties to be overcome in the rate system, but it provides a sound basis for local finance and no better system of local taxation has been propounded.
In 1929, when unemployment was widespread, it was decided in the light of economic conditions as they then were to de-rate industry and freight-transport from 100 per cent. to 25 per cent. of net annual value. Against the radically different economic background of the present day the Government have thoroughly re-examined this matter, taking into account all the arguments in both directions, and have decided that it is now right to raise 681 the rate contribution of industry and freight transport from 25 per cent. to 50 per cent. In addition, further changes will be made in the system of pool payments to local authorities by the nationalised industries, including the direct rating of electricity properties and the separate assessment of electricity and gas show-rooms used as shops, so that all payments now included in the pool are taken into account as rates. In Scotland, the necessity for changes on these lines will not arise during the period up to 1961 for which the existing valuations are frozen.
At the same time the Government intend a major recasting of the financial relationship between the Exchequer and local authorities. This will entail a radical revision of the structure of Exchequer grants, as well as some reduction of the grants to take account of the new rate income. With a few exceptions, where technical considerations make it not possible or desirable, specific grants will be replaced by a general grant of an amount fixed in advance for a short period of years, though not necessarily at the same level for each year of the period This general grant will be distributed to all county and county borough councils in England and Wales, and to county and town councils in Scotland, by reference to objective factors (mainly of weighted population) which are readily ascertainable and afford a fair and reasonable measure of the relative needs of each authority.
With this change, local authorities will acquire a great increase of responsibility in determining the money to be spent on the various services, in accordance with local needs. Local government will become more truly local. Our aim is to foster and stimulate a vigorous and independent local government, and to give members of councils a greater incentive to take a lively interest in their local expenditure by placing much more of it under their own control. Under the proposals the Government have in mind, the amount of general grant-in-aid, not tied in any way to individual services, will, at present levels of expenditure, rise from 682 less than one-sixth to close on two-thirds of the total Exchequer grants to local authorities.
It is also proposed to revise the system of Equalisation grants, on the basis of recommendations made in 1953, including the payment of grants direct to county district councils. In Scotland the arrangements for Equalisation grants were amended by the Act of 1954 and also by last year's Act, which provides that a further review must be held before 1963. My right honourable friends the Secretary of State for Scotland and the Minister of Transport intend also to review the present system of Highway grants.
So far as practicable, it is the Government's intention to bring all these changes into operation on a single date. Some transitional grant arrangements for a period thereafter will naturally be needed. These proposals will be discussed with other organisations affected by them, in addition to the discussions to be held with representatives of local authorities. The intention of the Government is to introduce legislation as soon as practicable when these necessary discussions have been completed.
I apologise to your Lordships for making so long a statement, but I thought that it was of such importance that your Lordships should hear it.

§ LORD PETHICK-LAWRENCE
My Lords, the statement made by the noble Earl on behalf of the Government is an exceedingly important one, and it will affect everybody throughout the country financially to a very large extent. Though there have been certain vague rumours that the Government were going to take this course, there has been no definite indication, and to a certain extent the statement is a new one. Since it deals with a large number of separate issues, the noble Earl will not expect me to have followed his statement fully and completely at first hearing. Nevertheless, it is a very interesting statement, and no doubt we shall want to debate it in time to come.
I would only remark: on two aspects of it. So far as the derating of industrial premises is concerned, I remember that being introduced by Mr. Winston Churchill (as he then was) in another place something over twenty years ago.

§ THE EARL OF MUNSTER
Twenty-nine years ago.

§ LORD PETHICK-LAWRENCE
Yes; just under thirty years ago. It was done at a time of great depression and deflation and to-day the circumstances are quite different. We have been suffering from inflation, from too great a boom for the actual finance and economy of the country to carry. Therefore it is understandable that the Government are taking a different view to-day from that which was taken by Mr. Winston Churchill at the time of the depression. I always thought that he went a great deal too far in his original proposal, which threw a tremendously heavy burden on enterprises which did not come under the strict terms of the reduction and caused a great deal of unfairness through particular enterprises coming on one side of the line or the other. It made a tremendous difference whether a business was charged full rates or one quarter of the rates. I have never been a supporter of the scheme as it stands, and therefore start with sympathy towards the proposals which the Government are making at the present time.
If I understood the noble Earl aright (and I am not quite sure that I did), it is proposed to alter the method by which grants to individual local authorities are passed. I remember that, when these were introduced and explained, no one in another place understood it, not even after they had seen it on paper. An honourable lady who bore my name asked that an algebraic formula should be put down and one was produced. A very complicated algebraic formula it was, but it enabled us to get, for the first time, an idea of the system that the Government were introducing. It may be that when we have gone into this a little further. I shall ask for a similar algebraic formula to be put down in this case. I think that that is as far as I ought to go at this moment, because until my colleagues and I have studied the statement we cannot judge or express any ultimate opinion of what view we shall take of the Government's proposals.

§ THE EARL OF MUNSTER
My Lords, I am sure that if the noble Lord sees fit to put down a Motion, or a Question, we shall be able to have the matter debated. The noble Lord will probably agree with me that the derating of industry, while it 684 lasted, has been beneficial to all industries throughout the country. As regards his remarks on grant to local authorities, I have the deepest sympathy with the lady in question, because I have never understood the formula, but I shall endeavour to give your Lordships a clear definition when we debate this subject in due course.

§ LORD SILKIN
My Lords, I do not wish to continue the debate, but I should like to ask the noble Earl whether I am right in inferring that it is not the Government's intention to introduce any measure for the reorganisation of local government. As the noble Earl will remember, there have been a good many discussions on the subject. Indeed, I am under the impression that it has been referred to in one or more of the gracious Speeches. If it was intended to reorganise local government, would it not have been better to enter into discussions on the present proposals contemporaneously with those on reorganisation? Otherwise, if it is still the intention, it would appear that there will have to be two different sets of discussion. Could the noble Earl say, broadly, whether the effect of these proposals will be not merely to make more logical the system of financing local government expenditure out of the Exchequer, but actually to reduce the amount of assistance which local authorities will get from the Exchequer? Is that not an important factor in the proposals which the noble Earl has read out to us?

§ THE EARL OF MUNSTER
My Lords, the statement I made to the House this afternoon dealt entirely with local government finance. If the noble Lord, Lord Silkin, has any question to raise on the reorganisation of local government, I would much rather he put down a separate Question dealing with that particular issue. As to the noble Lord's second question, I can give no categorical assurance that this will mean a reduction. However, as I said in the course of my remarks, no doubt the House will wish to debate this matter as soon as possible, and I am sure that all these matters will come up for review during that discussion.

§ LORD SILKIN
My Lords, merely for the purpose of getting the record right, of course, I do not know what are the Government's intentions about the 685 reorganisation of local government. I was merely suggesting that if it is still their intention to pursue this matter, it might be wiser to do the two things together. On the second point, I did not ask for an assurance that there would be a reduction in Government expenditure. On the contrary, I was hoping that I might get some reassurance from the noble Earl that there would be no overall reduction in the contributions which are being given to local authorities at the present time, and that this is not an indirect way of cutting down the grants given to local authorities.

§ VISCOUNT HAILSHAM
My Lords, if the noble Lord will allow me, although I am not very good at financial questions, I will try to help him on this point. The matter will be discussed with the local authorities. The first proposal, the re-rating of industry, will put a large sum of money into the pockets of local authorities. Obviously, the Exchequer will be the loser as a result of that, because a great deal will be lost in income tax due to the re-rating of industry. The financial consequences of that will not necessarily at this stage be either a reduction or an increase in what the local authorities get. Obviously there will be a large increase, from the re-rating, and presumably the Exchequer will want to discuss an adjustment of the grant in the light of that increase. The net result ought not to be a loss to the local authorities.

§ LORD SILKIN
My Lords, I hope the local authorities will take note of the noble Viscount's statement.

§ LORD PETHICK-LAWRENCE
My Lords, what I understand is that there will be a considerable readjustment between one local authority and another. If the formula in which they get the grant is considerably changed, some local authorities will gain by it and others will lose. Is that not the case?

§ VISCOUNT HAILSHAM
My Lords, I understand from my noble friend that there will be a good deal during the transitional period to which transitional provisions will apply. I think my noble friend's statement said that the equalisation grants would be affected.