HL Deb 07 February 1991 vol 525 cc1314-26

5.22 p.m.

Baroness Blatch

My Lords, I beg to move that the Bill be now read a second time.

This is a short Bill but it is an important one. Its purpose is to protect chargepayers by guaranteeing that they benefit fully from any budget reductions arising from charge capping. It will ensure that when such budget reductions are made there are commensurate reductions in community charges. Thus, if, as a result of capping, an authority's budget were reduced by, say, £50 per chargepayer, this Bill would ensure that the reduction is passed on to chargepayers in full by way of a £50 cut in the charge.

The need for the Bill was graphically shown last year when the London Borough of Lambeth exploited a loophole in the existing statutory provisions for setting substitute charges. The council took advantage of this when it had to reset its charges after my right honourable friend capped its excessive budget for the 1990–91 financial year.

What happened in Lambeth was that when the council reset its charges in August after capping, it increased its estimate of non-collection; that is, its estimate of the number of people liable to pay the charge who do not in the event do so. The council changed its estimate from the 10 per cent. it had assumed when it set its original charges back in April, to 15 per cent. By increasing its estimate for non-collection, Lambeth deprived its chargepayers of some £29 each. That is over half the charge reduction implied by the cuts it had been forced to make in its excessive budget. This left Lambeth's new charge at £521–63, which enjoys the dubious distinction of being the highest community charge in the country.

The courts found that Lambeth, on the facts of its particular case, was entitled to do that. The legality of the council's behaviour is not in question. What is seriously in doubt is the equity of denying hard-pressed local people the full reductions in charges they might reasonably have expected to receive after the council had gone to the length of setting a new, lower budget and reducing its spending following capping.

I might point out that even after capping Lambeth's budget is still almost 19 per cent. above its standard spending assessment, that is, above the level of revenue spending that the Government considers appropriate. Whatever the council's views on the level of the cap itself, there was no justification whatever for doing other than passing on in full to chargepayers the benefit of the budget reduction which the council itself had made.

The simple purpose of the Bill therefore is to plug what I might term "the Lambeth Loophole". Let me dispel any notion that there is anything vindictive about the Bill; that we are in some way proceeding out of spite. Nothing could be further from the truth. If there has been any vindictiveness, it is in Lambeth's decision to deny its chargepayers the full benefit of having reduced its budget. Our sole concern with this Bill is to give chargepayers the protection which should be theirs.

The Bill thus has a narrow objective, which it achieves by amending the existing law relating to the setting of substitute charges in Section 35 of the Local Government Finance Act 1988. The Bill is not about the community charge in general. Nor does it affect the Secretary of State's powers to cap budgets which are in his opinion excessive or represent an excessive increase over the previous year. My right honourable friend has made it absolutely clear that if he needs to use those powers for next year he will do so. As I told the House on 22nd January, the Government stand by the intended criteria for charge capping announced on 31st October last year.

Although short, the Bill is a technical one; and I am conscious that at first sight it may appear to be complicated. The Bill has been drafted so as to achieve its objective in as robust and watertight a way as possible, and to ensure that the new provisions mesh in satisfactorily those in the existing legislation. Let me assure the House that the overall result is very simple. In essence, what the Bill does is to ensure that each authority's charges after capping are reduced by the amount of the budget reductions secured by capping, expressed in pounds per adult. It may help your Lordships if I now run through the provisions of the Bill.

Clause 1 is the key provision. It provides that substitute charges set because of capping have to be set on the basis of one of the formulae specified in the clause, not in accordance with the current provisions of Section 35 of the 1988 Act. The formulae do not apply to substitute charges set under that section where capping is not involved. As your Lordships may have observed, there are three formulae. One deals with the situation where a precepting authority, such as a county council, is capped. Another caters for the capping of a charging authority (other than a special authority); this category includes district councils and London boroughs. The third formula is for a special authority. There is only one special authority and that is the City of London.

By prescribing by means of formulae exactly how the substitute charge is calculated, we can ensure that authorities will no longer be able to take advantage of having to reset charges after capping to increase their allowance for non-collection, thereby denying their chargepayers the full benefits of capping. Authorities will have no flexibility or discretion to do other than pass on to local people, by way of commensurate reductions in charges, the full amount of the budget reductions achieved by capping.

But let me make it clear that this formula approach, designed to protect chargepayers, in no sense penalises capped authorities. Nor is it at odds with the statutory requirement for an authority to balance its books. The Bill does not change that requirement.

All authorities have to make their best estimate of income and expenditure at the beginning of the year and live with the consequences. An authority's actual income and expenditure is bound to differ, if only marginally, from its estimates so that at the end of the year its collection fund will be in surplus or deficit. So if the actual number of chargepayers turns out to be lower than the authority estimated when setting its charges, it will incur a deficit.

No authority can increase its charges part way through the year just because it realises that its estimates were wrong to begin with. The statutory arrangements are that any deficit has to be allowed for when setting the next year's charges. The Bill makes sure that capped authorities are in the same position as all other authorities.

I now turn to Clause 2. This clause defines the terms of the formulae specified in Clause 1. In essence, the formulae provide that the new charge must be derived by subtracting from the old charge ("A" in the formula) the difference between the old budget and the new budget (that is, "B" minus "C"), divided by the area's adult population ("D" in the formula). To repeat the example I gave earlier, if a budget were reduced by capping by, say, £50 per chargepayer, the charge likewise must be cut by £50.

In the case of the City of London there is an additional factor ("E" in the formula), to be prescribed by order, to ensure that the proportion of the budget reduction from which chargepayers benefit through reduced charges reflects the proportion of the City's budget funded by them rather than by business ratepayers under the City's special arrangements. It may help if I say that on the basis of this year's arrangements the "E" factor would have been 0.01.

Clause 3 provides a safeguard by making sure that authorities do not get round the formula by setting a further higher charge. Thus it provides that no substitute charges set under Section 35 may be higher than those for which they are substituted except in certain highly exceptional circumstances, all stemming from illegality. These are where a precept or a Section 95(4) calculation has been quashed or an original precept is issued late. The clause is consistent with the traditional local government finance principle that charges may not be increased part way through the financial year, except in these very exceptional circumstances.

Clause 4 is designed to ensure that if a charging authority has more than one obligation to set substitute charges—for example, if both it and an authority precepting on it were capped—it does not have to send new bills to its chargepayers and so on until all its obligations have been discharged. Under current provisions these and other actions are triggered by the setting of a substitute charge. It would be obviously ridiculous if an authority had to send out several sets of bills. Under this clause they will not have to and the bills issued would reflect the charge reduction resulting from the capping of both the charging authority and the precepting authority.

The remaining provisions of the Bill, Clauses 5, 6, 7 and the schedule, together deal with consequential amendments and repeals, timing of effect, citation and extent. On timing, I should point out that, although the provisions of the Bill will apply in relation to 1991–92 and subsequent years they will, for 1991–92, apply only in relation to things done after enactment. In other words, the Bill, if enacted, will not be retrospective.

In conclusion, the Government are determined to ensure that what Lambeth did this year cannot be repeated in future. We are simply not prepared to let the benefits of the Government's intervention on behalf of local people be undone by local authorities which have scant regard for their chargepayers. That is why we introduced this Bill in another place in November; a Bill which has reached your Lordships' House unamended.

This then is an important measure to protect local people. In future, chargepayers can be confident that reductions in their charges after capping are not dependent on the whims of local authorities. Indeed, as a result of the formula approach, such reductions can be predicted with pinpoint accuracy. Chargepayers in capped authorities will know exactly where they stand. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Baroness Blatch.)

5.32 p.m.

Lord McIntosh of Haringey

My Lords, the kindest thing that can be said about this nasty little Bill is that it is a waste of parliamentary time. It is a confession of failure on the part of the Government. Noble Lords who took part in the process of the Local Government Finance Act 1988 and the Local Government and Housing Act 1989—as I did for my sins—will remember that above all it was the provisions concerning the poll tax that we found most objectionable. They revealed that the Government did not believe in the poll tax which they were introducing. They did not believe that it would achieve accountability, which was virtually the only real claim made for it.

The accountability theory implied that a new system of local government finance would so directly relate to the expenditure of local authorities and the charge that they made on the inhabitants of their areas, that the local people would rise up in anger if there were overspending. The theory was that they would be happy and contented if there were prudent management of local authority finances which would be reflected in the ballot box. Therefore, we would be getting away from what was claimed to be the indirect and imperfect relationship between the expenditure of local authorities and the charges which they made on their inhabitants in the form of rates.

That was the theory, but it clearly has not worked. Before it was introduced the Government reneged on that theory. Right from 1988 they introduced the principle of capping. There are many quotations that I could produce from distinguished members of the Conservative Party about capping and the iniquity of the Government imposing their own views on local authorities as to what their budgets should be when they had spent so much time trying to avoid that eventuality. I shall not do that except to quote Mr. Michael Heseltine whose comments appeared in The Times on 9th May 1990. Before he became a Secretary of State he said that community charge capping will "negate responsibility". He also described it as an, act of centralised political power". He denounced it roundly. It is significant that Mr. Heseltine did not take part in any way in the debates on this Bill in another place. It is not just that this Bill is a confession of failure on the part of the Government to get their sums and legislation right. It is the unfortunate case that even since the Bill was introduced in another place last November the situation has become worse and the justification for this Bill, such as it is, has been reduced.

Since that time 1.2 billion or more of public money has been found to keep down the poll tax. Since then the Audit Commission has reported that another of the fundamental principles of the poll tax system is totally unsatisfactory; namely that everybody should pay something if only 20 per cent. We said that it was totally unsatisfactory right from the very beginning. It costs more to collect that 20 per cent. from many of the people most in need than is obtained in revenue. The Audit Commission recommended that that minimum 20 per cent., should be abolished.

In defending the Bill, Mr. Portillo wrote a letter to the leader of Lambeth Council in which he said that the Bill was, concerned with neither the community charge in general, nor our charge-capping powers". If it was not, it should have been. If ever there was a time when a fundamental review was needed of the poll tax legislation, it is now and before the damage which was done last year is extended to next year and the year after. I have said that the kindest thing to say is that this Bill is a waste of parliamentary time. But it is much worse than that. The principle of capping on the budget, however objectionable it may be, can at least be defended on the basis that the budgets of local authorities are public expenditure. That is the function which central government are seeking to control. They set the standard spending assessment on the basis of the needs, resources and costs of local authorities which is reflected in the budgets which the local authorities are expected to adopt.

This Bill now extends that control, which is designed to protect public expenditure, to the individual level of poll tax charged. In other words, the fig leaf of the control of public expenditure is thrown away. What we have left is a straightforward, naked political attempt to affect the way in which public expenditure is demanded. It is simply not true to say that local authorities like Lambeth are denying their inhabitants the benefits of the capping system.

There are good reasons why local authorities which are capped may find it impossible or undesirable immediately to pass on to the poll tax payers the reductions in their budgets. The simple fact has been well demonstrated in 1990. First, the very fact of capping causes confusion, delays in the sending out of the poll tax demands and a reduction in the collection rate. There is therefore a shortfall in the revenue of local authorities. It is the principle of in-year capping —that is to say, not doing it in advance, but after the rate has been set—which we attacked vigorously when the original Bills were going through. It is that fact which reduces the revenue of local authorities and hinders collection of the poll tax. That makes it impossible to pass on the so-called benefits.

They may do so, secondly, because budget cuts which take place in the course of the year are very often delays in expenditure rather than real cuts in expenditure. There has to be delayed expenditure. Local authorities have to put off to a future year things which need to be done. This means that the local authority has to maintain a higher level of reserves than it would otherwise do. As the capping formula for 1991–92, which was announced on 31st October last year, is based partly on the increase in the budget from year to year, if authorities do not provide themselves with adequate reserves to deal with the things they can no longer delay, then they will be caught by capping for another year.

The situation for such local authorities is quite impossible. There is no way in which they can pass on to their inhabitants every single penny that is cut from their budgets without betraying the principles of sound financial management. Although the Minister presents the Bill in a very competent and helpful way —I am grateful to her for that—but also in a very bland way because she seeks to present it really as a technical measure, I have to tell her that the Opposition treat this Bill extremely seriously and will be treating all stages of the Bill extremely seriously. We shall be proposing a series of amendments which will attempt to minimise the dangers we see in the Bill. We shall be using this opportunity to see to it that the Bill does not make the already bad situation of the poll tax worse.

We shall put forward five groups of amendments. First, we shall seek to ensure that implementation of the Bill is delayed until after the Government have completed their existing review. If, by the way, the Minister wants to repeat her offer to me to take part in the review, I accept that offer. I shall be glad to do so, provided that she withdraws the Bill. That is the only way her offer makes any sense. There is no point in my taking part in a general no-holds-barred review of local government finance if Bills like this are going to go forward.

The second group of amendments will be very businesslike. They will be concerned to ensure that local authorities are able to use the latest information available to them if they are capped in order to decide what the level of the poll tax should be. No sensible private business would dream of making a business plan except on the basis of the latest information available to it.

The third group of amendments will seek to ensure that local authorities, even where the information does not change, can exercise their latest and most up-to-date judgment on what that information means. It could well involve the later experience of collection rates.

The fourth group of amendments will seek to ensure that, whatever happens, capped local authorities are not forbidden for financial reasons from carrying out their statutory duties. We are already hearing screams of pain from police authorities and fire authorities—it is happening not only in Labour controlled areas—about what will happen to their budgets if they are forced down by the threat of capping to below the level which is necessary to maintain these essential emergency services.

The fifth group of amendments will be concerned with the realistic assumptions which should be made in the formulae about population, collection rates and so on. It can therefore be seen that the Committee and later stages of the Bill will not simply be formal or technical; they will be a good deal more serious than the Government would wish them to be.

The Bill is in some ways deliberately obscure because the Government do not wish us to know how deeply embarrassed they are by the failure of their own poll tax legislation. Many in the Conservative Party and indeed at the highest levels of government know the truth. It is an insult to this House that we should be presented with a Bill which pretends that we do not know the truth.

5.45 p.m.

Lord Meston

My Lords, this appears as a small Bill with an uninspiring Title. The introductory memorandum blandly states that it has no financial implications. The noble Baroness, in her helpful introduction, said that at first sight the Bill might appear rather complicated. It appears rather complicated to me not only at first sight but at second and third sight. Indeed, to the reader of average intelligence its contents are almost unintelligible, including the algebraic formulae which are becoming increasingly popular in legislation. There are moments when I think that I have grasped the structure of this legislation but they do not last. In that context I am grateful not only for the exposition of the noble Baroness but for the commentary provided by the relevant government departments.

In reality the Bill reflects a number of factors of broader importance, upon some of which the noble Lord, Lord McIntosh, has touched. First, it reflects the view that the courts took of the existing legislation. The courts held that as the law stood Lambeth was reasonable to allow for its predicted percentage of non-payment. That might strike one as analogous to any responsible business making a form of bad debt provision. The problems exposed in the Lambeth case arose from the way in which the legislation was drafted whereby the Government did not give themselves power directly to set charge levels, only to prescribe expenditure levels.

In that context, as I understand it, Lord Justice Mustill said in the Court of Appeal: In the lengthy conflict between central and local government for control of local taxation, central government had the whip hand, since it had the power to enact legislation which the court must seek to enforce in spirit as well as in letter; but, here, as it had been impossible to discern the spirit of Section 35(5) the court had to adhere to the written word". On that basis, it was held that Lambeth was entitled to take into account the kind of information that it did.

Lord Justice Bingham said that it must be assumed that it was intended that a, genuine power of decision was to continue to reside in the elected members of the authority". That assumption will no longer hold when this Bill is enacted. The fiction of accountability for local spending will go.

Secondly, this Bill and the problems which have given rise to it are the product of a system, a system outlined by the noble Lord, Lord McIntosh. It requires local authorities to make estimates which can include expenditure already incurred in a preceding year as well as anticipated expenditure in the following year before funds become available. Thirdly, the Bill is the product of a system of local government finance dependent on centralised control. The Bill increases that control by reducing matters to yet another formula.

Finally, the Bill and the case law leading to it are the product of the difficulty and expense of collection of the charge of which the Government had fair warning. It was well said that the community charge simply replaced one unsatisfactory form of taxation with another. The Secretary of State has now initiated a review of the community charge. The party to which I belong has been participating in that review and has put forward constructive proposals for reform in what we hope will continue to be a constructive debate, going to both the structure and the financing of local government. If there is not reform, the community charge will continue to be a source of dissension. Confidence in government, both local and central, will be undermined and the courts will continue to be required to hear political arguments dressed up as points of law, finding gaps to be corrected by unsatisfactory legislation such as this.

5.50 p.m.

Lord Skelmersdale

My Lords, as my noble friend on the Front Bench so clearly explained, this narrow, technical and necessarily complicated Bill is before the House solely to close a loophole in the existing law on community charge capping. I understand the strictures of the noble Lord, Lord McIntosh, on community charge capping per se and I shall, perhaps, have a word to say about that aspect of the matter later. However, contrary to the views which he expressed and which represent the party opposite, I have absolutely no doubt that it is both necessary and desirable to take such action. Nevertheless, I agree with him in a view which he did not quite express. To my mind, nothing demonstrates more clearly the breakdown of relationships between central and local government than this Bill.

The noble Lord, Lord Meston, may feel that one enters the field of local government finance at one's peril. Neither he nor I have taken that advice. Since relinquishing responsibility for local government finance, I have been a firm believer in what I call the pure milk of the community charge. I say "since" because I was not involved in the formulation of that policy. The idea that virtually every voter pays something towards the 25 per cent. of local authority expenditure that is raised locally must mean that every voter has an interest both in what is raised through local taxes and in what it is spent on. When my right honourable friend finishes his review, I hope that that central criterion will not be lost from whatever he recommends to Parliament.

The fact that the community charge is so high in many authorities must have come as a nasty shock to the one-third of voters who did not pay rates and to the other people living in houses where the rateable value produced a rate which was lower than the average community charge. Like many noble Lords, I await the electoral results of this shock with considerable interest. That is precisely why the Government have decided to have a proper in-depth review with, as we have heard so often, "nothing ruled in and nothing ruled out". That is certainly what is needed to change a method of local revenue raising that has caused widespread concern resulting in a significant number of people behaving illegally. I utterly condemn those who are refusing to pay the community charge and those who have in the recent past been involved in the so-called "poll tax riots".

It would indeed be tempting—and both previous speakers have sailed pretty close to the wind in this respect—to turn this debate into a general survey of current and future methods of financing local government services and of whether in this day and age local government is actually being asked to provide the right services. However, that is not what the debate on the Bill is about. In passing, perhaps I may say how glad I am that the usual channels have found time for a debate on that matter, which I believe to be crucial at this time, on 27th February.

In the meantime, we are left with the level of community charge in a period where there have not been enough local elections to bring about the vital synergy between the voter and the raiser of the money. I accept that we have seen some changes in councillors during the past year in such places as Brent, Trafford and Derby. But my answer to the noble Lord, Lord McIntosh, is that until there is a full raft of local elections under the community charge regime or its successor, we must, as a responsible party of government, help the chargepayers who until then will be unable to help themselves. When I voted for that provision, I saw it—and I still do—as a temporary one, probably for five years, after which time the right thing to do would be for it to lapse and ultimately disappear from the statute book.

I believe that it was George Bernard Shaw who said that it took 20 years to get an idea into the heads of the British people and a hundred years to get it out again. As I said, I do not believe that community charge capping will take as long as that—nor should it. But I hope that that will be the position for the successor to the community charge or, as may be the case, the revamped community charge. Having said that, it has to work and to work fairly according to a stated set of criteria.

Last year the Government decided to cap 21 local authorities because they increased their community charge significantly more than the average of all local authorities in the same group. Twenty of those authorities complained to the courts, believing that the Government did not have the legal powers to achieve their objective. That challenge was ultimately thrown out by your Lordships' House sitting in its judicial capacity. It is true to say that 20 years ago, or perhaps even 10, that would have been the end of the matter and the charge cap would have been passed on to the individual chargepayer, as was clearly intended by Parliament when it passed the Local Government Finance Act 1988.

I understand from local press reports that Lambeth Council —why does it always seem to be Lambeth which kicks so hard against the pricks?—caused disgraceful scenes in the council chamber on 1st February when it decided for reasons best known to itself to waste money and debating time on a noisy discussion about something which had absolutely nothing to do with local government; namely, the withdrawal of the United Kingdom from the Gulf Alliance. However, I turn now to deal with Lambeth in the context of this Bill. The council decided that it would not pass on the full savings which it had made—for a saving it was, albeit an enforced one—to the chargepayer. After further legal argument, it was established that Lambeth was legally correct and that it did not have to pass on such savings. However, morally, Lambeth was totally and absolutely in the wrong. The Government acted with speed and this Bill is the result. This time, I hope that they have got it right, as sooner or later it will surely be challenged in its turn in the courts.

However much some noble Lords dislike the community charge per se and however much they dislike community charge capping—and we have heard quite a lot about that—while they remain part of the law of the land, this Bill will be required, and rightly so. That is why I support it, though the reasons for it are disgraceful and shoddy. That criticism is not, I hasten to say, aimed at Her Majesty's Government. If certain local authorities are so profligate that they feel the need to levy charges on their chargepayers so excessive that they stick out from their group like a sore thumb and, more importantly, make the community charge wildly exaggerated in one local authority as compared to another without the will of the local electorate having been expressed, the Government have no option but to cap them. The result of the capping should be a reduction in the levy on individual chargepayers; in other words, those savings should be passed on. As I have already said, I believe that that was the original intention of Parliament.

If we examine the Bill as closely as we do most Bills in this House in their subsequent stages, I am convinced that chargepayers will breathe a little more easily knowing that we have protected them from exorbitant community charges. It is not a complete answer—indeed, it is not an answer at all—to the wider problem of who should pay for what services, wherever administered. But it does ensure that, where the worst excesses of local government are reined back, the benefit is passed on to the individual chargepayer. That is what is required of Parliament now.

5.57 p.m.

Baroness Blatch

My Lords, I thought for one moment that I would be able to accept the noble Lord's offer to participate in the local government review. I would happily welcome such an offer, but certainly not with the condition which he put upon it. However, on the same subject, I can say that we welcome the participation of the Liberals in this debate, and we look forward to hearing their submissions.

The Bill before us is not about the merits or otherwise of the system of capping; nor, as I said in my opening speech, is it concerned with the powers of the Secretary of State to cap local authorities. Similarly, I should point out that the Bill is not obscure, as was described by the noble Lord, Lord McIntosh. It is a specific Bill and it addresses a particular device used by Lambeth to deny chargepayers the full benefit of a reduction made as a result of an authority being capped.

The noble Lord, Lord McIntosh, suggested that we should delay the Bill while the local government review is taking place. I do not believe that the Bill should be delayed. It is needed in order to help chargepayers from next year by plugging a loophole which was exploited this year by Lambeth.

As I said when I opened this debate, this is a short Bill with a narrow and simple purpose. That does not in any way detract from the importance of the measure, which is designed to protect charge payers by ensuring that authorities cannot deny them the full benefits of charge capping. It amends the existing law by prescribing exactly how charges must be set after capping, thereby guaranteeing that the cuts an authority must make because of capping will lead to commensurate reductions in charges. Thus, the Bill complements the Government's existing powers to cap local authorities, which I have indicated we shall not hesitate to use again next year if we have to do so.

The Bill is about giving local people the certainty that, if their local authority were capped, they are not at risk of being put in the same position as the unfortunate people of Lambeth this year. In future, chargepayers will know that they will be fully protected if their local authority chooses to budget excessively.

I welcome the comments made by my noble friend Lord Skelmersdale. I should tell him that we believe we have got the Bill right. We also believe that it will withstand the challenge to which he referred.

The Bill is an important measure to protect local people by guaranteeing that they derive the full benefit of the Government's intervention on their behalf to curb authorities' excessive budgets. I call upon the House to give the Bill a Second Reading.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

House adjourned at six o'clock.