Local Government Finance

HC Deb 03 April 2001 vol 366 cc1-22WH

Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Touhig.]

9.30 am

Mr. Keith Darvill (Upminster)

It is a privilege to open this important debate on modernising local government finance and on the Green Paper on the subject that was published on 19 September. The Green Paper sought views on the Government's aims and proposals for modernising local government finance and invited responses by 8 December. More than 16,000 responses were received, which must be a record—I myself responded in detail. I look forward to seeing the White Paper later this year. While hon. Members had that opportunity to respond to the Green Paper, it is also useful for Green and White Papers to be debated in the House whenever possible. It is by such listening and debate that hon. Members can formulate ideas and opinions. Perhaps naively, one is also ever hopeful of persuading Ministers that general and specific proposals have merit and will be adopted as policy.

In addition to the broad point of principle about the opportunity to debate important issues such as this one, I was struck by the number of hon. Members who wanted to participate in the revenue support grant debates earlier this year but were unable to do so. It was disappointing that the Opposition insisted on separate debates for the special grant report and the rate support grant, leaving limited time to explore individual constituency grievances. Despite considerable latitude by the Deputy Speaker, the House had inadequate opportunity to debate this year's revenue support grant.

That small but important issue is relevant to this morning's debate. Hon. Members believe that the existing system is defective and will no doubt use this and other forums for debate to argue for changes based on experiences from their own local authority and perhaps their own experiences of local government. I hope that they will not only dwell on the defects but comment on the alternatives, particularly those set out in the Green Paper.

In his foreword to the Green Paper, my right hon. Friend the Deputy Prime Minister said: Our local government finance system is complex. Few people make the effort to understand it. Fewer still succeed. I am not an expert on that system and, indeed, have not fully understood it, but I am one of those few people who have made an effort to do so. I am convinced of the need for reform. Change should not be delayed beyond the timetable required to consult, decide and legislate because there is an overriding feeling that the existing system is unfair, has created many anomalies and is in need of urgent reform.

Unison, the union to which 1.3 million public service workers—including 850,000 in local government—belong, sent me a copy of its response to the Green Paper. That response, with which I very much agree, stated: We believe that the system of local government finance is long overdue for reform. We welcome the general approach which the Government has adopted in relation to the issue. For too long local government has suffered from the effects of cuts in funding coupled with restraints on freedom of action. The effects of persistent neglect can be seen in declining local services and underinvestment in staffing and infrastructure. Tackling these problems will require imagination and initiative together with the resources to really make a difference. Local authorities play different roles and provide a diverse range of public services. A substantial proportion of local authority activity effectively involves the delivery of Government-determined services, on which there is little variation between each local authority. As the Green Paper states, local government implements key national policies at local level. I expect that few right hon. and hon. Members disagree with the aims of reform: to fund all authorities adequately; to promote continuous improvement; to provide a reasonable degree of predictability and stability; to provide balanced funding for local government's delivery of national priorities and targets, with real financial freedom and responsibility; to be fair; to clarify accountability for financial decisions because, if council tax increases are excessive or services are underfunded, people should know whom to hold to account; to be intelligible and transparent; to make partnership working easier; and to encourage consultation, particularly with local taxpayers.

Some progress has been made on a number of fronts. I welcome the increased level of funding; the inbuilding of certainty with three-year spending rounds; the moratorium on changes to the grant-distribution formulae; the replacement of compulsory competitive tendering with best value and of crude and universal capping with new reserve powers; and pilot schemes for local public service agreements.

Despite those improvements, there is still much to do. As the Green Paper admits, the grant system and capital finance systems are especially complex and opaque. As I have said, the case for reform is overwhelming. Despite what the Green Paper says, the current system, which has been in place for the past decade or so, does not fulfil its single, explicit objective: to ensure that council tax bills for properties in the same council tax band are the same everywhere in England. They could be if every authority budgeted to spend in line with its standard spending assessment. Nor do I agree with the general assertion that the system has been able to cope with substantial change in the structures and responsibilities of local authorities. Paragraph 3.2 of the Green Paper sets out four weaknesses that have become apparent.

Mr. Nigel Waterson (Eastbourne)

Before the hon. Gentleman moves on to the next passage of his speech, to which I am listening intently, and while he is talking about comparisons between council tax rates in different authorities, does he accept the proposition that the proper comparison is between band D levels?

Mr. Darvill

I would not say that that is the proper comparison, but it is certainly one that is widely used.

First, the current system has lacked certainty. Only since the 1998 comprehensive spending review has that problem been addressed. In the past, there was uncertainty from year to year about the level of grant to expect, which hindered planning and modernisation of services. Stability and predictability are important changes for the better. Secondly, the current system gives authorities the same amount of grant regardless of what they are doing to modernise services. Thirdly, the grant system has relied too much on the mechanical use of the statistical analysis of spending. Fourthly, it does not apply any fine tuning to take account of circumstances in individual authorities. I would add a fifth weakness to those set out in the Green Paper: no account seems to be taken of the adverse historical circumstances that applied in some local authorities when the new system was introduced.

My complaints about and criticisms of the existing system are based firmly on my experience of finances in the London borough of Havering, not only in the past four years, but since the reforms were introduced by the previous Administration after the disastrous poll tax debacle more than 10 years ago. I speak from personal experience, not only as a politician, but as a governor for two local schools, an activist in the communities association in my local area, the backroom boy in the Labour party during those years and chair of the infamous local government committee in Havering.

How does the present system impact on boroughs such as Havering? First, the level of Government grant that Havering receives is one of the lowest in London. When compared with those of its neighbouring boroughs, the level of grant per head of population is significantly lower. That may sound like special pleading, which I accept to a certain extent in being an advocate for my local area. More importantly for this debate, that illustrates some of the weaknesses in the system.

For 2000–01, Havering received £578 grant per head of population, whereas Redbridge, its neighbour, received £741 grant per head—20 per cent. more. Barking and Dagenham, another neighbouring borough, received £896 per head—55 per cent. more—and Newham received £1,237, which was 114 per cent. more. I will continue to refer to those boroughs. Although deprivation levels are rightly taken into account, the structure of the standard spending assessment calculation does not reflect the pockets of deprivation in boroughs such as Havering, nor does it reflect the actual cost in, for example, the unit cost per pupil in the education SSA.

The basic structure of the SSA calculations is the number of clients multiplied by unit costs multiplied by area cost adjustment. The unit cost includes a national standard amount and a supplementary amount to reflect the assumed effects of deprivation, and sparsity or density, and the area cost adjustment reflects the higher cost of employing people and property in the area. The indicators in the formula determine the supplementary amounts that are detrimental to Havering. Although some data used in the education, social services and environmental, protective and cultural services—EPCS—service blocks are updated annually, such as the number of income support claimants, other data are based on the previous census, which was conducted 10 years ago, and have become considerably out of date.

To illustrate the detrimental effects of the formula, I refer to Havering's SSA for secondary education. The flat-rate unit is £2,306 for each pupil. The supplementary amount for deprivation is £309 for Havering, £448 for Redbridge, £549 for Barking and Dagenham, and £842 for Newham. The area cost adjustment is £283 for Havering, £298 for Redbridge, £309 for Barking and Dagenham, and £341 for Newham. The unit cost per pupil in Havering is £2,898. It is £3,052 in Redbridge, £3,164 in Barking and Dagenham, and £3,489 in Newham. The total secondary schools SSA is based on the number of pupils in the borough, which is 14,649.

I am sorry to repeat the statistics, but they illustrate an important point. If the SSA were based on the Barking and Dagenham unit cost, the total amount received from the Government would be £46.3 million. It would be £51.1 million for Newham, and £44.7 million for Redbridge. Havering receives only £42.4 million, which is £3.8 million below the Barking and Dagenham figure, £8.6 million less than Newham, and £2.2 million less than Redbridge. I appreciate that there are higher levels of deprivation in those areas, but the gap is too wide.

One can argue that it costs the same to educate a secondary school pupil in Havering as it does in neighbouring boroughs, in terms of the cost of teaching staff, staff-to-pupil ratios and school running costs. With those figures, Havering could attract £8.7 million extra in Government support on that part of the SSA alone. That is only one aspect of the formula. I could go on, because similar effects are illustrated by the EPCS service block and concessionary fares system.

The SSA formula has not reflected Havering's need to spend on local services, especially social services. Compared with outer-London boroughs in general, Havering continues to have one of the lowest SSAs per head of the population. Compared with its neighbours, the disparity is marked; Havering's SSA per head of population is on average 23 per cent. less. Although the borough recognises that the percentage increases in SSA for 2001–02 are good—double the rate of inflation—they will be applied against a low base and do not reflect true spending needs. In that respect, it is not as good a settlement as it looks.

Since 1995–96, Havering's budget requirements have consistently exceeded the SSA, even after accounting for drawing down from reserves—in 2000–01, spending was 4.5 per cent. above SSA. That inequity must be resolved. The continued underfunding has had a detrimental effect on the council's infrastructure. A prime example is highways maintenance spending. About 58 per cent. of the borough's street lighting columns are more than 15 years old, and in excess of 2,500 have significant deterioration. Spending on highways maintenance averaged 17 per cent. below the SSA in recent years. I was interested to look at the performance indicators. Whereas in the past, Havering's maintenance of street lights was average, it has now declined, which reflects the lack of investment in that important area.

The imposition of the ceiling for data changes appears to be unfair to councils like Havering. It already provides services for pupils in schools, for the elderly and other services for the general population and it pays higher input costs to employ skilled staff as reflected in the new earnings survey. Further more, as in other London boroughs there are recruitment and retention problems in key local government professions. The effect of the ceiling should be taken into account within the council tax benefit subsidy limitation scheme. It should also be taken into account in the passporting rules for the education standard spending assessment. Passporting the SSA increase in full will increase the loss to the council through the council tax benefit subsidy limitation scheme, yet Havering has the highest level of delegation in the country. Nearly 90 per cent. of devolved funding goes to local schools.

External support for Havering is one of the lowest in the outer London boroughs. In the past five years, it has averaged 71 per cent. while the outer-London average is 75 per cent. The gap is widening from 3 per cent. in 1996–97 to 4 per cent. in this year's provisional settlement. That means that in addition to having one of the lowest SSAs in London, which restricts the council's spending, Havering residents are expected to pay a higher proportion of costs towards local services. Currently, the council tax is well above average at £959 this year.

The borough loses out in other areas. Havering pays its levy to the East London Waste Authority based on band D equivalence. Funding through the SSA formula is based on population and deprivation indicators. The basis of the costs to the constituent boroughs is not represented in the SSA formula. If the levy were based on tonnage of waste generated, it would more closely reflect the funding stream and would save Havering nearly £875,000 per year. Another example is the mismatch between the funding and costs to the council in concessionary fares. The SSA formula, which distributes grants to fund that service, takes into account the way those services are paid for, but as the SSA formula includes deprivation indicators, our neighbouring authorities receive significantly more Government support to fund those services.

Havering also loses out in the London borough grants scheme. The total cost is allocated on a population basis, but grants made by the units to voluntary organisations whose work includes Havering represent approximately 10 per cent. of the amount that the council contributes. That is partly due to the fact that any grants allocated by the unit require match funding. The council has no scope to match-fund to attract those resources to improve services in the borough. I have gone though the difficulties that a borough like Havering has in some detail, but other boroughs throughout the country have similar problems. They have led to significant increases in the council tax. There was a 43 per cent. increase in council taxes from 1996 to 2001 There is a 12.4 per cent. increase for 2001–02. Increases above the national average are likely for the remainder of the comprehensive spending review period.

What does the future hold? The Green Paper sets out a number of ways of trying to achieve a better regime. A number of them require careful analysis. I am in favour of the safety valve suggestion. The Government recognise that any formula-based system is bound to have limitations and that those limitations could be resolved by allowing authorities to apply for further funding via a safety valve mechanism. That would allow the Government, presumably as a top-up to the revenue support grant, to pay additional non-ring-fenced grants to councils that appear to be underfunded.

I agree with that approach, subject to there being clear criteria that local councils can understand when applying for the funding. Comparisons of external support to the class of authority are a good starting point. The criteria should be consistent, holistic and not open to different interpretations. For example, unit costs can vary simply by the allocation, while best value performance indicators need to be applied consistently across authorities and years. The system should be neither administratively cumbersome nor costly. The Government should consider using other sources of information, such as inspection results.

Mr. David Kidney (Stafford)

My hon. Friend has shown a wonderful grasp of the details of Havering. He mentioned other sources of data. Is he aware of what the Office for National Statistics is doing? The decennial census is about to begin, the average earnings index is changing, and there is a new project to capture ward-based statistics. Does my hon. Friend agree that such new data might be helpful?

Mr. Darvill

I thank my hon. Friend for that intervention. The problems that can result from using old data are one of my main themes today. The current system perpetuates existing problems but, as my hon. Friend suggests, current technology could help to ensure that grants take account of updated information.

The use of ministerial discretion in safety valves could give rise to concern unless the discretion is tied into a clear, published and transparent framework. In other words, the safety valve system could work quickly, but the framework must be open to avoid difficulties with the allocation of grants at central level.

The Government have changed their emphasis recently on public service agreements. I look forward to hearing the Minister comment on the setting up of pilots, and clarify the criteria for public service agreements. The Green Paper also touches on the business rate, which the Government are considering. In principle, the more the business rate can be defined and made accountable to the local area, the more effective it will be.

I apologise for concentrating on my local authority's position, but I wanted to highlight the severe difficulties that have resulted from the existing system. The borough has never been a profligate or high-spending council. It has made strenuous efforts to modernise and embrace change, yet finds itself in a difficult position. It has suffered from a lack of investment in the past, almost entirely due to previous Conservative Administrations. I am sorry to make a party-political point, but it is relevant to explaining the historical position.

In the lead-up to the 1990s, the borough was a low-spending, low-investment authority. Following subsequent changes in the 90s, several services—particularly children's and other social services—needed improvement. Improvements often resulted from inspections, but funding adjustments were not made following the implementation of recommendations, resulting in spending above the standard spending assessment.

The previous Conservative Government, with their disastrous poll tax fiasco and creation of the present system, exacerbated the problem. Low settlement figures in the few years before 1997 were another factor. From a low base, the borough has never been able to recover and has sometimes had to reduce its reserves. That effectively lowers income because, as reserves reduce, so does the interest from investments. Despite higher investment by the present Government, the borough remains in a difficult position.

As a result of its continuing problems, the borough has made its own representations. With all-party support in the borough, a campaign for "Justice for Havering" has been established. We must halt the decline before the position worsens. It has been calculated that there have been cuts of approximately £19 million in the past 10 years. Admittedly, some of them were the result of planned spending expansions, but in many ways such expansions were justified investment in several essential services.

The financial system impedes the planning and modernisation of services. It hinders delivery of the Government's programme, creates low morale among staff and council members and leads to public incredulity because council taxes are high when public services have been cut. Local government finance needs urgent review—that will be complex—and I am aware that the Government are starting to give the matter priority, which I appreciate. If the planned reforms take longer than expected, the Government should introduce the safety-valve concept as an interim measure. That would be a possibility for boroughs such as Havering, which has specific difficulties.

It is important that our public services are maintained. Delivery is important not only for the local authority's services, but for initiatives in which local authorities have an important role, such as reducing crime and increasing educational standards. With that, I conclude my remarks and look forward to the Minister's reply.

9.56 am

Mr. David Kidney (Stafford)

I congratulate my hon. Friend the Member for Upminster (Mr. Darvill) on securing this important debate and on his thoroughly reasonable and constructive presentation. Yes, he made special pleas for the London borough of Havering; however, his grasp of the underlying circumstances in that borough shows that he has made a genuine effort to understand the complexities of local government finance.

I begin my discussion of some of the criticisms of the present system and why reform is necessary by referring to my hon. Friend's fifth criticism about the formula for funding local government from Government funds. That regressive formula goes back to a period in 1990 and seals in the pattern of spending that was then current. It means that the whole system is trapped in a time warp and that local authorities can do nothing to change their situations.

My special pleading is for the local authority of Staffordshire. In the league table of funding for shire counties, Staffordshire is always at No. 34 of 35. Unlike those in a football league table, the authority cannot raise its position by improving its performance. That is absolutely contrary to my idea of a modern system of local government finance.

Another criticism of the present system is the introduction into the formula of factors that are not objectively justified. The most obvious one is the area cost adjustment, which my hon. Friend mentioned. A couple of years ago, I asked the House of Commons Library for some details on how Staffordshire has been affected by not being eligible for the area cost adjustment, which is drawn in a ring around south-east England. I was given an indication of how Staffordshire has suffered. In 1999–2000, the standard spending assessment for Staffordshire county council would have been about £28.6 million—or 5.4 per cent.—higher, if area cost adjustment figures equal to the arithmetic mean for those counties with an area cost adjustment factor of more than one had been applied. Staffordshire was £28.6 million gorse off in that one year alone, simply because of exclusion from a formula for dishing out money. Staffordshire was denied that considerable chunk of spending.

Additional educational need is another element in Staffordshire—that need is thought to lack credibility. Parents of schoolchildren in Staffordshire often make comparisons with other parts of the country—not so much the London boroughs to which my hon. Friend referred, such as Hackney or Havering, but Hertfordshire in south-east England, which many people would say is similar to Staffordshire. Funding in Hertfordshire is between £200 and £300 higher per pupil than in Staffordshire, although the education service is the same.

Mr. Darvill

Does my hon. Friend agree that although those comparisons appear to be reasonable, they tend to undermine the system of local government finance in the eyes of the electorate?

Mr. Kidney

The Green Paper discusses the ability of politicians to explain and justify a system, which many people find incomprehensible, to the public. It is difficult to justify the formula because of its regressive nature.

I should also mention the plight of social services in Staffordshire. As the standard spending assessment is so low, support from central Government is also low. This year, the director of social services reckons that he is £17 million light on the funds that he needs to provide the same level of service as the rest of the country. From a politician's point of view, an excellent indication of that shortfall is that county council elections are due in Staffordshire on 7 June this year, but local politicians have decided to increase spending by 5 per cent. That is almost entirely because of the pressures on the social services budget, especially from older residents who want more support in their homes or to go into residential homes.

That spending increase is a measure of the desperation. Even in an election year, there is no question of not introducing an increase, although it will be unpopular with residents. As the 5 per cent. increase in spending outstrips central Government support by a considerable amount, the excess is loaded on the quarter of the council's income that comes from council tax, which converts to an 8.9 per cent increase in council tax bills, which has made residents angry. It is difficult to explain to them why the local authority bears such a disproportionate amount of that cost.

The Green Paper was welcomed in Staffordshire because it rejected a continuation of the status quo. In that regard, the Government have taken an important stride forward compared with previous Governments. My hon. Friend did not touch this matter, so I ought to make it clear that the Green Paper offered two different ways forward. On the one hand, it suggested a simplification of the existing formula for distributing central Government grants. On the other, it offered a system whereby local authorities would submit their plans for future spending and central Government would decide how to allocate funding in accordance with the quality of those plans.

Most responses that the Government have received do not favour the plan-based system because of the uncertainty at the bidding stage and concern about the additional bureaucracy caused by administering the plans. There is a further worry that that system would centralise control in the hands of the Government of the day, which would not allow local authority independence. Most people support a simplification of the formula. On 5 March, the Government published a summary of the responses received to the Green Paper, and if one reads through them it easy to see that a majority of respondents felt that a simplified formula was fairer, easier to explain and easier to understand.

I welcome the suggestion on education in the Green Paper, which proposes a simplified formula with a minimum per pupil entitlement throughout the country. The parents, teachers, school governors and politicians of Staffordshire would be delighted to see that in place. Of course, there are reasons why some parts of the country need more money—for example, inner-London boroughs. The Green Paper therefore discusses additional payments for objectively ascertainable levels of deprivation and the costs of recruitment and retention. I have already mentioned the role that the Office for National Statistics could play in providing ward-based data that would justify those objective decisions.

I welcome the discussion in the Green Paper of funding floors and ceilings to limit the gains and losses of the winners and losers and to improve stability from one year to the next. On balance, I would probably support safety valves, as did my hon. Friend, but I am worried about discretion for the Government of the day. I support the response that one local authority made to the Green Paper that any funding for safety valves should be additional funding from central Government and not achieved by top-slicing other authorities' funding.

My final and probably most important comment on the Green Paper concerns the anticipated levelling up of funding rather than taking money from existing winners and redistributing it to losers. That is important to ensure that the future settlement is acceptable throughout the country.

I have read the responses to the Green Paper, which include support for a simplified formula. That support is not unanimous and some authorities oppose it, but it is fair to surmise that opposition comes from those who are gaining from the present unfair formula and do not want to risk losing their gains. There is strong support for a system of funding floors. Of the 229 local authorities and other organisations that responded, 89 per cent. favoured a funding floor, 9 per cent. were neutral and only 2 per cent. opposed a funding floor. That response was different from the response to a system of funding ceilings—my hon. Friend was nervous bout that—which was supported by 56 per cent. of those who responded, with 26 per cent. being neutral and 19 per cent. opposed. Again, those who opposed it were those who feared that they would lose out.

My knowledge of funding campaigns goes back to the 1990s, when the seven worst funded shire counties formed themselves into a group. It called itself the E7 group and when another authority later joined, it became the E8 group. However, it had little clout or influence because it was a small group of losers and no one took any notice of it. If it threatened an authority that was a winner, it received no support, which was understandable. The group made a strategic decision during the present Parliament and disbanded. It obtained wider support from local government associations and formed a group of the 40 worst funded authorities in the country. It included all sorts of authorities—unitaries, metropolitans and so on. I was flattered that it chose the university of Staffordshire in Stafford in my constituency for its inaugural meeting in recognition of what I had said and done in Parliament.

I attended the inaugural meeting, at which it was agreed to set up a fair funding campaign group, called F40 for convenience and brevity. I said that I would write to Members of Parliament with constituencies covering those 40 authorities to ask if they were interested in supporting the group in the House. Approximately 200 Members of Parliament from all parties replied saying that they would support the campaign. We then held several meetings, which were very well attended bearing in mind our numerous commitments elsewhere, and were able to send out a firm and consistent message, especially to the Department of the Environment, Transport and the Regions.

I like to think that the message that we delivered so clearly and consistently influenced the rationale of the Green Paper. We were pleased with its contents and I am proud that 14,402 supporters of the F40 campaign wrote individual letters in response to the Green Paper. They came from parents, teachers and schools as far afield as Cambridgeshire, Cheshire, Cumbria, Derbyshire, Devon, Dorset, Gloucestershire, Leicestershire, North Yorkshire, Northumberland, Nottinghamshire, Shropshire, Somerset, Staffordshire, Suffolk, Warwickshire, Wiltshire, Worcestershire, Bury, Dudley, North Tyneside, Solihull, Stockport, Trafford, Tameside, Wakefield, Wigan, Bath and north-east Somerset, East Riding of Yorkshire, north Somerset, Poole, Rutland, Swindon, Warrington, west Berkshire, Wokingham and York. That is a pretty impressive spread. A total of 14,402 people wrote in support of a resolution, which, with your leave, Mr. Amess, I should like to read into the record of our deliberations, because the respondents deserve that recognition. It says: The f40 Group welcomes Government recognition of the need to remove unjustifiable inequalities in the system for funding education. The next three months give an opportunity for authorities, governors, teachers and parents to influence future plans. The Group is now keen to work with DfEE and DETR in the positive spirit of levelling up the worst funded areas. However, we are greatly concerned that the Government appears to contemplate that the existing injustices will be continued for another three years. We strongly urge the Government to act now to provide additional funding for levelling up from April 2001. This will provide a temporary solution under the existing discredited system while the new long-term proposals are being developed. The f40 Group is of the opinion that the proposed three year freeze to the SSA formula is unacceptable. That is a positive and powerful message to the Government. The April 2001 financial settlement, which is now up and running, does not include extra money specifically for areas such as Staffordshire. However—it is fair to give the Government these limited accolades—the local government formula for 2001–02 included funding floors and ceilings as an experiment. The Government were partly driven to do that by data changes in the average earnings index, which would have been embarrassing for them. Nevertheless, the fact that, even in advance of the White Paper and new legislation, they are operating floors and ceilings demonstrates a welcome commitment on their part to the matters discussed in the Green Paper.

In the Budget, the Chancellor of the Exchequer announced even greater flat-rate payments to every school in the country—up to £63,000 to a large primary school and £115,000 to a large secondary school. It is welcome, on the basis that equality is equity, that every school in the country receives the same sum of money regardless of its location.

Like my hon. Friend the Member for Upminster, I urge that the White Paper should not long be delayed and that legislation to make the necessary changes in accordance with it should be a priority for the next Parliament. We do not want new groupings of winners and losers fighting each other across party political boundaries about cash. To prevent that, it is important for the Government to stand by their commitment to level up funding to those authorities that are at present the losers.

I look forward to listening to other hon. Members' contributions to the debate.

10.13 am

Mr. David Drew (Stroud)

I add my congratulations to my hon. Friend the Member for Upminster (Mr. Darvill) on his lucid explanation of the subject and pay tribute to my hon. Friend the Member for Stafford (Mr. Kidney), who has led the F40 group magnificently both in this place and outside. We have made our point and eagerly await the Government's response.

There is always a temptation to think that anyone who takes an interest in local government finance is mad, bad or merely sad. However, its importance cannot be underestimated, given the impact that it has on our lives as Members of Parliament through the various ways in which our local councils operate. I shall lay my cards on the table from the outset. I come not to praise the current system, but to bury it. It is unfair, opaque, and fails in its key task of providing the right level of services in the appropriate way. Radical reform is necessary, and I welcome the Government's Green Paper. Like my hon. Friend the Member for Stafford, I look forward to a White Paper soon after the election to ensure that we drive the change through and achieve radical reform.

We can dissect the problems of local government finance in many ways, but I will concentrate on three areas that clearly demonstrate where it has gone wrong. First, my hon. Friend the Member for Stafford mentioned cost adjustment, which is the Tories' payola and nothing less titan a way of bribing certain local authorities to continue with what has happened in the past. If one wants to annoy any head teacher or councillor in an area that is tangential to an area in which cost adjustment applies, or in one of the metropolitan boroughs, one must only mention cost adjustment and a blue touch paper is lit; the issue causes incredible anger and dispute and something must be done about it.

Secondly, for all the complications and differences in local government finance, the same services are effectively being provided nationwide. There may be some cost differences across the country, but they are often exaggerated. If we are providing common services, they should be funded in common ways. A need for commonality of funding exists and we should either be levelling up to a mean, or jointly accepting that a common system can be achieved, barring the exceptions that I shall mention.

The third area may have been brought to Ministers' attention by the sheer idiocy of what is happening. Like my hon. Friends, I shall use the experiences of my local authority to highlight the anomalies in the system. Our fire and rescue service in Gloucestershire has done what it should have done —reduced the number of emergency calls by checking calls and ensuring that people are not abusing the emergency services, as well as the number of retirements—so it has achieved a wonderful 1.4 per cent. increase in our standard spending assessment. After some nifty lobbying on my part, I managed to reduce that to a 1.3 per cent. increase. Ministers were apoplectic when they were asked why that had happened. That anomaly, and other anomalies that every hon. Member can think of, bring home the reason why we must change the system.

Why have we failed to change the system in the past? We all agree on the need for reform, but not necessarily on a mutual goal. There has been conflict between the metropolitan boroughs and counties, among the various layers of local government and between those in an area of cost adjustment that have something to defend and those outside the area who are trying to get in, or who are saying that the system is unfair and should be changed. We sometimes underestimate the impact of the different layers of local government. It pleased me that the Green Paper mentioned parish and town councils. As a town councillor, I was happy to see that the first level of government—which should not be regarded as the lowest level—was mentioned because it has a role to play in reforming the system.

However, what brings home the need to engineer that reform is the state of the major services—education and social services. My hon. Friend the Member for Stafford mentioned that the Chancellor had channelled funding into schools in a different way, and we have certainly seen the advantages of having a common system. However, many problems exist in the social services of most authorities and they are related to funding and unfairness in the system, which we must do something about. To a certain extent, those problems could be dealt with outside the area of funding and its need to be linked with health, housing and other issues. However, that strategy will not be sufficient on its own and we must see what the funding arrangements are to ensure that services are receiving funding, particularly those for older people and children. One anomaly in the system that needs to be addressed is the radically different way in which children's services are funded in different parts of the country.

I shall deal with a few other matters in passing. The formula is far too complicated and as a result no one understands the nuances of the resulting change. Importantly, that situation militates against local initiatives and improvements. I have confidence in local government, albeit in perhaps a different form. Those of us with three-tier authorities are desperate to move to a two-tier system that bolsters town and parish councils and recognises that unitary authorities can deliver services with clarity. However, that is an argument for another day. It is galling to discover that the funding arrangements do not take account of particular problems. In the past six months, my county has been hit by two crises: flooding, which caused enormous problems, and foot and mouth disease. There must be a degree of finesse, in that funding must form part of the way in which we deal with those problems. Unfortunately, there is no way to do that at the moment.

What can we do? The Government must face up to the need for radical reform. My hon. Friend the Member for Stafford referred to the F40 group. Its highly creditable campaign, which the Government have regarded positively, has introduced many ideas, but we must push the rationale for reform. That is only one service and we must remember that we are reforming across the board, but its arguments for raising lower-funded authorities to an arithmetic mean and establishing common, service-based funding deserve close attention. Such initiatives could be linked to changes in the council tax regime. Re-banding, for example, should play a part in the changes in local government finance that we are discussing. We need to lower the banding for some residents in band A. Those of us who campaigned for fairness for dwellers in park homes will regard that as an important issue. Moreover, we should ensure greater fairness as regards those in band H—I am not having a go at them as individuals—who are not paying the proper amount towards local government funding.

Establishing floors and ceilings is a move in the right direction. I am confident that the Government now know how to do so, but they must grasp the nettle of reform and ensure that the various services are able to continue by providing appropriate funding.

Another reason why reform has failed is the London effect. Given that the constituency of my hon. Friend the Member for Upminster, who secured this Adjournment debate, is in the London borough of Havering, he is doubtless able to argue far more fiercely than I could for the need to recognise London's impact. I accept entirely that London is a special case, although we may not choose to describe it as such. We must recognise that the poorer London boroughs must not be disadvantaged by the new system. Indeed, if there is to be proper reform, some dampening might be necessary for a time to ensure that certain authorities are not unduly hammered. Some parts of the country will doubtless express a degree of schadenfreude, saying that it is about time that the south-east got its come-uppance. However, we should not argue that case too fiercely, because that is not the way to achieve an acceptable level of reform. We must recognise that there will be cost implications in the interim, until we move to a funding system that is fairer and more transparent.

We recognise that the task will not be easy and that many other elements in the Green Paper are also worthy of note. It is a strength of the document that it is thin: it is straightforward and not over-complicated. Pages 12 and 13 set out the SSA system clearly and comprehensively and have enabled me to come nearer to understanding it than ever before. I wish that the hideously complicated system were that simple in reality.

We must also examine such topics as the fairer use of capital investment and links to business rate changes. I would like the funding stream to be localised so that businesses can put money directly into their local communities. Such a link between a business and the local community is a symbolic, but important, gesture.

I hope that the Government recognise the need for urgent reform, and will get on and make the progress that some of us wanted earlier. The case is now proven, and all that remains is delivery.

10.26 am

Mr. Tom Brake (Carshalton and Wallington)

I congratulate the hon. Member for Upminster (Mr. Darvill) on securing the debate. "Justice for Sutton" has a nice ring, and something might be germinating there. We had the first phase of the "Justice for Sutton" campaign when I took an all-party group of local councillors to see the relevant Minister to express concern that, on the present grant, the London borough of Sutton cannot deliver the education or community services that residents want.

I welcome the opportunity to debate local government finance. Perhaps it is not the most media-grabbing issue, but it is of great concern to local residents, whom it seriously affects. As the hon. Member for Upminster pointed out, one could make this a much more controversial debate about public-private partnership for London Underground. The appropriate Minister is here, and such partnership is a means of funding local government services. Does the Minister advise local authorities to pursue public-private partnership arrangements for the long-term financing of council services?

We could make the debate different again by extracting the "local" and the "finance" to end up with "Modernising government". Today's debate could have touched briefly on the need for a fixed term for a Parliament. We must discuss that in this Chamber at some point.

The Liberal Democrats broadly support the aims of the reforms in the Green Paper, "Modernising Local Government Finance". Local authorities need a strong democratic mandate from voters and the support and involvement of a wide range of local stakeholders, as well as clear, forward vision and firm leadership. We agree with the hon. Members who have said that local authorities can achieve nothing without money. We must get financing right and fund all local authorities adequately.

Local authorities should have a greater say in what constitutes adequate funding. The standard spending assessment is unloved and based on projections that are up to 10 years old. If local authorities had a greater involvement in the funding process, some of the authorities in the south-east to which hon. Members have referred could have the necessary resources to tackle their serious problems, such as attracting teachers and social workers.

We support the continuous improvement in service quality. We support predictability and stability. Local authorities cannot plan ahead with confidence if they are subject to large or unexpected variations in grant, or take on additional responsibilities, perhaps at short notice, without the adequate level of funding required to deliver them. We support the need for local authorities to have real financial freedom and responsibility, but do the Government?

The Government's Green Paper states that local authorities need clear forward vision and firm leadership, but when local authorities provide firm leadership, they are slapped down by central Government. I shall cite my borough as an example, for which, like other hon. Members, I apologise—it is the borough that I know best. The London borough of Sutton carried out a consultation a few years ago asking local people what local government structure they wanted. My authority expressed its preferred option; it showed leadership, in other words. It had thought about the issue and suggested proposals. However, the local authority was sent off with its tail between its legs and told to rerun the consultation because of having expressed a preference—so much for allowing local authorities to demonstrate leadership. It is hard to believe that the Government are committed to giving local authorities real financial freedom and responsibility. We should allow local authorities to make their own decisions and their own mistakes, for which they may subsequently pay via the ballot box.

The Green Paper refers to the need to be fair to those who need and pay for local authority services and to ensure that people are fully protected. I hope that the Minister will explain what that means and from whom local residents need to be protected. Is it a code word for what used to be called loony left councils? Accountability for financial decisions needs to be clear. If council tax increases are excessive, or services underfunded, people need to know why. It should be clear to people whether council tax increases are a result of something that the local authority has done, or of central Government cutting the grant, or whether they are due to central Government passing on responsibilities to the local authority without giving it the necessary funding to allow services to be delivered.

The Minister will have seen chart A in the Green Paper, which shows a 4 per cent. increase in revenue support grant in the year 2000–01. Will he confirm what the increase would be if it were weighted in favour of additional responsibilities that local authorities have had to take on? What sum will the real new money be that local authorities will receive? The process of Government finance should be intelligible and transparent to stakeholders. No one could disagree with that. At present, few people understand the way in which local government is financed or realise the impact that the level of grant from central Government has on services.

The Green Paper refers to partnership working, which is again something that we support. We also support consultation, although referendums have to be handled carefully. Local authorities embarking on referendums need to be careful about the promises that they make and how binding they will be. When committing themselves to a council tax increase of a certain percentage, they need to be careful to take into account outside factors, such as the Ken Livingstone factor on precepts, and the impact that that could have on services.

The Green Paper refers to people being held to account if services are not being delivered or are inadequate. That is all well and good, but it is not easy to hold people to account in a first-past-the-post electoral system. My local authority has a massive Liberal Democrat majority, which I hope will continue for years to come, but under the present system, there is relatively little scope for people to achieve a change in local government. It is difficult to hold people to account under that system.

I accept that some progress has been made. It was right to move to a three-year spending round to give local authorities some stability so that they could see what was coming over the horizon in budget terms. However, there have been some unwelcome developments, such as the increase in the use of ring-fenced grants, or grants being given to specific bodies. Does the Minister think that central Government giving grants to schools results in greater clarity in financial decision making or responsibility? Does that help people to understand what is happening with local government finance?

The Green Paper contains much more that is welcome. Liberal Democrats aim to restore local government independence, which can be achieved in part by modernising local government finance. Will the Minister consider local income tax as a means of making accountability much clearer? How can that be achieved other than by shifting the balance of how local tax is raised, from a central Government grant to local people paying for local services and seeing that clearly in local income tax bills? Before anyone starts distributing leaflets saying that council tax will be increased threefold, taxpayers would be compensated by equivalent reductions in national income tax.

Mr. Phil Woolas (Oldham, East and Saddleworth)

Would a local income tax be raised from the residents of the borough or district, or from the employees working within that geographical boundary? How would the hon. Gentleman ensure a fair distribution of resources, given the higher incomes in the south-east?

Mr. Brake

There would need to be a mechanism for redistributing the moneys raised, so that deprived areas could be compensated, or given additional grant. That is why we are talking about, say, 80 per cent. of the money required to be raised locally and 20 per cent. raised centrally, with which we could achieve the sort of redistribution to which the hon. Gentleman referred. That would be achieved over a transitional period, so there would not be a heavy impact in year one.

The Government favour trials. We have had some interesting trials on voting procedure, with postal votes and allowing voting to take place in supermarkets, for example. Will the Minister consider allowing local authorities to use different methods of taxing businesses, for example? Many local authorities suffer, as mine does, from businesses or property owners who leave retail premises in prime high street locations empty year after year, waiting for I know not what. In a prime location in Wallington, the premises of what used to be a pizzeria have been empty for about 10 years. Can local authorities be given the flexibility to target empty retail premises and get them back into use, rather than leaving them vacant for many years?

I hope that the Minister will give local authorities financial freedom and responsibility and that he will respond positively to my radical proposals.

10.41 am

Mr. Nigel Waterson (Eastbourne)

It is a great pleasure to be in this Chamber under your chairmanship, Mr. Amess.

I congratulate the hon. Member for Upminster (Mr. Darvill) on securing this important debate. It would be unfair to describe those who are assembled here as "anoraks". We are not sad people—at least, not in this context. The hon. Gentleman raised some important matters and gave us the opportunity to probe the Government, in the estimable shape of the Minister, about their intentions. The Govt have published the Green Paper, taken consultations and had time to mull things over.

One of the problems about a Government coming to the end of their natural life is the tendency of Ministers to kick things into what is known in Whitehall as the long grass—the grass has never been longer or more widely spread than under this Government. The fly in the ointment is the postponement of the election to 7 June or whenever, because that means some things that are now in the long grass—hunting and so on—will have to be extracted from it.

On the more arcane issue of local government finance, we are entitled to know, in the dying days of this Government, whether Ministers will produce a White Paper on the subject. The last date for responses to the Green Paper was 8 December and it is high time that Ministers gave us their definitive views on the subject.

A problem with postponing local elections to June, or whenever, is that some fragile budgets have been put in place by regimes that expect to be booted out. My county, East Sussex, is a prime example. The Lib-Lab pact has made a complete mess of the budget and has left behind—or is hoping to leave behind—a fragile budget replete with booby traps for the incoming Conservative administration. It will be interesting to see how the Lib-Lab pact manages to soldier on, trying to operate the budget for the early part of the new financial year.

The comments made by the hon. Member for Upminster were thoughtful, although it was unfair to blame the Opposition for the lack of time available to debate the rate support grant, which is a matter for Government business managers. However, he was right to mention some of the defects in the current system. He touched on the Government's centralising agenda. Under this Government, local government finance is a major weapon for imposing a tighter grip from central Government on local democracy.

The hon. Gentleman mentioned best value, which has got completely out of control and which will need radical review under the next Conservative Government. He also talked about capping. With the effrontery that only politicians can manage, he denied that he would go into the subject of special pleading, of which he then gave us a lengthy example as it affects Havering. He was not alone in doing so—he thought that the settlement was not as good as it looked and talked about underfunding. He also mentioned large increases in council tax in his area.

The most useful parts of the hon. Gentleman's speech were his comments on floors and ceilings. A complaint about the Government's attitude to local government finance is that they claim to be in a period of stability, as they persist in calling it, with a freeze on standard spending assessment methodology. There are problems with that so-called freeze. At the start of the period, the Government made the conscious decision to shift resources away from shire areas and London—to the tune of hundreds of millions of pounds—and the three-year period of stability cemented in those unfairnesses for a significant period.

The Government are also bumping up against the problem of area cost adjustment. As the hon. Member for Stafford (Mr. Kidney) said, opinions differ on that subject, depending which part of the country an hon. Member represents. A Government faced with new data informing the calculation of area cost adjustment are in a predicament. Do they allow the new figures to be put into effect—that may cause even more steam to come out of the ears of the hon. Member for Stafford and his friends in the F40 group—or do they tinker with the system? In that respect, the hon. Member for Upminster put his finger on a major problem. Havering is one of a group of councils, which includes Newham, that have suffered a 0.2 per cent. loss in grant because of the introduction of floors and ceilings. The hon. Member for Stafford said again that it is a matter of top-slicing the money and redistributing it; it is not new money for people who are being given extra help, but money that is being taken away from all local councils, especially those on the list that includes Havering, which is losing even more grant because of the new ceiling arrangements.

In the middle of a so-called freeze of methodology, when the Government are supposed to be sitting in a darkened room taking account of representations on the Green Paper and taking serious decisions about the future of local government finance, they are merely tinkering with the system at the edges. They are just dipping their toe in the water; if it works this year and the Government think that they can get away with it, it is a wonderful opportunity for Ministers to make politically informed decisions about distributing grant around the country.

It was fascinating to hear the hon. Member for Upminster touch on that issue when he sounded a warning bell about ministerial discretion. There are two schools of thought on the Government Benches: first, that they do not want plan-based funding, and secondly, that they want a simplified formula. The only problem is that one authority's simplified formula is another's gross unfairness. The Minister will warn us about the search for undue simplicity in the formulas, but there is a consensus on the Labour Benches that plan-based funding is not the answer. In large measure, that is because of their suspicion and, if they are suspicious, what are the rest of us to say of ministerial power and the centralising power of Government over local authorities? It we are not careful it will be yet another mechanism that the Government will put in place to control the agenda of local authorities.

If there is not to be a simplified formula-based system, there is growing support on the Labour Benches for ministerial discretion, or interference, and we all know what that means. Already, specific grants under this Government have risen dramatically; they have gone up even in this year by more than 18 per cent. as a proportion of total grant. The growth in competition for particular pots of money is often time wasting and expensive for local authorities, especially those who do not succeed and now there is to be a system of floors and ceilings, which will allow Ministers to interfere, subject to representations from their hon. Friends—

Mr. Darvill

I have been listening closely to the hon. Gentleman. Am I to gather from what he said that he would be opposed to a safety-valve mechanism, or does he think that one could be introduced, provided that there were the right safeguards and criteria?

Mr. Waterson

With respect, that begs the question what system there will be at the end of the process. It is true that for a Government bent on centralising in local government there are major attractions in safety valves and other mechanisms based on ministerial discretion.

We heard a great deal about simplified formulas, especially from the hon. Member for Stafford, who speaks with some knowledge about such matters, and from the hon. Member for Stroud (Mr. Drew). The hon. Member for Carshalton and Wallington (Mr. Brake) was sensible not to dwell on Liberal Democrat policies of increased income tax, local income tax and regional tax and support for the Government's imposition of extra burdens on the motorist.

The important aspect of all this complexity, and the interesting and arcane discussions to which it leads, is the effect that it has on real people. Despite the Government's projections, this year there will be a further average increase of 6.4 per cent. in council tax—that is three times the rate of inflation. In Staffordshire, it is more than 8 per cent.; in East Sussex, it is close to 10 per cent. That is wholly unacceptable to ordinary people, especially pensioners, who, in effect, are having to pay a new stealth tax.

10.50 am

The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Mr. Keith Hill)

I congratulate my hon. Friend the Member for Upminster (Mr. Darvill) on his success in securing the debate. He was one of several Members of Parliament who responded directly with their views on the options for reform outlined in the Green Paper, "Modernising Local Government Finance". I have read his response, which was thoughtful, as was his speech today.

We heard interesting and serious contributions from my hon. Friends the Members for Stafford (Mr. Kidney) and for Stroud (Mr. Drew) and from the hon. Members for Eastbourne (Mr. Waterson) and for Carshalton and Wallington (Mr. Brake). Several hon. Members referred to the unique and compelling reasons why their local authorities should receive a somewhat better deal out of local government finance arrangements, and I should like to have been able to respond to those individual concerns. However, in view of the limited time remaining to me, I propose to confine my remarks to the Green Paper, which has been the underlying theme and connecting link of the debate.

First, on revenue grant distribution, the key point to emphasise is that we have not yet made final decisions about whether we will extend the formula freeze for another year or base the new revenue grant system on a formula or plan-based approach. In the meantime, officials are working with local government on the detail of our proposals for reform. New formulas are being developed only on a purely contingency basis. I shall return to that matter later.

Perhaps the most consistent message in the responses to the Green Paper was that local government needs more stability and predictability in funding levels. That enables authorities to concentrate on medium and long-term planning for improved service delivery rather than on annual fire-fighting and demotivating rounds of cuts when grant figures are announced. As my hon. Friend the Member for Upminster said, we have made progress in that respect. We have sought to provide as much stability and predictability as we could, through three-year plans for total grants and the continued freeze on SSA formulas. This year, we have gone further by introducing floors and ceilings to grant changes. That was much welcome I by my hon. Friend the Member for Stafford.

However, we have promised more than predictability and stability. We all agree that a fairer grant distribution system is needed, but fairness does not mean just "fairness for my authority". Given the complexity of the formulas, it is inevitable that every authority feels hard done by in some respect. Every authority can give compelling reasons why it should get more, and it is the unenviable job of central Government to try to balance all those views and to deliver a fair outcome for all areas throughout the country.

Our present grant system attracts a lot of criticism. It has not made it easy for authorities to improve their services and it is extremely difficult for people to understand. Small wonder, therefore, that authorities doubt whether it is fair. However, our review of the distribution system has been making good progress. We are not rushing ahead with hasty solutions, as some would urge, but taking a long, hard look at our shared objectives for the system and the best way in which to deliver them. We are building consensus through working alongside and listening to local government and other stakeholders, but much work remains to be done and we are eager to press ahead.

We are well aware of the F40 campaign, which has been active at grassroots level among local authorities and in the House, and is so ably led by my hon. Friend the Member for Stafford. I thank him for his kind words on the work done through direct grant to schools and through floors and ceilings. He will be pleased to hear that we have made an early start to joint working with local government and wider stakeholders on education funding.

A group has been set up to work on the funding of schools and local education authorities. Its overall aim is to oversee the production of a full proposal for a new funding system and a timetable for its implementation. The group's membership has been drawn from central Government and local government unions, and also includes representatives of teaching and non-teaching staff, schools, governors' organisations and the churches. It is working on a contingency basis and no decisions have been taken about changes for 2002–03.

My hon. Friend the Member for Upminster mentioned the safety-valve grant. The proposal on that was well received by Green Paper respondents. We are now discussing the detailed operation of the scheme with the Local Government Association, and considering the issues that my hon. Friend raised. The grant must be targeted at only a small number of authorities, but my hon. Friend has r lade a cogent case for his borough, Havering.

My hon. Friend the Member for Upminster also mentioned the local public service agreements that we are piloting. They are a new and potentially valuable tool for improving local services, involving closer co-operation between central Government and local government. They allow councils to sign up to challenging targets and to deliver on key national and local priorities in return for agreed freedoms, flexibilities and financial incentives. They allow us to examine ways in which the finance system can encourage exceptional performance. The pilot exercise is now being concluded.

Some 14 agreements have been signed with authorities around the country and the remaining six should be signed shortly. We will extend the local PSAs to other upper-tier authorities in England on a voluntary basis.

I have concentrated on the distribution of revenue grant, which arouses strong feelings because of the sums involved. The debate, however, is on modernising the whole local government finance system and I will briefly cover other matters raised in the Green Paper.

We are introducing more flexibility to capital finance by the single capital pot—a cross-service allocation mechanism for giving central Government capital support to local authorities. That will be introduced next year, but we are going still further. Green Paper respondents overwhelmingly endorsed our proposals to abolish the complex system of local authority capital controls and replace it with the "prudential system" described in the Green Paper.

Two weeks ago, my right hon. Friend the Minister for Local Government and the Regions announced to the House our decision to implement the changes. Local government has long sought such capital reforms and they are widely welcomed. Under the new system, authorities will be free to invest in their communities without needing permission from central Government each time. Safeguards in the system will ensure that authorities do not run up unsustainable debts, but the increased flexibility will enable them to deliver better value for money, including through partnership working. The necessary legislation will be introduced as soon as there is parliamentary time.

In the past four years, the Government have increased grant to local authorities by £8.7 billion. That real-terms increase of 13.6 per cent. contrasts with the previous four years, when there was a real cut in grant of 6.9 per cent. In our first four years in office, we have concentrated on the biggest problems: inadequate funding for local government and lack of certainty about future funding. The Green Paper and forthcoming White Paper represent the next phase of our agenda to modernise local government. That includes the reform of grant distribution, capital finance and local taxation systems, and we will continue to work in partnership with local government and local stakeholders to achieve our aims.