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'OVERWHELMING CASE FOR FUNDAMENTAL COUNCIL TAX REFORM'

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MP for Nottingham North, Graham Allen told the House of Commons last night that the use of the council tax as a top...
MP for Nottingham North, Graham Allen told the House of Commons last night that the use of the council tax as a top-up fee for local government funding had 'run its course'.

He said: 'Even ignoring the democratic arguments, there is now an overwhelming case for a fundamental reform of the local and national government relationship. This is my contribution to the big conversation, which is needed on the topic ahead of the third term.

'I welcome the ODPM under-secretary of state, my honourable friend the member for Corby, Phil Hope, to the front bench. This is the first time that I have had the pleasure of having an adjournment debate with him. We go back some time. I remember when we were twinned before the 1997 general election. I always knew that my hon. Friend had a great future ahead of him, and he is proving that as he makes a great impact in his ministerial position.

'The government are to be commended for their open-mindedness in looking at local income tax and other forms of local government funding. While important in itself, it will be even more significant as the trigger for the next serious step to democratic reform in the United Kingdom. Most western democracies have guaranteed local government independence, backed up by a constitutional guarantee. For that to work in the UK would require not only powers, but financial autonomy, to be devolved to local government.

'The appalling turnouts for modern elections underline the fact that it is time either to create genuine democratic local government or to stop the pretence and wind it up. In the debate on local income tax we should stake a claim for nothing less than constitutionally independent local government for the whole of the United Kingdom. That is a concept that would sustain local government and its financing long into the future and end the annual begging-bowl round that so humiliates both the central Government giver and the local government receiver.

'Given the reduction of local government ove r recent decades to little more than an agent of central government, this proposal would amount to the largest denationalisation ever undertaken in the UK, and the restoration to the public of their ownership of their own local government. The centralisers in British politics have had their day. Over the past 40 years, whatever success they have had nationally, they have delivered neither economic nor social progress at the local level. We see short-term finance, interference, distortion of local priorities, people spending much of their time bidding or working to protect the future of their own jobs, a plethora of schemes and bodies to circumvent local democratic decision making, barely understood by anyone but a new cadre of local professionals.

'Virtually every nation and every business has concluded that the current economic complexities are way beyond the capacities of a command economy. They speak, and deliver on, the language of decentralisation, devolution, local budget holding, participation, and team working. Yet the way we in the UK govern ourselves seems to be stuck, Brezhnev-like, in command politics. That is seen at its starkest and its most wasteful in central control of local government-a concept both alien and hilarious to most other western democracies.

'Free local democracy will provide more diversity and independence in our political system, which will lead to more creativity, sensitivity and innovation throughout our society and economy. Merely to remove some of the worst excesses of centralism, such as ending the capping of local spending, democratising quangos and releasing capital receipts, welcome as those steps are, is not enough. We need to put local independence beyond the reach of central government and to admit that the man in Whitehall does not know best, even if, in my case, he is a Labour man.

'Petty interference from the centre must be denied any legal or financial basis and that should be achieved in two ways. First, local authorities must be created in l aw as independent sovereign entities to guarantee their independence. They would then be able to undertake, as of right, all the duties for which they were elected locally and that are recognised as being local under subsidiarity-a concept that will soon have legal force in the European constitution. They would include duties that are not prohibited by law, which would turn the present injunction saying that authorities are not allowed to do things that are not expressly allowed by law on its head. Local government, like any other public body, would have to perform its duties under a legitimate inspection regime, in the context of the European convention on human rights and, potentially, under a more comprehensive and up-to-date British Bill of Rights. It could, therefore, be held to account by any citizen if it were arbitrarily to breach such rights.

'Additionally, the pull of centralism is so great that even a government who had created independent local government might succumb to the temptation to meddle unless we were to ensure that such local rights were put constitutionally out of bounds. That could be achieved initially by this place passing a local government independence Bill that could be protected from easy repeal by including an amendment to the Parliament Act 1911 to allow a second Chamber to veto legislation threatening the rights of local government. In the longer term, such a fundamental bedrock of our democracy must be guaranteed by clauses in a written constitution for the United Kingdom.

'Secondly, although we may return the ownership of local government to local people, we must also restore control to them. Political independence for councils would mean nothing without financial independence. The bulk of all local authority spending-more than half-is provided by central government and only a fraction-one eighth-is raised locally by council tax. Such dependency must end. central government must be removed from the financial equation locally and a radical new settlement on taxat ion must be implemented to achieve that.

'Income tax is first collected from local taxpayers by the Inland Revenue and distributed back to the localities by central government, but that essentially technical system of distribution has become politicised and arbitrary due to ministerial manipulation and the desire to impose central priorities. In future, I propose that the Inland Revenue should collect the same amount of income tax revenue, thus leaving the taxpayer completely financially unaffected. However, the precise amount that currently goes to local government would be ring-fenced and given to it directly rather than via the centre.

'Central government spending on local services in England and Wales is £54.6bn and the income tax take for England and Wales is £109bn. In effect, about 50%. of the income tax take would become a local element and 50%. would go to the chancellor. That could be done via an independent commission that would be legally separate and dislocated from Whitehall. It would receive local government's slice of income tax directly from the Inland Revenue and be charged with distributing money to councils on the same basis as that currently used by the government department with responsibility for local government. There is no reason why most of the commission's members could not be elected councillors from all parties. Local government's national bodies have shown themselves to be mature and confident in their cross-party work and when co-operating among themselves, so there is no reason why such a commission could not perform that task. The amount of income tax raised for national and local expenditure would be clearly identified on everybody's payslip as national and local income tax to aid accountability. Although central government would be legally excluded from tampering with the overwhelming bulk of local authorities' income, they could perform the function for which they are best suited by being free to assist councils with time-limited funding for specific problems, which is already done by the federal government of the United States and the governments of many-indeed, most-European states.

'Local councils, assured that the funding of most of their expenditure was secure, could then be free to raise the remaining part of their income from a menu of tax-raising revenue powers, ranging from property taxes to sales taxes. Decisions on local taxes and rates could be taken by local representatives, perhaps even endorsed in local referendums. My guess is that local authorities would mostly rely on their local income tax-£54.6bn-a returned business rate of £16.3bn and a property tax of £17.7bn to meet their total current expenditure of £88.5bn. However, this would be a matter entirely for them to decide. In a mature democracy local authorities would be confident and competent enough to raise and spend what they decide is appropriate, always needing to balance service delivery with revenue raising and being aware of the electoral consequences of no taxation without explanation.

'Citizens, knowing what they pay and why they pay it and holding their own local representatives to account, would constitute a firmer discipline and a stronger bulwark against central interference than any statute that could be passed by this place. Local authorities already have a record of financial expertise and economic management that bears comparison with central government, who so often wish to lecture them whatever political party that government happen to represent.

'As a constitutional safeguard, local authorities would be obliged to operate a balanced budget provision, a self-discipline operated by most American state governments. Annual income would have to match annual spending. Local borrowing, provided that its costs were met from annual income, need not be controlled by Whitehall or appear in the old public sector borrowing requirement, which is now called the public sector net cash requirement.

'Throwing away the crutch of central government will be a frightening as well as exciting challenge. There will be nobody else to blame any more. However, devoted public service has always characterised local councillors of all parties, and they will respond to their liberty. Let local people decide on their spending, their services, their electoral system or the use of direct democracy. A thousand flowers are waiting to bloom locally, but not all of them to the liking of whichever political party is in control at the centre. We must be mature enough to accept that, alongside one council's initiative to create jobs or vocational training in schools, for example, another council may wish to reinstate grammar schools. Such diversity should be not centrally repressed but fought out nationally and locally in the melting pot of campaigns, the contest of ideas and the votes around local choices.

'I have faith that my party's ideas would pass such tests, not least because they would deliver a tremendous revitalisation to our all-too-often moribund local politics. Returning real decision-making powers to local areas would give a much-needed stimulus to local political parties. Many individuals who have opted out of local politics would again be drawn back into public service. Once again, it would really matter who got elected locally and how well they were politically prepared and technically trained to handle the onerous duties and responsibilities of independent local government.

'We would recreate that invaluable network of citizen politicians of all parties, in touch with their communities, close to their constituents, empowered and empowering their local areas. We all know that the current agency relationship between the centre and the localities cannot be sustained. Independence for local government and independence for people locally is an idea that could revitalise not only our politics but ourlocal civic community. Now is the time for some bold leadership to release and return power back to where it belongs-our local communities.'< p/="">

ODPM minister Phil Hope replied: 'I congratulate my honourable friend Mr. Allen on securing this evening's debate and thank him for his kind remarks at the beginning. He managed cleverly to refer to President Brezhnev, and Chairman Mao indirectly, in the same contribution, even though they had opposing philosophies-although the citizens of their two countries may not feel that way.

'This is a good time to discuss this important subject, which the government take seriously, and with which I am closely involved, not least as a member of the steering group that is looking at the balance of funding. I listened with great interest to my hon. Friend's views and suggestions on how the local government system should operate, and it may help the House if I recap on the background to the many issues that he raised.

'My honourable friend is concerned with local government's constitutional standing, electoral turnout, the need for political and financial independence and the case for a local income tax. Any of those might be considered a suitable subject for an Adjournment debate in its own right, and he is to be congratulated on bringing so many important issues together in one short debate.

'I should like to start with localism, which is at the core of my hon. Friend's proposals. That is a term that is used increasingly commonly in many different contexts, and rightly so: it is a central theme in the government's thinking, and underpinned much of what we said in our White Paper and the new financial freedoms in the Local Government Act 2003.

'What does localism mean? Like many well-used phrases, it is, I suspect, open to a range of different interpretations. Presumably, it is the opposite of centralism and command politics, the sins that my hon. Friend described earlier. To do him credit, he proposed a truly radical meaning that would entirely break with the history of local government and the current constitution of this country. His localism would require constitutionally independen t local government, backed by a new inspection regime, a new British Bill of Rights, a local income tax, and a menu of other tax-raising powers. I hope that I have not understated the radical nature of his approach.

'The government have their own powerful vision here-one in which strengthened and efficient councils are free to deliver what their voters demand. But we also need to have the power to intervene where they are clearly not doing so. Our vision recognises the expectations of the public. When asked their opinion, many of the public are often in favour of devolution in principle. It seems common sense that councils should be left alone to get on with things in the way that my hon. Friend described, but others seem to trust their local councils less than they do Parliament and Whitehall, and that was shown, for example,by our focus group research on public attitudes to the balance of funding. If the public are asked different questions, they tend to be hostile to what the press like to call the postcode lottery. If we are to advocate the localist cause, we have to be prepared to build public understanding that devolution of decision making involves greater diversity of provision.

'The public can also be slightly less devolutionist when things go wrong. They are quick to point the finger at central government and ask us to step in. For example, in response to a highly publicised social services case, or evidence of educational under-achievement, the tendency is to insist that the government must do something to remedy the problem. There are expectations that the government should ensure certain minimum standards, and that means that there must be a limit to local discretion. Society simply will not accept standards of provision falling below certain norms in any area, and, frankly, neither will we.

'Now we hear the term new localism or, in different contexts, civil renewal, suggesting that we should perhaps look at a radically new concept of devolution to the town hall and beyond. I should be clear that I support giving people a strong say in their localities in respect of services, and in other issues, such as liveability, that affect their everyday lives. That is about getting better services because they can better reflect local needs and priorities, and about getting people involved. I echo my hon. Friend's sentiments in his remarks towards the end of his speech, because effective local leadership is vital to achieving that. Thriving communities and strong democratic leadership go hand in hand. He and I both know from our constituency experience that neighbourhoods have complex interrelated problems, services are delivered by multiple agencies and there are limits to the capacity of any community to address all issues.

'That is why we see a vital role for the council as community leader and facilitator, and we have started to give councils the ability to play that role. In 2000, we gave councils a power to promote the well-being of their areas, allowing them to respond to a wide range of local issues. This year, the Local Government Act 2003 gave local authorities more freedoms that will help them to respond to local priorities and needs. Financial freedoms and the freedom to respond to businesses and communities are crucial to making credible an agenda of responsiveness. In a different context, which we have been debating today, we are ensuring that the planning system-one of the issues about which local people get most concerned-is more responsive to the community.

'Those issues are the context for the new localism, but we recognise that it does not stop at the town hall. There are already models of empowering communities, such as neighbourhood management schemes, which I am sure my hon. Friend has in his area, and quality parishes. We are lookingat those options and others across services and Departments. He will have seen that, in the big conversation, of which his contribution is a part, we have asked for views on whether we should give neighbourhoods more direct pow er over public spaces and community safety, with the power to raise small sums of money. We want a real debate on those issues, and his contribution has been an important part of that.

'I should add a word on the European context, to which my honourable friend also referred. In their approach to the Convention on the Future of Europe and now towards the intergovernmental conference in drawing up a constitutional treaty for the European Union, the UK government have throughout been a leading advocate both of ensuring that subsidiarity is properly enforced and of strengthening the role of national Parliaments in Europe. We also welcomed the recognition that the Convention gave to the role of regional and local government. We are continuing to support those proposals in the IGC.

'I should like now to move on to the finance issues that my honourable friend raised. First, I refer him to the recent provisional grant settlement for local authorities. I know that that does not quite go to the philosophical root of his arguments, but I should like to preface my later remarks with some comments on the reality of what is happening now. As he will know, the government have increased the grant to local government by some 29%. in real terms since 1997, taking account of the provisional settlement for 2004-05. That settlement is the seventh successive settlement to give an above-inflation increase to councils-in this case no less than 6.5%.

'More money is going into local government, but my hon. Friend asks for more financial freedoms for local government. We have already moved in that direction, as can be seen in our commitment to reverse the trend on the ring-fencing of grants to local authorities. I am pleased to say that, in the recent grant settlement, we reduced the ring-fenced grant from 13.3 to 11.1%. of the total grant.

'The Local Government Act 2003 is also about giving councils more independence and flexibility, including financially, and paves the way for even greater freedoms for cou ncils to improve their services. It includes powers to trade, charge for discretionary services and retain income from some fines and penalties, and gives incentives for local government to work with local businesses through the business improvement districts and growth incentives schemes. It also provides for authorities, rather than the government, to decide how much they need to borrow.

'I welcome my honourable friend's comments on the balanced budget duty. The duty to set a balanced revenue budget has long been a fundamental part of the local government financial framework. From next April, the 2003 Act will strengthen current rules even further.

'I am also pleased that my honourable friend favours removing central control from local borrowing. As he knows, that is exactly what will happen next April, when the new prudential capital finance system comes into force. Again, the framework has been provided in the Local Government Act 2003. For the first time, local authorities will be free to borrow to fund capital expenditure without government consent, provided that they can afford to service the debt without extra government support.

'Let me move on to my hon. friend's specific suggestions on what taxes local government should be able to raise and to the broader-brushed canvas that he described. In brief, I understand that he is proposing a local income tax, relocalisation of the business rates and other local revenue sources such as a sales tax. His voice is certainly not the first to make those suggestions. All of them are among the areas for further consideration raised by respondents to the consultation on our balance of funding review, which has invited expert evidence on all those issues in the next few months.

'It is possible that, despite recent discussions of council tax rises, some hon. Members are not familiar with the balance of funding review, although I am sure that my hon. Friend is. The government proposed in their 2001 White Paper to set up a high-level working group to address an issue repeatedly raised by local authorities and the Local Government Association. They argued that the fact that local authorities raised only 25%. of their own funding on average, and relied on central government grant for the rest, was bad for local democracy. They also argued that it caused the problem of gearing, by which an authority needs to raise its council tax bill by an average of 4%. to raise its budget by just 1%.

'The review has met several times under the chairmanship of my right hon. Friend the Minister for Local Government, Regional Governance and Fire. It has discussed the principles of a successful local government finance system, commissioned independent research-all of which is now available on the ODPM's website, so it is transparent and available for everyone to become engaged with-and held a public consultation. It is now discussing possible reform options. In the context of this debate, I want to emphasise two of its findings so far.

'First, the research shows that much of the public are not clear where accountability for local government services lies or where the money comes from. What matters to them is not where local authorities get their money, but that services are efficiently delivered. There seems to be no sign of a direct link between the balance of funding and local election turnout-that was a surprise to many of us. Secondly, our consultation results show that there are many concerns about aspects of the local government finance system, particularly gearing and the impact of council tax rises on taxpayers with fixed incomes. However, there was no clear or simple view of what needs to be done. There are no easy fixes or quick wins and we do not want a knee-jerk reaction. That is why we reject the simplistic, uncosted notions proposed by the Liberal Democrats, and why the official Opposition have so far remained silent on the matter. We need to think the issues through fully if we want, as I do, a system that is fair and widely accepted.

'Let me look at my hon. Friend's proposal for a local income tax. The balance of funding review consultation showed support in some quarters for replacing or supplementing council tax with a local income tax, or at least considering the case for one. However, we already gain most of our tax revenue from a national income tax, so we would need to be very sure of the case for having a local income tax, too. I should also point out that the prime minister has made it clear that the government do not favour replacing council tax with local income tax. However, we are certainly prepared in the review to listen to reasoned arguments, and this is one of four issues on which we are asking expert organisations-in this case, the Chartered Institute of Public Finance and Accountancy-to provide further evidence on the pros and cons. That is vital in the case of local income tax, because there are many different ways in which it could work. My hon. friend proposes assigning a fixed proportion of national income tax to local government. That would, as he suggested, provide security, but it would hardly give councils greater freedom because they would have no control over the rate. I can see that it would be easier to administer than a system where councils set the rate, but I am not sure how it would increase local democracy.'

Mr. Allen said in response: 'I need to make it clear that, as my hon. friend has grasped, I am not suggesting that local authorities themselves should have any ability to vary the rate-certainly, not initially-but that the amount of national income tax that gets diverted to local services follows a more direct route that would aid accountability. In a sense, since it does not alter the payments made by the individual taxpayer, it is a fairly modest proposal, but the symbolism of assigning that money as a local income tax would be a tremendous boon to accountability. It need not necessarily stop there, but I am conscious of my hon. friend's blandishments about not doing anything too radical. Th is proposal is radical enough-I hope that it would encourage local government to think further about its options in a decade or two.'

Mr Hope said: 'My hon. friend makes a good point. He talked about creating a new independent commission of elected members who would distribute that ring-fenced money. I can see advantages to his proposals as well as a great many disadvantages-that is why the balance of funding review is considering all the issues. Some advocates of local income tax suggest that its administrative costs are minimal, but that is frankly not credible. The review will need to hear a great deal of evidence about that.

'I am aware that time is running out, Mr. deputy speaker. My hon. friend also suggested the re-localisation of business rates. We have a predisposition against re-localisation because we fear that a postcode lottery may occur where businesses are allowed to go down that route.

'I welcome my hon. friend's contribution to this important debate. His paper certainly reflects the importance of getting it right, and it is admirably detailed in its proposals. These are complex issues. There is no easy fix and no magic formula: we need to plan for the long term. We are firmly committed to the new localism, as well as to providing new freedoms to local government and exploring options on how it is financed, although I have to say that the government's considering how such options might work does not mean that we endorse or intend to adopt them, whatever newspapers might say.'

The motion having been made at ten o'clock, and the debate having continued for half an hour, Mr. Deputy Speaker adjourned the House without question put, pursuant to the Standing Order.

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