§ Motion made, and Question proposed, That this House do now adjourn.—[Jim Fitzpatrick.]
§ 7 pm
§ Mr. Peter Luff (Mid-Worcestershire)
I am very grateful to you, Mr. Speaker, for the opportunity to discuss this matter of great importance to my constituents in Mid-Worcestershire and to those of my hon. Friend the Member for Bromsgrove (Miss Kirkbride), whom I am glad to see in her place, and of my hon. Friend the Member for Leominster (Mr. Wiggin), who still has a significant footprint in Worcestershire in the area of Tenbury Wells.
Local government taxation has always been a controversial matter, but recent increases have made it much more so. This debate need not be a matter of party politics. I will say some fairly firm things to the Minister, because, although the problems I am describing began when my party was in power, they have become worse under this Government—we are both guilty men in that sense—and the matter is now becoming increasingly urgent.
Pensioners and low-income householders in Worcestershire simply cannot afford any more significant above-inflation increases. I know that my hon. Friend the Member for West Worcestershire (Sir Michael Spicer) agrees with that. He was always going to be detained somewhere else tonight—he had a long-standing engagement. I suspect that something else may have overtaken that long-standing engagement, but he is still elsewhere tonight, so he has asked me to say that he associates himself with the arguments that I am putting to the Minister and the House this evening.
The county precept in Worcestershire has gone up by nearly 80 per cent. in cash terms since 1997. Again, that is not a matter of party controversy, because the recent large increases—nearly 13 per cent. in the current year—were supported by councillors of all parties, albeit with some reluctance, because they recognised that it is the only way they can protect services in the county. The police precept has risen by about 50 per cent. in the last two years alone—another very significant increase. These increases have been made until the pips squeak, but sadly it is not the pips of the rich but the pips of the poor that are squeaking, and that is the problem.
Service delivery is also very vulnerable in the county. For example, the gap is growing between Worcestershire's schools and those in neighbouring authorities—Birmingham spends an average of about £700 more per pupil—and head teachers in Worcestershire are at their wits' end. Forty-one schools currently face deficits, and unless something is done the situation will be worse next year as balances put by for projects, or prudently for contingencies, are exhausted. We are grateful to the Minister for School Standards for the attention that he has given to the situation in Worcestershire, but, as he knows, head teachers in the county are dignified in their protests but increasingly convinced that something must be done to correct this growing divide.
The problem that we have in debating this subject is that local government finance is notoriously complex, and that complexity has enabled the Government, I 276 think, to hide a huge increase in taxation—or to hide it until recently. The problem I have in talking to constituents is trying to explain gearing in less than two or three sides of A4. It is a difficult problem, and the result—I think the Minister will admit this, and of course it happened under the previous Government, too—is quite often that county councils get it in the neck from central Government's policies.
I still fondly cling to the hope that everything, when properly understood, is simple, so I think there are three simple truths about Worcestershire's council tax. The first, a very important one, is compound interest. That means that discrepancies increase over time. The rules of compound interest are clear. If the same percentage increase is applied to a small sum and a larger sum, the gap between the two sums widens over time. The trouble is that Worcestershire has seen an increase in central Government education spend per pupil of only 39 per cent. since 1997, compared with a national average of 47 per cent., so that 8 per cent. discrepancy has magnified an already large gap and made the rules of compound increase even more cruel.
The second truth is that if the Government reduce the share of local expenditure that they finance, council tax must rise to fill the gap. That has also been happening in Worcestershire.
The third truth—and it is a matter to which I shall return at the end of my remarks—is that if the Government keep the promises implied in the public expenditure White Paper and elsewhere, the county's council tax increase next year need "only" be around 6.5 per cent., although that is still a large sum. As it is, the average Worcestershire council tax payer—that is, a band D council tax payer—is already paying more than the average Birmingham council tax payer, and more than people in Dudley, Solihull and Walsall. The amount paid in Worcestershire is about the same as the average paid by the English council tax payer, but it is more than what is paid by the average unitary authority tax payer. To be fair, the amount paid in Worcestershire is very slightly less that than the amount paid by the average county council tax payer.
In other words, it would be wrong to look to Worcestershire council tax payers to put right the discrimination against schools and other local services by paying more in council tax. I qualify that assertion in one way: if the Government agreed to give us a fairer deal, to narrow the gap between us and similar authorities and to make a bigger contribution themselves to council services in Worcestershire, I would consider supporting a matching increase in council tax. However, I cannot argue that council tax payers in Worcestershire should bear all the pain for central Government's failure to fund those services.
Council tax in my constituency is divided into four elements, and there will be five next year. The county council takes 75 per cent. of the total, and the district councils—in my case, that is Wychavon—account for about 12 per cent. The police account for some 11 per cent., and the parishes for around 2 per cent. When the fire authority becomes a precepting authority in the coming financial year, it will receive a separate precept.
A brief look at the police shows that there are 300 more officers, but that is no thanks to the Government. We in West Mercia now pay more for police—£119.80 277 on average—than people in Birmingham, who pay £71.16. The Home Secretary cannot rightly boast of any achievement in that respect. The local council tax payer has paid for those officers through the massive increase in police precept—50 per cent. over the past two years.
The prospects for the coming year are very bad, as the Association of Police Authorities confirmed in a briefing yesterday to all hon. Members. West Mercia faces cost pressures of 5.8 per cent. to maintain current levels of policing—that is, to meet pension and pay requirements under the Police Reform Act 2002, and to cover other variables imposed by the Government, such as DNA testing, and so on.
If the Government grant increases by 3 per cent., as they did last year, gearing—the proportion raised by local council tax payers—would mean that the police precept would have to rise by 11.5 per cent. just to stand still. Is the Minister able to assure me that the increase in Government grant will at least match the extra costs imposed on West Mercia under the Government's reform programme? There is also speculation that a 2.5 per cent. floor in the Government grant would apply to West Mercia. That would have a disastrous impact on council tax and service levels.
I shall make a few brief remarks about the district council. Wychavon district council is a very well-run administration. It has more flexibility than others, as there are no large budgets for fixed costs such as education and social services. That means that it has managed to keep its council tax increase in line with inflation and the retail prices index, while maintaining and improving services. The planning department, in particular, has received a pat on the back from the Office of the Deputy Prime Minister, the Minister's own Department, for spectacular improvement in output over the past year.
We do not know what will happen with fire, for which there will be a precept for the first time in the coming year. I assume that the precept will be relatively modest, but it is a matter for concern, given that Worcestershire always spends significantly more than the standard spending assessment or the formula spending share. The parish precept of 2 per cent. is ungeared and no large increase is expected, so it is not really an issue.
The big precept is the one for the county council, which accounts for 75 per cent. of the total. I want to dispose of two myths about the county. First, there is little room for efficiency savings. Worcestershire is an efficient council. Central costs at county hall are about 75 per cent. of the national average, and efficiency savings have recently exceeded all Government targets. The Audit Commission has said that no other council in the west midlands offers a better quality of service. The commission went on to say that the council needs more money to improve further.
The second myth that I want to dispel has to do with money passported to schools. Worcestershire county council has not sat on money that it should have passported to schools. It spends 2 per cent. more than the Government formula suggests it should, and it passported 103.5 per cent. of last year's increase.
There are two reasons for the massive increases in Worcestershire's council tax in recent years. First, Government policy is to reduce the amount of expenditure obligations funded centrally—out of 278 general taxation—and to shift the burden to the council tax. That policy was in place before 1997, but it has accelerated since. The second reason is the continuing and increasing discrimination against Worcestershire in all the funding formulae.
The first reason to which I have referred is Government policy for all of local government. However, we should not blame councils for increases in council tax that flow directly from central Government policy. The second matter is more specific to Worcestershire, and is an accident of history that urgently needs to be corrected. The Government claimed to have changed the funding formula this year, but they merely seemed to rig the criteria so that the new formulae mirrored the outcome of the old ones. There were remarkably few changes.
I have a practical suggestion for when the Government reconsider the issue. Sadly, I think that it will be two years before they do so; I wish it could be sooner. We should learn a lesson from the health service. It, too, has complicated means of distributing resources throughout the country, but I have never heard the criticism that Worcestershire receives an unfair share of health service funding. The formulae are complicated—had I more time, I might have expounded them at length to the House—but I hope that the Minister might consider them as an alternative funding mechanism for local government.
That brings me inevitably to the question of area cost adjustment. I am grateful to the Minister for the time that he spent recently with a delegation from Worcestershire. The delegation was so large that the numbers had to be rationed and I could not join it myself, although I should have liked to take part. I pay tribute to the hon. Member for Worcester (Mr. Foster) who initiated an interesting debate on area cost adjustment, a highly technical subject, earlier this year. However, the debate missed a vital point: national pay scales and national teaching costs mean that there is no intellectual justification for applying the area cost adjustment to education at all, and it should be phased out.
If we have to keep the area cost adjustment—I hope that we do not—Worcestershire deserves it. The vice-chancellor of Birmingham university, the chief executive of South Worcestershire primary care trust, the artistic and musical director of the English symphony orchestra, all the county's councillors and MPs, and even the Bishop of Worcester, all agree. God, the arts, industry and education are all on our side: area cost adjustment is needed for the county. Adrian Hardman, the cabinet member for resources said:The unfairness of the situation is highlighted by the fact that I can look from my house to my neighbours across the river in Gloucestershire and know that they receive this valued top-up, living in virtually identical surroundings.
I shall not rehearse the arguments at length because the Minister is familiar with them, but most of Worcestershire falls in the travel-to-work area of towns and cities in other authorities that receive the ACA. Teachers live in Worcestershire, but work in Birmingham, Warwickshire or Gloucestershire; they live in a local education authority area that does not get ACA, but work in one that receives it.
279 We compete in the same labour markets. Strangely, despite the high costs of living in Worcestershire, which count against us on resource equalisation, we are second from bottom of a table for county council funding per resident. We are almost unique in not receiving area cost adjustment, but we are penalised by resource equalisation.
House prices in Worcestershire are relatively strong, so Ministers judge that the council tax base can support a higher proportion of spending, which means that Worcestershire receives less than its fair share of grant aid from the national Exchequer. Ministers have decided that grant can be switched from Worcestershire through the resource equalisation formula. At £13 million, that is quite a switch.
Set against that, Ministers judge that Worcestershire has low wage costs and so should not be allowed area cost adjustment. That decision by Ministers is worth £10 million in lost income to the county. Ministerial decisions seem to defy mathematical gravity: high house prices supported by low wages—an economic miracle. It is no miracle, however; the statistics are wrong. It is wrong-headed to unhinge Worcestershire from the greater west midlands labour market. Ministerial decisions to do so cause real damage to those relying on services and those who pay for them. The result is that my county is out of pocket to the tune of £23 million.
Indeed, only 64 per cent. of our costs are met by central Government, down from 67 per cent. last year and compared to a national average of 73 per cent; that old friend, gearing, comes back to make up the difference—painfully—for my constituents.
§ Miss Julie Kirkbride (Bromsgrove)
I am loth to interrupt my hon. Friend as he is making a fantastic case for Worcestershire and I hope that the Minister has been listening. May I add another fact to all the relevant facts that my hon. Friend has given? In Bromsgrove, I feel acutely the problems relating to the funding gap between schools. Last year, the gap between Bromsgrove schools and those in Birmingham was £560 per head per year; the figure is now £720.
§ Mr. Luff
My hon. Friend is right. The gap is growing yearly in both absolute and relative terms. That cannot continue indefinitely; the process must be ended, as I am sure the Minister will agree. Indeed, I am a practical man, so I have a suggestion to make. I am running out of time, and as I want to hear the Minister's response I shall offer three short-term solutions.
First, we should phase out the area cost adjustment and consider the health service model to which I referred. Secondly, we should end resource equalisation, which certainly cannot be justified for Worcestershire. Thirdly, at least this year—and possibly in future years—we should increase per pupil funding in cash, not percentage, terms. We should start to narrow the gap to which my hon. Friend referred and give every school in the country, say, £100 per pupil, rather than 3, 4 or 5 per cent.
To meet service delivery obligations, the county's budget has to go up by 5.9 per cent.—about £25 million. If central Government grants to local authorities rise in 280 line with those obligations and with Government expenditure forecasts, all of which are published by the Chancellor, the county could keep its council tax increase precept at only—only—6.5 per cent., which is still too high, but half this year's rise of nearly 13 per cent. If the Government give us any less than they have hinted—say, 4.5 per cent.—council tax will rise by 8.6 per cent., or services will have to be cut by about £3.3 million.
But, worse than that, the Department for Education and Skills insists that all the increases in formula spending share are added to school budgets, so any shortfall in total grant for the county will fall exclusively on the other services. County social services, in particular, will be put under pressure, as demographic trends are against us with an ageing population in the county, and the road repair programme might also have to be slashed. Roads in Worcestershire have improved dramatically in recent years, but we do not want that progress to be curtailed.
I have made some practical suggestions for a way forward, but I conclude with a key message: the buck for any increase in council tax above 6.5 per cent. for Worcestershire or any cut in services stops with the Government, and the Minister has it in his power to prevent that from happening.
§ The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Phil Hope)
I congratulate the hon. Member for Mid-Worcestershire (Mr. Luff) on securing this debate about council tax increases in Worcestershire. He has been busy writing letters just lately, and he has obviously been drawn away from other business—pressing discussions—but he has made good use of the time in making what I can describe as a very sound leadership bid this evening.
The Government have high aspirations for local government. We are continuing to match those aspirations with proper investment, as demonstrated by this year's generous local government finance settlement. However, council tax continues to engender debate throughout the country—including Worcestershire—and has taken on a significant profile this year after some high increases. I shall return to that issue shortly, but before doing so, I want to put the debate into a wider context.
It is worthwhile reminding hon. Members of the good increases in grant that we have been able to provide local authorities generally. This year's settlement provides an overall increase in general grant of 5.9 per cent. It has allowed us, for the first time ever, to ensure that all local authorities receive a grant increase that is at least above the rate of inflation. It has enabled us to continue the considerable investment that we have made in local government since we took office. That investment involves a 25 per cent. real-terms increase in grant since 1997. That compares starkly with the 7 per cent. Real-terms cut in grant that councils experienced in the last four years of the previous Government.
Some local authorities have expressed concern at the pressures that they face this year. I understand those pressures and I am aware that many councils still face difficult decisions. However, we have increased total Government grant, including special and specific grants, 281 by £3.8 billion. That is an 8 per cent. increase. That increase takes account of the work that we undertook with local government during the spending review to identify the pressures that they would face in the coming years. The additional £3.8 billion includes funding for the effects of inflation on local authority budgets, the 1 percentage point increase in national insurance contributions and recent pay awards.
Authorities in Worcestershire have benefited from that extra money. Worcestershire county council has received a grant increase of £15.5 million or 6 per cent., which is above the average for county councils. Two district councils received grant increase at the 12.5 per cent. ceiling that we set for such authorities, and one district council benefited from our guarantee of a grant increase at least above the rate of inflation. Indeed, the hon. Gentleman made generous reference in his contribution to some of the real-terms increases for education and in the number of police officers that have resulted from that increased funding.
It is, however, for local authorities in Worcestershire to decide how much council tax their people should pay. We do not tell local authorities what level of council tax they should set. We do not tell them what they should spend the money on. Such decisions are for individual local authorities, but local authorities are answerable to their local electorates about the council tax. We believe that they should take into consideration the views of local taxpayers on local authority spending and how much council tax they would be willing to pay.
This year, we have given all councils above-inflation increases in grant for the first time ever. The average increase is 5.9 per cent.—Worcestershire county council received a grant increase of 6 per cent. and West Mercia police received an increase of 3 per cent. In addition to the cash, we have given local authorities more freedoms and more flexibilities. In return, we expect all councils to behave responsibly and not to impose excessive increases on their council tax payers.
§ Phil Hope
I understand the hon. Gentleman's point, but I said earlier that we took into account in the spending review, in negotiations with local government, such cost pressures, including the 1 per cent. national insurance contribution increase and pay increases.
The average council tax increase in England this year for a band D property was 12.9 per cent. The increase in Wychavon was 12 per cent., and Worcester city council increased its council tax by 12 per cent. Knowing that we would be debating the hon. Gentleman's concerns this evening, I visited his website, on which he has already put elements of his speech. His comment in it thatwe are paying more than Birmingham residents for our local servicesis not the case. Band D council tax is lower in Wychavon and Worcester than it is in Birmingham.
§ Phil Hope
The hon. Gentleman indicates from sedentary position that it is not. Perhaps he would like to write to me later. I assure him, however, that I have been given sound advice.
282 We are therefore extremely disappointed that despite the generous grants that we have given to local authorities, some local authorities have chosen to set large increases, which we recognise is causing hardship to the most vulnerable members of society. The hon. Gentleman mentioned pensioners in particular. To ensure that pensioners on lower incomes are not unfairly affected by council tax rises, we are encouraging take-up of council tax benefit and housing benefit as part of our roll-out of the pension credit. We have changed the benefit rules so that even pensioners who are not eligible for the minimum income guarantee may benefit from council tax benefit and housing benefit. Indeed, if we take into account above-inflation rises in the basic state pension, free television licences for over-75s, the winter fuel payment and the pension credit, on average pensioner households will be more than £1,250 a year better-off in real terms, which is around £24 extra a week. The poorest third of pensioners will have gained an average of £1,600 a year since 1997. Therefore, while I recognise his point, there are some important points to be made about the extra support that we are giving to pensioners.
One issue to which the hon. Gentleman did not refer was the question of capping as a solution to the problems. As the Minister for Local Government, Regional Governance and Fire made clear on 15 September, we have decided not to take action about council tax increases this year. However—I share the hon. Gentleman's view on this—the current trend in year-on-year increases in council tax is simply not sustainable. We will look very carefully at all the council tax rises next year, and we will also look at the trend in the increases over more than one year. If necessary, we will use our targeted capping powers in 2004–05. If necessary, in exceptional circumstances, we will use our powers to cap authorities categorised as "excellent" or "good" in the current and future comprehensive performance assessments.
The hon. Gentleman did, however, raise the more fundamental question of gearing, and the problems that that creates in terms of the ratio between the amount that the Government give to local government and the amount that can be raised through local council tax. He makes a very good point. I draw to his attention the fact that the Government have established the balance of funding review to look specifically at that problem. The review is looking at issues relating to the current balance of funding between council tax and Government grant, and at a range of options for change in the light of that analysis. The final report of the review will set out the pros and cons of various options rather than making recommendations. I emphasise that the review is about the balance of funding, not about increasing the overall tax burden. The balance of control between local government and central Government, and the amount of money that local authorities receive, are distinct issues that are outside the scope of the review.
We have had more than 200 responses, and we had a meeting on 21 October. As I mentioned websites earlier, I must also mention the Office of the Deputy Prime Minister's website—I am the Minister with responsibility for e-government, so this is an opportunity to raise the value of electronic technology in increasing participation. The findings, the work that is being done, the papers that are being commissioned 283 and the research that is being produced and analysed are on the Office of the Deputy Prime Minister website for all to see because we recognise, in a non-political way, the difficulty of the existing system. Part of the reason why there is a problem with the current gearing ratio dates back perhaps to the poll tax, as the hon. Gentleman generously recognised, and perhaps before that. Some £4.8 billion of central Government money had to go to local government to compensate for the poll tax fiasco, and that money had to be taken from a massive increase in value added tax, as I am sure that he remembers.
The hon. Gentleman raised other issues, and specifically the area cost adjustment. Worcestershire county council believes that the area cost adjustment impacts on the council tax that it must set. As he said, I met a large delegation from the area that made powerful points in favour of its case.
Let me explain the situation a little further. The area cost adjustment is the element of the funding formula that directs extra resources to local authorities with higher wage and rates costs. We calculate the ACA using the best available evidence on wage and business rates costs. The hon. Gentleman suggests simply abolishing the ACA but that would have a huge impact in different parts of the country and would make it difficult for local authorities to cope with problems of higher wage and rates costs. We made major improvements to the way in which the ACA is calculated this year. We previously used simple average wages to calculate it for crude concentric circles radiating from London and throughout the south-east. That method took no account of the way in which wage pressures varied in each ACA area and, as he realises, provided no extra funding for authorities outside the south-east of England with high wage costs. We now calculate the ACA at a much finer geography, which allows us to reflect local wage pressures better.
One of the most frequently raised questions in the ACA debate is about geography, by which I mean about the authorities that receive an adjustment and where boundary lines are drawn. Some authorities, such as Worcestershire, have complained strongly about being grouped into their pre-reorganisation counties for the calculation of the ACA. Worcestershire also complains that the geography of the ACA does not reflect the part that it plays in the much larger west midlands labour market. However, it is fair to say that the new ACA geography is a vast improvement on the old system. Until this year, councils outside south-east England did 284 not receive an ACA, no matter how high their wage pressures, and authorities in the south-east were all treated the same, despite the wide range of pressures.
When calculating the ACA, we now look at wage pressures throughout England and Wales. Outside London and its fringe, we calculate the ACA for every pre-reorganisation county. We have split the counties neighbouring London into fringe and non-fringe areas, which reflects higher wage pressures. In that way, we have extended the coverage of the ACA beyond the artificial confines of the south-east to areas such as Cambridge, the west midlands and Greater Manchester, the wage pressures of which previously went unrecognised.
I know that Worcestershire would like us to calculate an ACA value for it alone—the hon. Gentleman did not talk about that but I have been pressed on it—rather than combining the area with Herefordshire. However, we had to make a judgment on geography. If we had treated Worcestershire as an ACA area in its own right for this year's settlement, the area would not have had sufficiently high labour costs to lift it out of the lower limit floor mechanism and its ACA would have remained unchanged.
We have reformed the system to influence not only the areas that get cost adjustment but how the top-up is calculated. We use detailed information from the whole labour market and new earnings survey data as the basis of the calculation because they are the largest sources of information on wage levels throughout the UK and contain the information that we need on each person who takes part in the survey.
We have heard suggestions from Worcestershire that we should use the labour force survey as the basis of our calculations, but that would mean that we could not calculate the ACA with such fine geography. It was also suggested that the ACA should be based on who lives in a county rather than who works there. However, I am clear that the best way to assess the extra labour costs faced by local authorities is to base that on what local employers are actually paying. Having examined Worcestershire's case closely, I know that as it benefits from the lower limit threshold in the ACA, it has received an increase of £800,000 in the formula spending share for its social services formula alone, which it would not receive if that was not the case.
The hon. Gentleman mentioned resource equalisation. Resource equalisation is about fairness—
§ The motion having been made after Seven o'clock, and the debate having continued for half an hour, MR. SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at half-past Seven o'clock.