Subordinate Legislation
Non-Domestic Rate (Scotland) Order 2004 (SSI 2004/59)
I formally open today's committee meeting. I remind members that it will be the last committee meeting before the Easter recess; the next meeting will be on 20 April 2004.
I note that two members are here as substitutes. I ask Bill Butler to confirm that he is present as a substitute for Sylvia Jackson.
That is correct.
I ask Brian Monteith to confirm that he is here as a substitute for David Mundell.
That is correct.
I welcome both members to the meeting.
The first item on the agenda is consideration of a piece of subordinate legislation. A motion to annul the Non-Domestic Rate (Scotland) Order 2004 (SSI 2004/59) has been lodged in the name of Brian Monteith. The motion reads:
"That the Local Government and Transport Committee recommends that nothing further be done under the Non-Domestic Rate (Scotland) Order 2004 (SSI 2004/59)."
I propose to give the minister an initial opportunity to introduce the order; at this stage, I ask him to restrict that to a technical explanation of what it is about. We will have a full opportunity to debate the merits of the order and the motion to annul it once we get into the open debate.
Once the minister has made his introductory remarks, I will give members an opportunity to ask questions. At this stage, I ask members to stick to specific questions rather than to have a political debate on the issue, as they will have that opportunity when we enter the debate. If members have any questions of a technical nature that will require the assistance of the Executive officials, they will need to ask them during the initial stage. I invite the Deputy Minister for Finance and Public Services to make some introductory remarks.
I thank the committee for the opportunity to speak to the order. My remarks will be brief. I introduce Carol Sibbald and Ann Thomson.
The order prescribes a rate of 48.8p in the pound as the non-domestic rate to be levied throughout Scotland in respect of the financial year 2004-05. The non-domestic rate that Scottish ministers prescribed to be levied throughout Scotland for the financial year 2003-04 was 47.8p in the pound.
The only other important detail that members may wish to bear in mind is that the order has been subject to consultation with the business community. My colleague Andy Kerr met representatives of the Scottish business community late last year to discuss the proposed order. In relation to such matters, we are obviously subject to continuing representations from the business community. If that is enough, I will keep to the convener's instruction to be brief.
Thank you. Do any members wish to ask questions of the minister or his officials at this stage?
We are talking about uprating. Will you explain the level of uprating and why it was necessary?
If you are asking whether we have increased the business rate, the answer is that we have increased it, but the increase is below the rate of inflation. I am sure that we will wish to come on to that subject in the debate.
We have responded positively to the business community's representations in that regard. We are proceeding with matters very much in line with the partnership agreement. Those are the only compelling points that I want to make in response to that question.
Do you have any plans to devolve the setting of the business rate to local authorities and to give them back the power that was removed from them? Are there any such plans afoot?
We have no such plans.
As there are no further questions, we will move to the debate on motion S2M-1005, in the name of Brian Monteith.
Because I have not appeared at the committee as a substitute before—although I have attended a number of committee visits—I state that I have no interests to declare.
I place the motion before the committee because I wish to make the case for annulling the order that will increase the non-domestic rate by a penny in the pound. It may seem to some that that is not a great increase—indeed, the minister has pointed out that it is below inflation—but the poundage is multiplied by the property valuation, and it is my contention that the rise is unnecessary. I would prefer not only that there was no rise, but that the rate was reduced. However, that is not possible to achieve through the negative instrument to which we are limited, so I will stick to the case for taking no action.
My argument is that Scotland's economic performance is not good enough in comparison with that of the rest of the United Kingdom or other countries; that the level of poundage is an important issue to business domestically and in comparison with the rest of the UK and Europe; that there is no need for an increase, given that the revenue that was raised last year was greater than expected; and that the Executive has conceded those arguments by introducing a self-financing small business rate relief scheme and then freezing the business rate the following year.
Members might challenge the context into which I am putting the order so, before we move on to the arguments, I will present some factual context. Between 1995 and 2002, Scotland's economic growth was 13.4 per cent, whereas UK growth was 21.2 per cent. Not only is there a comparative difference in growth, which is historical, but Scotland is witnessing a business decline, with business start-up and survival rates behind those of the UK. Business birth rates have been of particular interest to Scottish Enterprise and previous Governments as well as to the Executive, and the business birth rate in Scotland is 28 businesses per 10,000 people, whereas in the UK it is 37.
Scotland's manufacturing is in something of a crisis. Some 71,000 jobs have been lost since 1997 from firms such as Motorola, NEC, BAE Systems, Boots and Hoover—I will come back to Hoover later. Scotland's manufacturing output for 2003 was down by 3.9 per cent, whereas the UK's output was down by only 0.7 per cent, and the three-year survival rates for businesses are less in Scotland than they are in every other part of the United Kingdom.
We also know from a number of members, not least the First Minister, that Scotland has a declining population, which is expected to fall below 5 million by 2009. Indeed, it is projected that, between 2002 and 2021, Scotland's population will decline by some 3.2 per cent, whereas the UK population will increase by 5.3 per cent. I mention that because many people would agree that Scotland's population is in some way related to its economic performance. Without economic opportunities, we cannot expect economic migrants to come to Scotland. At the moment, only 4 per cent of migrants who are attracted to the UK come to Scotland, whereas some 41.5 per cent go to London. I contend that that is due to London's perceived economic opportunities. It certainly would not be for London's public services or housing, which are, by our standards, relatively scarce.
Members may think that I am painting a bleak landscape, a picture of Scotland that they do not recognise, but I humbly suggest that, in the Parliament, we tend to look at everything through public sector glasses, through which our vision is not so much rose tinted as infra red. We must acknowledge that, in an economy in which 55 per cent of activity is in the public sector and is financed by the wealth that is generated by the 45 per cent of activity in the private sector, marginal improvements or regressions in the private economy will have a significantly beneficial or damaging effect on our public services. In other words, the winners and the losers will be the poorest in our society.
In that context, I argue that business rates matter. An Ernst & Young survey of director-level personnel in Scottish firms was published in Scotland on Sunday on 14 March. People were asked what they thought the Chancellor of the Exchequer could do to improve their trading prospects. In first place, on 21 per cent, was the idea of cutting red tape but, in second place, on 17 per cent, was the idea of cutting business rates—even though the chancellor has no responsibility for that. The second question in the survey asked what else the chancellor should do as a priority. Top of the list of answers was the idea that he should reduce VAT, which he has responsibility for, but second again, on 14 per cent, was the idea that he should cut business rates. Those answers confirm that Scottish businesses believe that cutting their overheads, by cutting their business rates, would help their prospects.
The survey is not, of course, unique. Many people, whom the minister may have consulted, have commented. Dr Peter Hughes of Scottish Engineering has said:
"The manufacturing engineering industry is still in recession and dramatic increases in employers' liability insurance combined with high business rates and increasing water charges are not helping our sector."
The other comments that I could quote are legion. The point is that business feels strongly about business rates.
I return to the example of Hoover. If business rates are not important to businesses, why did the Minister for Enterprise and Lifelong Learning, in a parliamentary answer to me, confirm that part of the deal struck by the Scottish Executive to keep Hoover in Scotland was a promise to review its business rates? Mr Wallace said:
"The incentives offered to Hoover are as outlined in the answer to S2W-5032 on 12 February 2004 with the addition that South Lanarkshire Council has agreed to look into reviewing Hoover's rates".—[Official Report, Written Answers, 8 March 2004; S2W-6386.]
We also know that some companies, such as Harvey Nichols, choose to locate in Edinburgh because of favourable deals involving business rates. Business feels that business rates are important and should be tackled.
Why freeze or even cut business rates? We have limited powers in this Parliament. We have a limited number of economic or even regulatory levers, we control only one significant business tax—the non-domestic rate—and issues such as corporation tax and employment law are outside our jurisdiction. Whatever we might think of having greater economic powers in future, today we have to deal with the here and now. For the foreseeable future, business rates will be the most important economic lever available to us. The evidence shows that lower business taxes lead to higher growth. In many countries, lower taxes have made that difference, with more jobs and increased investment.
Another reason to freeze or cut business rates is that the Executive can afford it. In the past, the Executive has underestimated the amount that accrues in receipts from non-domestic rates—to the extent that last year some £140 million of additional funds accrued to the Executive. That amount, strangely enough, is exactly the same amount that it would take to return non-domestic rates in Scotland to the same level as those in England.
The Scottish Executive has argued that investment is needed to ensure a smart, successful Scotland, but I contend that businesses make the best investment decisions for themselves. The minister is no better able to predict the needs of businesses in this or that street than he or Scottish Enterprise is able to predict the aggregate needs of businesses across Scotland. That is why we have so many shortages at the moment. Economic planning is the cause of shortages and more economic planning will not cure the problems of business; it will only make matters worse. We should therefore return money to businesses for them to make their own decisions in their own interests and not in the sectional interests of quangos, politicians such as us, or well-meaning well-wishers.
The Executive talks about the economy being its number 1 priority, but in the same breath it talks about introducing a law to increase directors' liability for so-called "corporate murder", introducing ever more regulation compared with that in the rest of the United Kingdom, and now increasing business rates for the fourth time in five years.
My motion for annulment gives the Executive the chance to show that it means what it says by withdrawing the tax increase and giving our private sector some room to breathe again.
I move,
That the Local Government and Transport Committee recommends that nothing further be done under the Non-Domestic Rate (Scotland) Order 2004 (SSI 2004/59).
Mr Monteith's arguments are an important part of the debate about how Scotland values business and responds to the issues that business raises. However, I profoundly disagree with his analysis as I think that his thinking is a little mixed. It is not possible to completely disaggregate business rates and the arguments about them from what might loosely be termed the totality of tax, which we discussed last Thursday in the debate in the chamber on local government finance. I hope that I reasonably directly quote Mr Monteith when I say that, in that debate, he accepted the argument for considering taxation in its totality in relation to a citizen, a businessman or a business organisation.
It is important to say a few words about the overall business rates policy.
There are frequent claims that the higher poundage rate in Scotland—currently 47.8p as opposed to 44.4p in England—adversely affects the competitiveness of Scottish businesses. It is true that the poundage rate is higher in Scotland, but let us not forget that the poundage rate is only one element in the calculation of a rates bill. The second element is rateable value and, although I appreciate that it is complex, the lower increase in rateable values in Scotland than in England at the last revaluation in April 2000 means that an average non-domestic property in Scotland and England will receive a similar rates bill.
We have more than met our commitment to business on rates. We froze the current poundage rate at 2002-03 levels and the order before the committee today is seeking to set a poundage rate of 48.8p throughout Scotland for 2004-05. That is a below-inflation increase of 2.1 per cent—which is something that Andrew Welsh asked about earlier—and, combined with this year's rates freeze, represents a permanent reduction in non-domestic rates income of £39 million.
We are targeting rates reduction where the burden is highest: small businesses and rural communities. The introduction of a small business rate relief scheme in April 2003 means that up to 70 per cent of Scottish ratepayers will have lower rates bills to pay.
In recognition of the continuing decline in services in rural areas we recently extended the scope of an existing rural rate relief scheme to small food shops, petrol filling stations, public houses and small hotels. To encourage farm diversification and rural entrepreneurship, we have introduced a new farm diversification rate relief scheme.
However, we need to strike a balance between minimising the burden of taxation on one hand and maximising the resources that are available for investment in the various elements that drive economic development—such as transport, innovation, research and development, and skills—on the other. Again, I say that we must consider the totality of taxation and the argument that it can and does benefit business.
Each 1p reduction in the poundage rate would cost around £38 million. Setting the Scottish poundage rate at the same level as in England for all businesses would therefore cost around £122 million for 2004-05 and would likely cost even more in future years. We simply believe that that money can be better spent in ways that will still benefit Scottish businesses. Time and again, Scottish businesses say that they want us to invest in transport, skills and the enterprise network.
Generally, business is taxed relatively moderately in the UK and Scotland compared with in most other developed countries—again, that relates to the argument about the totality of taxation. In 2000, the overall tax revenue—corporation tax, employers' social security contributions and business property tax—that was raised from businesses in Scotland and the UK was 9.2 per cent and 9.0 per cent of gross domestic product, respectively. That was lower than in all other countries for which there is comparable Organisation for Economic Co-operation and Development data, with the exception of Ireland and the United States of America. The highest level prevailed in Sweden, where the overall tax revenue is 16.5 per cent of GDP. France, Germany and the Netherlands raised business tax revenues of 15.1 per cent, 9.4 per cent and 9.5 per cent of GDP, respectively.
Within the total business tax burden, social security contributions in the UK as a percentage of GDP were significantly below the European Union average, while business property tax and corporation tax contributed relatively more to public revenue than in the rest of the EU. As far as competitiveness is concerned, we must consider not just business rates, which represent about 2 per cent of GDP, but all those costs. After all, employment costs represent more than 60 per cent of GDP and are lower in Scotland than in England.
Non-domestic rates are a relatively small part of business taxation in Scotland. For example, it is estimated that the level of Scottish non-domestic rates in 2000 was equivalent to 2.1 per cent of GDP. That stands in contrast to other business taxes such as corporation tax and, indeed, employers' social security payments, which amount to 3.6 per cent of GDP. Non-domestic rates should also be considered in comparison with the other costs that affect business. For example, with regard to the total amount of wage and social security payments in 2000, employee costs to business amounted to 64 per cent of GDP during the same period.
In addition to those points, I am sure that Mr Monteith will acknowledge the conclusions of the comparative study by the Scottish manufacturing steering group, whose membership includes Peter Hughes, the very person he mentioned earlier. It is also important to consider other international business cost comparators such as the Heritage Foundation and The Wall Street Journal's economic freedom index, in which the UK is defined as being very much free: in other words, business in the UK is seen as lightly taxed and regulated. I believe that such important aspects must be taken into account when we consider the argument in the round.
As for Mr Monteith's point about higher than forecast income from rates, we must recognise that Government always has to make some estimate and put prudent planning at the core of its decision-making process. In the past, the income from rates has proved to be higher than forecast, but that has been due mainly to higher than forecast levels of buoyancy and lower losses on appeal. Opposition parties would howl at us if we got that equation wrong. If our income forecasts were not prudent, there would be a shortfall in income to support public services. As a result, it should be argued that additional rates income is good news as it reflects new business start-ups and not any additional costs for existing businesses.
Irrespective of Mr Monteith's arguments, we should acknowledge that a cut in non-domestic rates means a cut in public services. I accept that the Conservative position on this issue is clear and that our parties differ on the matter. However, it is not possible to argue that such cuts would have no impact on crucial areas such as transport and skills.
As far as I understand what Mr Monteith is doing, he is also wrong procedurally. By proposing to annul the motion, he cannot cut business rates by 1p or indeed by any amount. After all, if the motion were annulled, no business rates income at all would be received, which would result in a £1.8 billion cut in local government budgets. Even with my poor grasp of maths, I can work out that that would probably mean a 100 per cent rise in council tax to pay for the measure. The committee is faced with a pretty clear choice and I ask members to reject his proposals.
It is interesting to note that Brian Monteith's understanding of economics is about as good as his understanding of maths. I am afraid that, as we found out many years ago, it is not a simple matter of tax cuts leading to improvements in enterprise; as the minister pointed out, we must also invest in the public services such as transport and further and higher education that business needs and that were sorely starved of funding throughout the 1990s by the Conservative Government. Indeed, the Scottish economy is lagging behind other economies not because of the level of business rates but because of that failure to invest in our essential public services.
Mr Monteith's maths fail because he has not taken into account the simple fact that one's rates bill is not based either on the rateable value or on the penny poundage. Instead, it is a combination of the two; it is the rateable value multiplied by the poundage. The Conservatives and other parties refuse to acknowledge that, in Scotland, rateable values in 2000 did not rise by the same amount as they did in England. An average business, with an average increase in its rateable value in 2000, will now be paying 1.5 per cent less in total rates than a similar business in England will be paying.
If the Conservatives really want us to be paying the same national non-domestic rates as in England, that would mean that many of our businesses would have to pay more in order to equalise. Over the past two years, there have been real-terms cuts in rates and rate bills for Scottish businesses, while English businesses have not benefited from those real-terms cuts. Since the rateable values were changed in 2000, a Scottish business will have experienced a rise in its rates bill of around 14.75 per cent. In England, that increase will have been over 16.5 per cent. English businesses are less competitive than Scottish businesses in terms of their rates bills today. That is the message that we should be putting out.
The Conservatives want to pretend that our rates are putting businesses off, but we should instead be saying that it is better for businesses to come to Scotland, because their bills will be lower in Scotland than in England. Brian Monteith is scratching his head because he does not understand the maths. He does not understand the maths for council tax increases either. In fact, the maths are simple. Take the rateable value and multiply it by the rate poundage, and that is the rates bill. It is rates bills that matter to businesses, not rates poundages, and the bills are going down in Scotland in relative terms compared with in England, and in real terms.
As the minister concluded, if we pass Mr Monteith's motion this morning, there will be no rates that can be levied in Scotland. That would be a disaster for Scotland and for council services. I think that Brian Monteith needs to go away and get some lessons in economics and maths.
The Scottish National Party has long supported a reduction in Scottish business rates in order to give our businesses a cutting, competitive edge through a reduced tax burden. That is especially true for Scotland's small and medium enterprises, which make up the largest sector of our economy. Scottish statutory instruments cannot be amended. We either accept them in total or reject them in total. As the minister pointed out, that would leave a gigantic hole, which somebody somewhere would have to fill. The Tory annulment would block a marginal, less-than-inflation change.
Brian Monteith has correctly pointed out the problems. Scotland has suffered from low economic growth, the number of small businesses has been in decline and our manufacturing is in trouble. However, that can hardly be cured by eliminating the marginal adjustment in business tax.
Having tholed Mrs Thatcher for many more years than I would have liked, I would say that the manoeuvre is somewhat hypocritical, given that the Tory financial and taxation record in government was a disaster for Scotland's business community. When it came to destroying manufacturing industry and closing small businesses, Mrs Thatcher probably holds the record. I lived through those years and opposed her tooth and nail during them. Far from lowering Scottish business tax burdens, during its 18 years in power between 1979 and 1997, the Tory Government imposed higher business rates in Scotland than in England. A Scottish Council for Development and Industry study showed that, during the five Tory years from 1990 to 1995, an extra £1.2 billion of business taxes was imposed on Scotland's business community.
This Tory manoeuvre should be treated with the contempt that it deserves. The Tories' record should be warning enough for Scotland's small business community. There should be a far more thoughtful, longer-term solution that gets to the heart of the needs of Scotland's economy. That is not just about business rates, as we need also to consider many of the things to which the minister alluded, including the more general economic measures that any self-respecting Government would adopt to ensure that its economy thrived.
We have to be as competitive as possible in a very competitive world, and we should seek long-term stability, in particular by adopting as many measures as possible to suit our small and medium enterprises, which lie at the heartland of the Scottish economy, covering the length and breadth of this country. This piece of Tory nonsense should be seen for what it is: an inadequate and pathetic stunt. I know that Brian Monteith cares about business, but his motion is not good enough, and it is not good enough for this Parliament. If anything should be annulled, it is stunts such as this. Our business community is far too important to be treated in such a way.
Does any other member want to speak in the general debate? I want to add a few comments, but I will not prolong proceedings too much.
I do not want to add much to what the minister said, which comprehensively demolished Brian Monteith's case. The minister's demonstration of the overall level of taxation on businesses was particularly telling, given that Brian Monteith lectured the leader of the SNP in the council tax debate only last week on considering the totality of taxation in relation to personal taxation. Brian Monteith does not seem to be willing to accept the minister's viewpoint on the totality of taxation on businesses, which obviously includes not only non-domestic rates but a range of taxes such as corporation tax, VAT and fuel excise duty. On that basis, as the minister has clearly demonstrated, it is not true that businesses in Scotland are at a competitive disadvantage in relation to their main competitors throughout the OECD; in fact, only two countries—the USA and Ireland—have a significantly lower level of taxation.
Brian Monteith used companies such as Motorola and NEC as examples of why business taxation should be cut, but that is a fundamental misunderstanding of why such companies have recently left Scotland or closed factories in Scotland. The Motorola factory in West Lothian that closed was more profitable than its German partner that stayed open and the decision that was taken involved far more complex factors than any level of taxation. As the minister said, business taxation levels in Germany are higher than those in Scotland. I am sure that Brian Monteith well knows that NEC decided to move because of the collapse in the price of semiconductors, which affected the semiconductor industry throughout the world. Even the abolition of business rates would not have touched on such an economic decision. Brian Monteith's suggestion was naive. I have more regard for his intellect than to believe that he himself believes what he said.
Finally, it is not really a surprise that businesses sometimes call for lower taxation levels, but they also call for investment in skills and transport. The Government must balance calls about what people are prepared to pay in taxation with the public services or levels of investment in infrastructure that people want to be delivered. A complex set of decisions must be taken and I think that the Executive has got things right. I agree with members that we should disagree to Brian Monteith's motion.
I give the minister an opportunity to respond to any of the issues that have been raised in the debate.
I do not have anything to add, except for one slight observation. Mr Monteith used the example of Harvey Nichols, but spoke about it in the context of overall taxation levels. That is the most telling argument in relation to what he said and he knows that that is the case. On that basis, and particularly because of what Andrew Welsh said, I suggest that Brian Monteith should do no more with his proposal.
I invite Brian Monteith to make some remarks—not extensive remarks—in response to what has been said. He should also say whether he wishes to pursue the motion.
I will pursue it, convener. However, a small number of points need to be addressed. First, I am well aware of today's procedures. I do not seek to amend the order—I am seeking to annul it. If I were to succeed, I would expect the Executive quickly to ensure that there would be a further vote on the order and that the so-called loss of £1.8 billion would not happen. The idea that has been put about that somehow one should not have the temerity to propose an annulment to a committee is anti-democratic. The whole point of having SSIs is to give us the opportunity to test ministers and the Executive on whether they are doing the right thing. Too few members take the opportunity to push matters.
In closing, I also contest a number of the economic issues that have been mentioned. The minister claimed that 70 per cent of businesses will have smaller bills, but those will be paid for by the 30 per cent of businesses that will receive larger bills. I could mention several other points, such as the reports that the Executive commissioned that, like the comparative studies on the totality of taxes, show that Scottish businesses are now in a worse position.
I will have to go back and read the Official Report, but I am sure that I will not be alone in having had difficulties in following Iain Smith's argument that Scottish businesses are doing better because they face a higher rates poundage—which will be even higher after today.
Will you take an intervention?
No. I need not accept interventions from those who choose to abuse members in debates, as you have done today by questioning whether I can add. Had the intervention come from Andrew Welsh, who was at least civil, I would have given way.
In conclusion, there is a clear divergence of view, but that is to be expected in politics. It is right and proper that subject committees take the opportunity to test ministers by debating motions to annul, even though, if my motion were to succeed today, we would no doubt have further debates to correct what would doubtless be a Pyrrhic victory.
The question is, that motion S2M-1005, in the name of Brian Monteith, be agreed to. Are we agreed?
No.
There will be a division.
For
Monteith, Mr Brian (Mid Scotland and Fife) (Con)
Against
Butler, Bill (Glasgow Anniesland) (Lab)
McMahon, Michael (Hamilton North and Bellshill) (Lab)
Muldoon, Bristow (Livingston) (Lab)
Sheridan, Tommy (Glasgow) (SSP)
Smith, Iain (North East Fife) (LD)
Welsh, Mr Andrew (Angus) (SNP)
The result of the division is: For 1, Against 6, Abstentions 0.
Motion disagreed to.
In circumstances where there has been a motion to annul, the committee usually produces a report of the debate and the outcome of the vote. Is it agreed that we produce such a report?
Members indicated agreement.
I thank the minister for his attendance today.
I apologise to the convener, but I must also leave now. I had not expected to participate in today's proceedings as a substitute, although I took the opportunity to vote on the motion.