Local Government and Communities Committee, 25 Jun 2008

Meeting date: Wednesday, June 25, 2008

Official Report 250KB pdf

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Local Income Tax

The committee will now take evidence on proposals for a local income tax. I welcome Angela Scott, who is head of the Chartered Institute of Public Finance and Accountancy in Scotland, and Don Peebles, who is policy and technical manager at CIPFA.

If you wish to make an opening statement, we will be happy to hear that before we move to questions.

I will take the opportunity to make an opening statement. First, I mention a caveat. A formal consultation process is under way, and we are working on our submission to it. Any comments that we make today will be drawn from that submission, although it is a work in progress. I suspect that members will have an appetite for beans from the bean counters, but we are still working on some of the bean calculations. If we are unable to give answers on some matters, we will follow them up later and will send the committee a copy of our formal submission when we submit it to the Government.

I will give the committee a flavour of the issues in our submission as it stands. In our deliberations, we have come across a number of challenging issues around legal competence and a number of areas that need to be addressed. It is beyond our professional competence to take them much further, but we will certainly include them in our submission and we look forward to the Government's response to them.

In our submission, as bean counters we identify the potential funding gap and provide some analysis of that. We also identify a number of technical challenges, although none of them is insurmountable. Where there is a will, there is a way: there are potential solutions to all the problems that we identify and we will submit them to the Government for it to address. The technical issues include what the introduction of LIT will mean for local authorities' cash flow and budget processes. There are also issues about the relationship between revenue and capital, which is probably an area that has not been debated much so far.

Given the new powers that were given to local government under the Local Government in Scotland Act 2003 and the introduction of the prudential borrowing regime, there is a potential knock-on effect on future capital investment. The committee might like to hear a bit more about that.

There is a raft of technical issues. Both today and in our formal submission, our comments will be made in the spirit of co-operation. We want to identify from a professional point of view some of the gaps and the issues that need to be addressed and we will then work with Government to address those.

Thank you. I welcome that statement.

Good morning. Will you elaborate on your point that the local income tax would have implications for the prudential borrowing regime and future capital investment? What did you mean by that?

If you do not mind, I will go back a wee bit in history. Before the Local Government in Scotland Act 2003, each local authority was given what was known as a section 94 consent. In effect, that was a cap on the amount of borrowing that they could undertake. With the passing of the 2003 act, decisions about levels of investment and, in turn, levels of borrowing reverted to local authorities. The act introduced the prudential borrowing regime, and decisions about borrowing are now for local authorities to make.

As the professional body for local government, CIPFA was asked to develop the framework of the prudential borrowing regime. One feature is that, when there is a need for increased investment, local authorities have an opportunity to increase the council tax to fund specific projects. Hypothetically, if we wanted to build a new ring road around a city, we could go to the electorate and say, "We will increase the council tax by this much. The additional funding will go to support repayments of the debt for the ring road." Citizens would clearly see the relationship between the tax and the contribution that it made to a specific capital project.

One of the things that strikes CIPFA about removing the council tax and replacing it with a nationally set tax is that the ability to increase the tax specifically to fund capital investment would potentially be lost. That is one of the areas that we need to work through with Government. Changing the funding on the revenue side would potentially cause a knock-on effect on the capital side. Citizens would be able to see that direct relationship in relation to an increase in tax. It is an area that needs further consideration.

Your observations would apply if there was a nationally determined rate of local income tax, because there would not be that local flexibility. I presume, however, that that would not apply to the same extent if there was a locally determined rate of income tax, because it could be adjusted by 0.1p, or whatever. Is that correct?

Potentially, yes.

So there would be the same flexibility in funding as before. On another technical issue, is it possible to introduce a local income tax in Scotland—whether it is determined nationally or locally by councils—without the co-operation of HM Revenue and Customs? If it is possible, can you map out what would be required organisationally to raise such a tax on a free-standing basis?

It is perhaps appropriate in answering that question to talk about CIPFA's role in examining proposals for income tax over the past few years. In 2004, CIPFA was part of the balance of funding review group, which was formed for England and Wales specifically. It examined—as its title suggests—the balance of funding, and it considered which models of local taxation might be appropriate for the modern era. CIPFA was asked, as part of the review group, specifically to examine the prospect and possibility of introducing a local income tax. We undertook a fairly significant study on that, and reported back to the group. Again, at the specific request of the group, we came back with a review of a possible model of local income tax, which was a supplement to council tax. Although the group covered England and Wales, its remit was extended to consider what the likelihood of such a tax might be for the United Kingdom.

The conclusion at that time, based on the review that was carried out specifically for that group, was that it was unlikely that a local income tax could be introduced without having to use HM Revenue and Customs. I stress that that finding was based on the specific requirements of the review group at that time, which was about four years ago. A specific study like that has not, to my knowledge, been undertaken in Scotland.

The Burt inquiry raised the question of who has the legal powers to collect income tax. You are better placed than we are to comment on that, but Sir Peter Burt said that local authorities have the legal power to collect the tax—ministers do not. There is a legal question behind the role of HMRC and whether ministers could use it.

We have begun to examine the cost of and the performance in collection, in relation to the current position. The performance of local government in terms of collection is improving. The Accounts Commission annual report that was published today congratulates local authorities on improved collection. There are also statistics on the cost of collection. We are not clear about what the cost of collection would be under HMRC and how it would perform in terms of its ability to collect tax—that is an unknown. There are a number of issues: the legality question about who has the power to collect; the performance of HMRC; and the cost of collection under any relationship with HMRC.

With regard to who pays income taxes—or potential local income taxes—we have in the Scotland Act 1998 a definition of a Scottish taxpayer for the purposes of applying, if it were ever applied, a variable rate of the UK income tax, so there has been an attempt to define that.

I presume that, if we had variable rates of local income tax, we would have to define someone as an Edinburgh taxpayer, a West Lothian taxpayer or a Fife taxpayer. How would that be done? Would we work on the basis that if someone spent 90 days in Edinburgh that would make them an Edinburgh resident? If that person moved outwith Scotland, we would have to consider whether they were taxable for the purposes of tax in Edinburgh. How would someone who moves from Edinburgh to Glasgow become a Glasgow taxpayer? How are we going to keep track of all those movements and of people's local income tax residence, for the purpose of establishing the tax liability of the population? As we know from a previous tax regime, many people are highly transient and difficult to track.

We do not have the magic answer. You have just set out the arguments for a tax on property as opposed to a tax on individuals. That is why we need to discuss with HMRC its systems' capability and capacity to cope.

I do not want to put words in your mouth, but I think you are saying that if we had variable rates of local income tax, we would have to have a definition of residency, by reference to local authority, of every person in Scotland, which might change from year to year as people move in or out of an area. Is that right?

Indeed. As I understand it, the proposal uses the definition of a Scottish taxpayer in the Scotland Act 1998.

When we participated in the 2004 balance of funding review, we acknowledged that we would have to define residency at some point. A host of issues arose, some of which David McLetchie has touched on well. We realised that we would have to draw a line at some point in the financial year and we concluded—perhaps somewhat simplistically—that where a taxpayer was resident part way through the fiscal or financial year might be as appropriate a criterion as any. However, that would not be without its problems and there are many arguments for why it might not work. In any case, a line would have to be drawn.

That is very helpful. Thank you.

Does CIPFA in Scotland have a view on the broad principle of moving from a property-based local taxation system to an income-based local taxation system?

The institute's preferred option is, for a number of reasons, the retention of a property-based tax. In our submission, we set out the principles against which we should test any system of taxation—whether it is a local income tax or a property tax—which include accountability, transparency, stability and predictability. Given those principles, our preference is for the retention of a property tax, but one that is more progressive.

In our submission, we aspire to set out the risks and rewards that are associated with a change in taxation. We do not have to go too far back in history to see the price that we as a country have paid for a change in the taxation system. There is a price to be paid at a number of levels. From a narrow financial point of view, the culture of non-compliance and non-payment that developed had a real cost, which is still being borne today in recovery of debt. We say in our submission that if we change our system of taxation, it is vital that we are confident that whoever collects the tax has robust and proper systems in place and that we make it clear to the public that non-compliance will not be accepted, because there is a real cost to it. We have a preferred position, but within the current agenda, we are trying to make it clear that there are risks in making the shift to a different system and that all those risks will have to be managed. The lack of management of those risks will have various costs.

CIPFA's response to some of what has been proposed is extremely interesting. You quite amusingly referred to yourselves earlier as bean counters. I have a problem with some of the beans that are missing—I refer to the beans that we might lose if we move to a person-based local tax, for example money that might or might not come from HM Government in the form of council tax benefit. There still seems to be a major shortfall in the Government's proposals in relation to what a 3p tax rate would bring in, against what is required to run services. What is CIPFA's view on the shortfall, the black hole—those missing beans, if you like—and how it can be adjusted or overcome?

The fact that there is a shortfall is not news to anyone. The consultation paper acknowledges that there will be a difference between the tax that would be collected and the amount that is required for local service delivery, although the terms "shortfall" or "gap" are not used; the term that is used is the "adjustment" that will be required, which we have taken to be a proxy for "shortfall".

Our statistics team has done a number of preliminary calculations to try to identify the extent to which, in the 2008-09 financial year, resources that require to be gathered would not be available for local service delivery. That figure might be representative of the shortfall—the calculations reveal a figure of about £750 million. It is important to appreciate that that represents resources that would not be collected and which would consequently not be available for local service delivery. That means that resources would have to come from two sources: the shortfall from council tax subsidy or other parts of the Scottish block budget.

Does the £750 million include or exclude council tax benefit? If we could overcome that problem, what rate would the tax collection have to be above 3p in the pound to overcome the shortfall?

The figure includes council tax benefit, on the basis that our expectation is that that would not fall to be a feature of the new system. If we were hypothetically to operate on the basis that the money could be recovered in some way, our estimate of the shortfall, based on the 3 per cent rate, is that it would be about £310 million. I stress that those are preliminary calculations for 2008-09—we will take the opportunity to refine and review them prior to our submission to the Government. We appreciate that, as Angela Scott said, there is an appetite for such a figure, so we are happy to talk about figures in broad terms to enable a debate and so that we can engage in debate with the committee.

The other consideration in respect of the gap is that if we change the system of taxation, we will be changing it for a significant period, so we cannot consider only today's potential gap—we must also consider the future gap. If you look at this as purely a matter of income and expenditure, it is difficult, given the ageing population and all that goes with it, to put a figure on the future cost of providing all the services that we currently provide. There is also a big question over the future costs of local authority services, which results in another question about the income that we need to sustain them.

Another dimension with the local income tax is its volatility—it is difficult to predict the level of likely collectable income, because of which there is the potential for the gap constantly to change, based on the number of people in employment and earning income. A number of factors are involved in considering an income gap, which is an issue not only under an LIT, but for the future funding of local government per se. If we learn anything from history, it is that the system of taxation has to be sustainable for the next generation and the generation after that; it is wrong to introduce a system of taxation that is not sustainable and cannot fund services over time. It is not an easy bean to come up with, which is the challenge in identifying the financial implications of a bill.

I was going to ask a similar question to Mr Tolson's, so I will perhaps go back a little bit.

Moving on from the mechanics of the system, which Mr McLetchie discussed, I appreciate that at times of high unemployment many vagaries must be factored into the system. As far as the process is concerned, am I right in thinking that if the money were to be collected centrally—by, I presume, HMRC—it would have to be disbursed to local authorities? If so, would some middle person have to do that? Would the money have to come back to, for example, the Scottish Government for disbursal?

That is a question that we have asked. If the tax is set and the money collected locally, the process will be straightforward. However, if it is set nationally, how will the money be distributed? As members are aware, under the current system there is an equalisation between the council tax and the Government grant. In our submission to the Government, we intend to ask whether its aim is to maintain that equalisation throughout Scotland and, if so, what mechanism it will use to do so.

Moreover, if HMRC collects the tax, there will be a timing issue about when the money will come back to us. It could be a month or two before we physically get that cash. As Patricia Ferguson and I both know, when it comes to cash-flow management—although I am sure that you manage your cash better than I do—costs can be incurred if money is not coming into the bank. The question is certainly valid: as I said, we, too, are asking it. How will we get the money from whomever will collect it, and who will determine each local authority's share? Will it simply be that the local authority will retain whatever is attributed to an area? If so, will there be equalisation with the Government grant?

It is worth adding that the cash-flow element might well incur real costs. We are working with one local authority on a case study to establish what that cost might be. The benefit of such a study is that it might allow the Government to identify the costs of the system across the board. The local authority in question has estimated that it collects 95 per cent of its in-year collection by January, which means that it can start to plan for the next financial year. However, with a local income tax, not all revenues are collected in-year; we need think only of self-employed people, for example, to realise that there will have to be different payment arrangements. If there were to be a gap—of, say, eight weeks—between receipt by Government of the money and the payment of that money to local authorities in the first year of a new system, it would be possible to measure what the cash cost would be to the local authorities. I am reluctant to put a figure on it, but for large local authorities that one-off cost could run into millions of pounds.

I do not want to put words in anyone's mouth, but it sounds as though, given all the steps that will have to come between collecting the tax and distributing the money, a local income tax might be less local than has been argued.

Of course, all that raises the question of who would be responsible for chasing up non-payers. I presume that it would be HMRC, which means that local authorities and/or the Scottish Government would have to rely on the efficiency of that organisation in carrying out that task.

At the moment, local authorities are responsible for chasing up such debt. When they set their budgets, they make an assumption at the outset about the likely level of non-collection, which is obviously why they have invested so much time and energy in converting people to paying by direct debit; after all, they want to get the cash into the bank as quickly as possible. One would have to assume that, if someone else were given responsibility for collecting the tax, they would also be responsible for chasing non-payments. As Don Peebles has made clear, all such activity incurs costs. Who would underwrite it? That is another question that requires an answer.

A question just occurred to me as Ms Scott was speaking. Do we have any idea of how many people in local authorities are engaged in council tax work? Surely, if such jobs are no longer to exist, a lot of people will have reason to worry about their employment.

We do not have those statistics, but I am sure that the Institute of Revenues Rating and Valuation will be able to supply the committee with them. However, we should remember that local authorities also collect water charges. Even if the council tax were, in effect, to be abolished, people would still have a role not only in that respect but in administering housing benefits and so on.

I have not come armed with employee numbers, but estimated council tax collection and administration costs in Scotland are about £40 million.

I take it, Ms Scott, that your mention of previous forms of tax referred to the poll tax. If so, I declare an interest, as I was one of those who were neither willing nor able to comply with that tax at the time.

One of the reasons why the poll tax was controversial was to do with fairness. You cited several principles on which you based your position on the proposals for local income tax. Did the principles of fairness and ability to pay fall within the scope of your consideration?

Our view—in keeping with the view of almost certainly everyone else in the room—is that the council tax is a regressive form of taxation. Furthermore, we believe that, because a local income tax is more related to the ability to pay, there will be more elements of fairness in that system. However, restriction of the definition of income to earned income merely pares away the extent to which the tax would be fair. In that case, elements of a regressive nature would be introduced into the local income tax, which would mean that some of the criticisms of the council tax could—I stress "could"—be applied to the proposed local income tax.

However, we think that there is a different way to view fairness. Fairness can be viewed not only in terms of what is fair to the individual or the couple but what is fair in terms of local service delivery and local authorities themselves. Perhaps unusually, we have extended the principle to consider what the impact might be on local authority services because, ultimately, some individuals who are recipients of local authority services will themselves be looking for fairness.

You mentioned the restriction on the Scottish Parliament that means that it cannot consider unearned income. Do you feel that that represents an undue restriction on the powers of the Scottish Parliament?

We would be interested to hear more about why that restriction applies to that extent. To return, yet again, to the work that we did on local income tax in the balance of funding review, we concluded that it would be difficult to include unearned income because a raft of additional costs are associated with it. I speculate that it might be that the current proposals have learned from that. Although none of the problems that we identified is insurmountable, as we said earlier, it is important to appreciate that there are consequences that arise from that restriction, one of which is that the tax can be accused of being less fair because the only income that is targeted specifically is earned income.

On collection, you mentioned the question whether HMRC would have the responsibility for chasing up unpaid tax. Would it be fair to say that it would do that the same way as it does in relation to income tax? Surely the collection rates for income tax are higher than they are for council tax.

We do not have that information—I have yet to see what the performance levels for HMRC are in relation to income tax. Figures that will be published by the Convention of Scottish Local Authorities today will reveal an increase in council tax collection rates, which, in some local authorities, are as high as 99 per cent. I do not compare or contrast that with HMRC because I have not seen information on its collection levels. I would be interested to know the extent to which it can produce that information, because it is an important part of the debate.

It is a shame that we do not have a written submission from you, as that would have enabled us to do you the courtesy of examining your thoughts on the matter in more detail. As that is not the case, the questions that we can ask you are a little restricted.

You have said clearly that you do not favour a local income tax. I assume that you have arrived at that view as a result of a cost-benefit analysis involving a comparison with the current council tax. Is that the case?

Before I address your question, I will deal with your comment about the fact that you do not have a written submission. We came to the meeting with an understanding that we would not be making a written submission. The submission that we are preparing is for the Government's consultation and I ask committee members to respect the integrity of that process, as we do. As soon as we have prepared—

To be clear, the committee and I understand that you are here on that basis and we appreciate your attendance.

As soon as we have that information ready for public consumption, we will make it available to the committee and we will be happy to talk to the committee at any time about the detail of that submission. I understand and respect the frustration that you might feel in speaking to us today.

A cost-benefit analysis would be an extremely narrow view to take on taxation. You might expect such an analysis from us—we have already described ourselves as bean counters—and it is difficult to get away from what the financial consequences are, but it is important that we take a wider view of the consequences of the tax than simply considering the costs. However, as we are talking about public expenditure, the expression will ultimately be a financial one, which is why we spoke initially about the funding shortfall, which has direct consequences for service delivery.

Specificallly, a cost-benefit analysis takes us into the realms of council tax collection versus local income tax collection, and the resources that are available for service delivery. We already know what council tax collection levels are and that councils have become extremely efficient at collecting it. However, we are unable to compare or contrast that with HMRC's collection levels because we do not know the extent to which it is able to match council tax collection levels, which are as high as 99 per cent in certain areas. As for the impact of a local income tax on services, it comes down to the resources that will be available. We have already said that, given 2008-09 levels, there is the prospect that fewer resources will be available, which means that it is difficult to justify the proposal that is before us.

We know what the council tax situation is, but we are looking at the challenges and opportunities of a local income tax. For example, local authorities might not have to pursue non-payers, which would save them money. Further, if they were not administering the collection of council tax, that would liberate cash. There are all sorts of opportunities.

Obviously, you prefer a property-based tax. Do you agree that, if the council tax were to be retained, there would need to be a revaluation of properties? Do you agree that, for the 2 million properties in Scotland, that revaluation is long overdue? Do you know that it is estimated that, in Wales, around 750,000 properties would have to pay significantly more council tax if there were a revaluation? Have you estimated the cost of revaluing 2 million properties? If we do a cost-benefit analysis, we have to consider the costs—the social as well as the bean-counting costs—of keeping the council tax.

The institute's view is that a property-based tax should be retained, but that a number of reforms should be made to the council tax system. Revaluation is one reform that we would welcome, as well as a number of reforms around the benefit system. We have not counted the beans on that to an extent that would satisfy you, so we cannot supply you with relevant numbers at this point.

I am not frustrated that we do not have written evidence from you; I merely suggested that, if we had it, we would have been able to do you the courtesy of reading it before we talked to you. However, I am slightly frustrated that you can provide figures and estimates for the additional cost of the local income tax but not for what it would cost to revalue the council tax. You cannot do a cost-benefit analysis unless you look at both sides of the fence.

That extends to a whole raft of aspects of both the current system and the consultation document. You are quite right—we do not disagree. It is part of your role in converting the consultation document into a bill, and part of our collective responsibility, to make sure that the public know all the costs. The local income tax is one of a number of public policy issues that the institute is commenting on.

You are right that it is easy to number-crunch where there are numbers, but it is very unsatisfying to present numbers that are vague or not based on anything and that, dare I say it, journalists use to their own ends. Offering such numbers on a key issue for society is dangerous. We are guarded about the numbers that we are releasing into the debate; we want to ensure that we have confidence in them, because they are being used outwith our control. If we did not do that, we would be in breach of our duty to protect the public interest.

We do not disagree with you. What you describe is part of the process and we will play our part as more answers are provided. If we consider the council tax alone, you are right to say that savings could be made by not having local authority staff involved in collection or benefits administration but, on the other hand, the housing benefits system needs to be administered and water charges collected. The institute does not have enough information to allow us to do the complete analysis that you suggest. However, we will be more than happy to do that as the agenda develops.

You said earlier that the cost of council tax collection would be about £40 million a year. Have you any ballpark figures for what it would cost to collect a local income tax, either nationally or by 32 councils with variable rates?

The most recent review that was conducted was the Burt review, with which I am sure the committee is familiar and to which we gave evidence. Burt used some of our evidence and undertook his own calculations. His determination at that time, which was three years ago, was that the annual estimated cost for HMRC would be of the order of £10 million. However, he cautioned that that figure was possibly understated. Burt also found that it was likely that there would be an additional cost for employers—his estimate was that it would be about £18 million per annum. That was for a local income tax; I do not recall whether he distinguished between a nationally set local income tax and one that was collected locally, but I am fairly certain that the £10 million was for additional costs for HMRC.

Is it logical to suggest that it is likely that it would be more expensive if there were 32 different collection rates?

That goes back to the capacity of HMRC's systems. Without knowing the system, the query is whether it would be capable of administering 32 different rates. It might have that capacity, so HMRC might be able to make the collection. We need engagement with HMRC to understand what its systems are capable of.

I have one other point. Adjustment was mentioned in the context of the £750 million shortfall, £440 million of which is connected to benefits, although I do not really want to go into that. You suggested that, regardless of the benefits issue, there would be a £310 million shortfall, which represents about 1 per cent of the annual Scottish block. If that money is not collected, does that mean that there will be a £310 million tax cut for the Scottish public?

My understanding is that if services were maintained at the current level, those resources would have to be found elsewhere from within the current Scottish expenditure block budget.

But if we were not able to raise those resources, for whatever reason, that £310 million would, in effect, remain in the pockets of Scottish taxpayers.

And not in the control of local authorities—

—and therefore not within their gift to spend on services.

What impact would that £310 million tax cut that we are all looking forward to have on local services?

The estimated tax take for 2008-09 is approximately £2.2 billion, and £300 million is a significant proportion of that. Under a nationally set local income tax, local authorities would not have the flexibility—other than by imposing fees and charges—to raise that money. It could come only from the Scottish Government.

I do not know whether the bean counters are frustrated by this, but when comparisons are done between the cost now and what the cost would be, it is put entirely in terms of what people would pay in tax. Is there any way in which you can quantify, in a way that people would understand, what it would actually mean if £300 million was taken out of local services? The tax rate could be set at 1p and we would all be better off by huge amounts, but how do you express the consequences? It has been suggested that the money will come in from somewhere else, such as national Government, but it is still a huge pot of money to take out of the system.

I suppose that one does not have to look much further than Aberdeen City Council, which had £27 million of savings. If we consider the decisions behind that £27 million, we are talking about schools and care homes.

Have you done any work on an equality impact assessment of the cost of services? To a person who has no family or is in work, it may be that the loss of £310 million-worth of services is not very great. For a family that has a child with complex learning needs, however, the demand on services is greater. Would you expect that there would need to be an equality impact assessment of the consequences of saying, "Well, we have to live with that level of cuts"?

We have not done that, but you make an interesting point about the fundamental nature of local government. Historically, local government was created to be there when people needed it. I often say that pre-marriage and children I never used public services; now I am constantly at their door. As a culture and a society, we have decided that we want those public services to be there when we need them, so that we can dip in and out. If people paid their part of the tax only when they needed it, that would be a radically different system from the one that our society currently has. As an organisation, we have not done that type of equality assessment, but I am sympathetic to what you are saying.

I will ask just one last stupid-person question. If national Government wants to get rid of council tax and wants an income tax of 3p in the pound to spend on local services, would it not be an awful lot simpler for it to admit that the tax is not a local income tax, and to use its power under the Scotland Act 1998 to vary income tax by 3p in the pound? Would that not raise the same amount of money?

With respect, that is one for the Government. The answer is that it would not raise the same amount of money. You would actually raise less with the basic rate than you would at 3p on the top rate. It is a different tax yield.

Do you want to see some numbers on that?

It is not a matter for a Government, in the sense that it could do that and it would be doing the same thing—it would be raising money at a national level to be distributed to local authorities. It could get rid of council tax and raise the money in that way and distribute it—but the funding shortfall would be bigger.

The restrictions on the tax-varying power mean that going down that road would not generate the amount of cash that would be needed. It comes back to not comparing apples with apples.

Under the tax-varying power, tax can be set only on the basic rate, whereas the proposal that we have in front of us is for 3p on the top rate.

The £310 million would equate to about 3 per cent of local government expenditure on an annual basis, if the whole 3 per cent fell on local government. Is that correct?

The leader of the Opposition suggested, in her hungry caterpillar speech a year ago, that there should be 3 per cent top-sliced efficiency savings every year. How would local government cope with that level of cuts in services on a year-on-year basis as opposed to this proposal, which would effectively be a one-off?

I understand what the impact would be on local authorities of a £300 million reduction—assuming that there would be a reduction. It would be an annual consequence, not just a one-off, because it would be a reduction in the annual tax take. As for what that would mean, I have already given an indication of what proportion that is of £2.2 billion. Given that there would be no local flexibility to raise income back to that level, the only logical consequence would be an adverse impact on service delivery, but that is more properly a question for local authorities.

Indeed, but it would not be year on year; it would be a one-off hit. It would not be a 3 per cent efficiency saving year after year; it would be 3 per cent once.

No, £310 million would be the annual reduction.

Aye, but it would not be £300 million in year 1, then £600 million and then £900 million, which is what a 3 per cent year-on-year efficiency saving would be.

It would be £300 million per annum.

You also have to factor in the volatility of the income base that you are taxing, so you cannot give any certainty about how much income the tax will generate. There is a potential gap as a consequence of volatility.

That goes up as well as down.

That is right.

Thank you for your evidence. As one of my colleagues mentioned, we look forward to seeing you in the future, further to your submission to the Government's consultation.

As previously agreed, agenda items 5 and 6 will be taken in private.

Meeting continued in private until 12:44.