Official Report 277KB pdf
We now move on to the next part of our inquiry into local government finance. I welcome Alex Linkston, who is the chief executive of West Lothian Council, and John Lindsay, who is the chief executive of East Lothian Council.
Although we are chief executives from individual councils, John Lindsay and I are here representing all the chief executives in Scotland, in our capacity as members of the Society of Local Authority Chief Executives and Senior Managers.
Does John Lindsay want to say anything?
I will say just a few words about capital. We consider that there has been a massive underinvestment in public sector infrastructure over the past 20 years—perhaps for the past generation. For local government, that means underinvestment in public buildings, roads, schools, hospitals, railways, sewers and all the rest of it. We need a substantial capital investment just to catch up in the short term.
I suspect that you will not be surprised to learn that you are not the first person to have made that plea.
Could you explain your views of the difference between local government and the local administration of services?
Local government has a mandate and is accountable to the electorate, but local administration means that everything is handed down to us by central Government—by the Executive—and we account for what we spend to central Government.
Do you think that local government, as distinct from local administration, is important and, if so, why?
I think that local government is very important. It is right that the Scottish Parliament and the Scottish Executive have national priorities, but those priorities do not all apply equally to every community in Scotland. Local government must be able to take national priorities and apply them to local needs and circumstances. The strength of local democracy is that the people who are elected on the ground are close to their communities because they are elected from among them and can interpret local needs.
Is it possible to maintain a system of local government, as opposed to a system of local administration, when the Scottish Executive controls 80 per cent of council funding? What do you think about the balance in local government finances?
If I may, I will say first that I am in favour of local democracy, but there is no doubt that it costs money and that local administration would be cheaper to administer. However, if people want a system of local democracy, they must pay for it. Local councils are elected on local manifestos, on which they must deliver within the overall national priorities that are laid down by the Scottish Executive.
In your introduction, you mentioned a joint planning system between the Scottish Executive and local government, and your submission refers to a
In local government and certainly in SOLACE, people feel that the Executive is managing at the margins. It is concentrating on new initiatives or on particular services in which it wants improvements to be made, rather than looking at the needs of the whole service. For example, most of the resources that have gone into education over the past few years have been directed through the excellence fund and have been earmarked for specific spending in schools. There has been no discretion to take account of other spending pressures, which councils must absorb by making economies elsewhere.
Is there anything more that you can say about how the Scottish Executive and local government could come to an agreement on that? What you are saying is that we have come some way, but that we need more communication. You mentioned the need for an evaluation. Whom do you envisage doing that?
Two of our three documents make that clear. The first is the report "Proposals for a future planning system in Scottish Local Government Finance", in which we suggest that evaluation should be conducted in about six groupings: children and families; community safety; support for vulnerable people and community care; economic development and employment; sustaining and enhancing the built and natural environments; and public transport and infrastructure. Those are our suggestions. We should sit down with the Executive and agree jointly on the spending pressures on new initiatives and maintaining current services.
We need something to replace hypothecation and ring-fencing. They are symptomatic of there being insufficient money in the system to deliver on expectations, and they allow ministers and civil servants to impose priorities from the centre. As Alex Linkston said, we need to have more discussion in a joint planning forum. To all intents and purposes, the current spending round is over and we should start to talk together now about the next spending round. That would give us a longer lead-in time to agree national priorities. Local democracy means local priorities, and cognisance needs to be taken of both local and national priorities in any talks that take place in a joint planning forum.
It would be helpful to have a summary of how you see the joint planning group going forward. I am aware that we have a copy of the documents, but a copy of such a summary would be useful. The committee might want to contact you again on that issue.
I was pleased to hear John Lindsay refer to section 94 consents in his opening remarks, because views on that issue were not made clear in the written submission.
That refers to a system of prudential controls. I understand that, under the English system, the bottom line would involve first having a balanced budget. The budget could not be overspent. In other words, it would not be possible to budget for a deficit. As for the overall controls on revenue expenditure, members will know that loan charges represent the way in which capital expenditure impacts on revenue. The Government controls the overall totals and has reserve capping powers. There may also be other transitional arrangements, whereby authorities cannot borrow more than a certain percentage of their debt. They cannot over-commit by more than a certain percentage of their debt for their forward commitments. Some sort of prudential controls need to be brought into place—I think that we are quite capable of doing that.
I take it then, that you think that councils should secure the Scottish Executive's approval for their capital improvement programme.
No, I do not think that they need that approval. The controls are through the revenue system and the way in which the Government controls the overall revenue total—total expenditure—and a system of prudential controls along the lines of, "Do not borrow more than 1 per cent of your outstanding debt in any one year." Apart from that system, councils spend what they need to.
You spoke about a longer lead-in and discussion time. Is that the type of thing that you would want to discuss in order to arrive at a position where everybody is agreed on what each council should allocate?
Absolutely.
Is that the basis of everything else that you are talking about in relation to the systems and the mechanisms?
Yes.
In your written evidence, you suggest that there is no benefit for local government from the return to local control of the non-domestic rate. Can you explain why SOLACE takes that view?
That view is held by SOLACE, rather than by individual local authorities. Individual authorities would respond depending on how each was affected. From an all-Scotland perspective, it will be a matter of winners and losers. If one council gets more—given that the sums that are involved are previously determined—other councils will get less. We want even allocation of resources, and to secure more certainty. A system that brought more uncertainty would set council against council for allocation.
Can you explain why a nationally set non-domestic rate is better able to cushion areas from any temporary local decline in the tax base, compared to a locally set non-domestic rate? Would an equalising grant system provide such protection, even if the tax were set locally?
There has always been an equalisation process for non-domestic rates. Even when it was under local control, there was an equalisation process, which was known as the standard penny rate product. If a business found itself under the level of the standard penny rate product, the difference was made up through the grant system.
Why does SOLACE believe that a single non-domestic rate poundage for the whole of Scotland is necessary for a successful enterprise economy? Why would local competition over tax rates not stimulate inward investment?
I would prefer to turn that question around. SOLACE is a bit ambivalent about the return of the non-domestic rate, because we think that that would give the appearance of more local control without actually giving more local control. We have had many years—I cannot remember how many—of national control over non-domestic rates. Therein lies the problem; if local authorities are seen ostensibly to be given back control over the non-domestic rate, and if limitations are put on us on how much we can put up the rate, nothing much will have changed, to all intents and purposes. That is our dilemma and problem with regard to a return to local control of the non-domestic rate.
Following on from that, if non-domestic rates were passed back to the control of local authorities with a degree of flexibility, such as a 3 per cent margin, would that change your view?
It would help, but the difference would be at the margin. At present, 22 per cent of expenditure is raised by council tax and 23 per cent is raised by non-domestic rates. The amount that could be added as a supplementary tax that would be payable by businesses would be only about 2 per cent or 3 per cent.
The difference would be that the balance that sees 80 per cent of local authorities' funding being provided by the Executive and 20 per cent being raised by the councils would change. The argument is that only the balance would be different. If the Government allowed more flexibility, there might be a 50/50 split of the true responsibility for the collection and dispensation of the non-domestic rates. If the council had the authority to raise or lower non-domestic rates—
That would help, obviously. It would mean that there was less addition to council tax, because the increases could be spread more widely.
If that were the only change, there would be little benefit to local government. The problem that we face is that too many initiatives come from the centre and we do not have the capacity to fund them and to provide services that are relevant to our local community. The main thrust of our submission is to try to get a better joint planning system. All the small initiatives will help, but local government is haemorrhaging because of the top-down pressure that is being placed upon us.
When we took evidence from representatives of Glasgow City Council, I was a bit concerned about their arguments in relation to retaining non-domestic rates because of the impact that that would have on neighbouring authorities. In reply to my concerns, the councillors said that they wanted to retain the additional growth that was generated from an investment that had attracted an increase in non-domestic rates. Do you sympathise with that point of view? Is that what you understand that Glasgow City Council is saying?
There has to be an equalisation system. If the non-domestic rate is returned to local control, the benefits must be equalised throughout the country. We have always had such a system and I do not think that we could do other than have an equalisation system that takes account of growth and reduction in growth.
I read the Official Report that contained Glasgow City Council's evidence and I must say that SOLACE supports that council's position in principle, in the circumstances that it described. The problem will come from having to identify what additional rate income derives from an investment that Glasgow City Council specifically led, as opposed to an investment that would have been made anyway or had been delivered by Scottish Enterprise. West Lothian is an expanding area at the moment, for example, but it is hard to say how much of that is because of the council and how much is because of the area's location or because of what previous Governments, the development corporation and so on did a number of years ago. There are no easy answers in this complex situation.
Talk about equalisation in relation to non-domestic rates takes me neatly on to the question that I was going to ask. SOLACE seems to reject the concept of local income tax on two grounds, which are fairness, and administration cost and complexity. On the issue of fairness, you mention in your submission that
Again, there is equalisation within the grant distribution system to increase the funding of authorities that are not as wealthy as others.
I presume that you could still have equalisation within a local income tax regime. As for administration, do not you accept that payroll systems ought to be able to cope with a local income tax system? In Scotland, payroll systems are already set up to cope with the tax-varying powers of the Scottish Parliament—which have yet to be used. However, I am sure that it is not impossible to set up payroll systems to cope with different tax rates. After all, it is done in other countries where there is local income tax.
You may have to take that up with the Federation of Small Businesses, which is a substantial employer across the land. If there were 32 different rates of income tax, my council might, given its catchment, have to handle about 10 of those on its payroll. It would be a nightmare for a big employer and impossible for a small one. It would lead to distortion in employment, with employers considering where potential recruits came from.
I am intrigued by what you say about 32 different levels of taxation. I understood that there were 32 different levels of taxation anyway, through the council tax. Is not it the case that every authority has a different level of council tax?
That is a property tax, not an income tax.
Yes, I am aware of that—but why would having different levels of local income tax create any more difficulties than having different levels of property tax?
The local income tax would be deducted by the employer whereas, at the moment, each local authority sends out a bill to every property in its area. The answer to your question lies in the complexity of administration. Third parties would have to be brought in to administer a local income tax.
If it is so difficult, how do they manage to administer such taxes in places such as Scandinavia, which is certainly more advanced than we are in the delivery of social justice objectives.
I am afraid that I have not studied those systems, so I cannot answer your question.
Has SOLACE considered the systems in other countries? The difficulty that we have is that theories are being considered, as opposed to the practical things that are actually happening in other countries. I do not think that anybody around the table wants to reinvent the wheel. If other small nations are successfully implementing taxation systems, is not it the duty of organisations such as SOLACE—and this committee and the Scottish Executive—to consider those systems and say either that they are better or that they would not apply in Scotland?
Before you could say whether a system was workable, you would need to do detailed research. SOLACE does not have the capacity to do that. In our submission, we have concentrated on what we think is achievable and we have addressed what we think are the key issues. I am not saying that another form of local tax is not a proper issue for the committee to consider, but you would need to commission some detailed research to ensure that you had quality information on which to base decisions. I am afraid that SOLACE has neither that capacity nor that information at present.
How much does it cost to collect and administer the council tax throughout Scotland?
I do not have the detailed figures with me, but the council tax is relatively cheap to collect compared to other forms of taxation.
So you are saying, although you have not done any research into alternative systems such as local income tax, that your gut instinct is that council tax is less expensive to collect. However, employers may be faced with the administrative costs of one tax and local authorities with the administrative costs of the other.
Local authorities would be faced with the administrative costs under both systems, but in addition the local income tax would impose a big cost on employers.
I have a question on capital. On page 4 of your submission you state:
It would frighten everyone if we started to consider what we need to spend to get our infrastructure back up to what it should be. We are talking huge sums of money. We need only consider the roads network, schools and public buildings—they need a lot of investment. I think that it has never been calculated. We have considered it tentatively in the capital planning committee without getting to the bottom of it. The huge sums of money required are above and beyond what the system—as it stands—can deliver.
Is there any year in which capital funding peaked? Was there a golden year—for example in the 1970s, 1980s or 1990s—for the funding of capital services?
Capital funding peaked about 20 years ago and has been sliding ever since. For central Government it is an easy cut to make—easier than revenue costs, which means jobs. However, capital funding is indirectly an investment in jobs and so on.
How long would it take to bring things back up? Should the Scottish Executive prepare a plan to restore Scotland's infrastructure over, for example, 10 years or 20 years?
Ten years is a reasonable period in which to make a huge inroad into restoring levels of funding—that is feasible. It takes time to plan systems and to get them, the processes and people in place to undertake that.
Should the Scottish Executive consider the cost of restoring funding levels over a ten-year period? Should it consider funding that?
From a local government perspective, yes.
I apologise—I thought that Kenny Gibson was going to ask one question. I should have known.
As if.
I am delighted that you told Mr Gibson that funding peaked under a Conservative Government. Thank you.
Was it a Conservative Government?
Twenty years ago, yes.
Like everything, those responses were prepared by a committee. Individual authorities have clear views on how the system should be reorganised. There are 32 good reasons why councils need more money. We all need more cash. In the submission we tried to pick up the key problems throughout Scotland. The 80:20 split is not good, but while the Executive continues to impose new burdens upon us, annually or every three years, without having regard to their effect, it is wrong to consider only the non-domestic rates issue and other minor sources of income.
So you are saying that it would be desirable to move toward a 50:50 split.
I would love to move to a 50:50 split, if we had a meaningful 50 per cent and real discretion.
You identify hypothecation as a problem, particularly in education. I am a radical, so I ask about removing education and social services from local government. That would lead to a 50:50 split.
It would, but we would then have national services and there would be prescription. As well as educating children, schools have a big role to play in the agendas for social inclusion, improving Scotland's health, and safer communities. If a head teacher is made accountable to, say, a committee of the Parliament, their objectives will become very narrow.
I was not suggesting moving education to the control of a parliamentary committee or even the Executive. I was suggesting that funding could go directly to schools under the control of school boards. We will leave that matter.
I should think so, too.
Your submission says that council tax has a good collection rate. Do you consider the rate good when it is 10 per cent below that of England and Wales?
You must compare like with like. A culture of non-payment developed with the community charge, which has taken a while to turn round. Local authorities are getting on top of that and collection rates are improving year-on-year. My council budgeted for 95 per cent collection for the past five years. This year, we increased the figure to 96 per cent. I hope that we will progress to 97 per cent or 97.5 per cent in the next couple of years. The collection rate is rising.
If we moved towards a prudential system for capital, what would the society recommend should be done with councils' inherited debts?
That is a question of detail for a working party. The grant system is based on the level of debt and additional capital expenditure, so a system would have to be worked out that took into account existing debt and the amount of grant received in relation to existing debt. I do not think that we have gone far enough to be able to sit down and work something out about that, although East Lothian Council's capital planning committee has provisionally considered that, without reaching any conclusions.
I will give a relevant example. At present, capital and revenue are in different compartments. In the world in which we work, money flows between the two. If an official in my council approached me and said, "I could save us £50,000 by replacing a boiler that costs us £250,000 in one of our premises," we could do that under John Lindsay's prudential rules, because capital expenditure would be incurred and the revenue saving would be made on fuel costs, which would cover the additional loan charges. However, to do that under the present system, I would need to persuade my council to cut out a capital project, which would invariably involve traffic management improvement or school improvement or modernisation. Energy conservation is a poor relation of primary school improvement.
I understand the concept, which has many attractions, but I am worried that councils do not have a level playing field. Some have higher debt burdens than others, which may be a problem.
The grant system adjusts that and would continue to do so.
The system does that—at present.
We hope that we will continue to have grant after the review.
I have two quick questions. I wonder whether I have misinterpreted your comments a bit. First, am I right to think that your written evidence suggests that the Scottish Executive should be more involved in the planning of every council's capital and revenue budget? Secondly, if you could change one aspect of local government finance to make a difference, what would it be?
I would change the section 94 rules. If I could get anything out of the committee and the review, it would be the abandonment of section 94. That would make an immediate difference to Scottish society.
I would like output-based agreements rather than hypothecation.
What about the suggestion that the Scottish Executive be involved in the planning of every council's revenue and capital budget?
Did we say that? [Laughter.]
That is what I think you said.
We are talking not about every council's budget, but about a joint planning forum, whereby Scottish local government would come together with the Scottish Executive and plan in a longer-term arrangement. That would provide joint outcome agreements to replace hypothecation and other initiatives.
So, it links in to what you said at the end. Okay. Thank you for attending the committee and for your presentation. It would be helpful if you could leave the documents or if we could have copies of them.
Thank you, convener. Good afternoon, ladies and gentlemen. You will have received a submission from Aberdeenshire Council.
Yes, we have received that paper.
That paper is only a finance officer's view—it has not been formally endorsed by the council. Nonetheless, by and large it is in line with the council's thinking as expressed on various occasions over the past few months and years. Views have been expressed on 12 of the 13 issues that are contained in the committee's remit, which was submitted to us. I will highlight two of those issues in my introductory statement: the first is non-domestic rates and the second is revenue finance.
You say that you have concerns about the three-year budgeting process. You have answered the question that I was going to ask. You are looking for a rolling programme in which year 3 would drop out and year 4 would come into play. You are saying that you would like a progressive, rolling programme, as you state on page 3 of your submission.
I confirm that such a rolling programme is exactly what I am suggesting.
Would it save money if the system used only six indicators, rather than the present number?
I do not think that it would save money directly, but it would save a lot of effort by the Scottish Executive and councils, and it would stop a lot of time-consuming lobbying. Indirectly, it would release staff resources for other work.
So, indirectly it would save money by releasing staff resources.
Theoretically, yes.
I am intrigued. I understand that, among Aberdeenshire Council's 68 members there are 28 Liberal Democrats and 24 SNP members. Both those parties have a policy on local income tax, yet there seems to be no mention of local income tax in your submission. Why is that?
As I said at the outset, my submission is an officer-prepared paper and has had no political input. My view is that a local income tax would not really work. It would have to be based on an individual's place of employment, which would cause difficulties for local authorities. For example, many residents of Aberdeenshire work in Aberdeen, therefore Aberdeen City Council would gain by a local income tax and Aberdeenshire Council would lose out. [Interruption.] Sorry. I had a French meal at lunchtime, and I seem to have a frog in my throat.
So your understanding is that revenue from a local income tax would go to the local authority where an individual worked. Has the council examined systems in other countries where there is a local income tax? Do you accept that, if there were a local income tax in this country, an element of equalisation would be involved?
We have not examined any other systems in any other countries. I suspect that an equalisation system could be brought into play, but I question whether the effort involved in that would be worth while. I question whether such a system would be any better than the council tax that we have at the moment.
How do you know until you look? If you have not looked, how can you possibly ascertain whether what you say is the case? Equalisation seems to work perfectly well in other societies.
If a concrete suggestion were made, we would certainly consider it.
You talked at some length about non-domestic rates and said that you were unhappy at the idea of such rates going back to local control. If an equalisation method was in place—you have touched on that—surely the return of the non-domestic rate to local control would reduce the gearing of the local tax and give local authorities greater freedom to determine local spending needs, given that your local authority would not be a penny worse off than it is at present.
That would be the case if local authorities had the power to vary the rate of non-domestic tax. Failing that, it would not expand the local tax base at all. It would simply be equivalent to the system that exists at the moment.
Would that method not allow local authorities to be more sensitive to business needs and therefore develop more business-friendly policies? Even if they might not be seen to be getting any additional resources—unless, as Glasgow City Council suggested, there was a slight increase over the margins—might it not be more sensitive to local business needs and interests?
Businesses might perceive it as better that the local authority would be receiving their income. However, that would be a perception only; there would be no real benefit.
You support the imposition of full council tax on second homes. Has the council estimated its potential extra income if that happened?
We have not gone through that exercise as yet.
Can you explain further why you consider that the council tax base and the yield from a council tax levied on second homes should be treated differently for revenue support grant purposes from the existing council tax base and yield?
I am not quite sure that I follow the point of the question.
You say in your submission:
I meant that there is little point in expanding the council tax base to include second homes if the revenue support grant is simply reduced accordingly. However, I accept the point that that would mean a small increase in the local tax base at the expense of the Government grants.
I will go on. What implications do you believe that the special treatment of the yield from the full council tax on second homes would be likely to have for the future of an equalising grant system in Scotland? Do you feel that it would reduce the RSG? RSG is not reduced when you build new homes, is it?
I was thinking of council tax on second homes as an additional source of income for the local authority. If we are given an additional source of income—
It should be additional.
Yes. It should be allowed to be put into services rather than clawed back by central Government, which, in effect, it would be if the RSG were to be adjusted downwards.
I want to ask about capital. Your submission suggests that you agree with the approach of other organisations to the move towards a prudential system for capital finance. Is that a reasonable interpretation of your remarks?
What we are saying is broader than that. I think that section 94 controls should be abolished altogether and that control should simply be through revenue.
That is essentially similar to the prudential approach. The submission states that you have had some difficulties with public-private partnership schemes and private finance initiatives. Can you give us some examples of the types of difficulties that have arisen?
We have started to build a new school complex. That has taken something like two years of preparation, which is much longer than it would have taken normally. We have had to spend a significant amount on consultants, specialists, legal advisers and financial advisers. We would not have had to do that if we had been involved in a conventional capital project.
Many of the submissions from councils that we have received say that the council tax base should be revalued and that the banding structures should be changed. Your written evidence says nothing about any revaluation but says that the tax system should remain structurally unchanged. Why have you adopted that position?
I am aware of the views of other councils. When I say that the tax system should remain structurally unchanged, I mean that the basic system is satisfactory and is working quite nicely. Revaluation is a sensible thing to do—it is so obvious that it should happen from time to time that I do not think that it has to be highlighted as being a potentially major change to the council tax system.
Is there an argument for allowing a degree of flexibility in the level of bands between one local authority and another, or should the structure remain the same in the interests of uniformity? If the number of bands is increased, should that increase be uniform across Scotland or should account be taken of the number of houses in each band in any given area?
Any change in the number of bands should take effect across Scotland. I do not think that there would be any advantage in having differences between local authorities.
I wondered whether there might be a difference between the number of houses in a particular band in a rural area compared with an urban area or in a deprived area compared with a prosperous area. Does that have implications?
What you say is true. For example, Aberdeenshire has fewer houses in band A than Glasgow has. However, I am not sure that the problem of deprivation could be addressed by changing the council tax banding. Again, the issue that you raise would probably have to be investigated in more depth, but my gut feeling is that such a change would not be beneficial.
When you spoke about the distribution formula earlier, you said that simplifying the formula would make the situation easier, although it was a broad-brush approach. After considering some of the complexities, we agree with you to an extent. However, bearing in mind the section in your paper on hypothecation and challenge funding—and I accept that it is an officer-led paper—surely the attempt to dovetail more closely national priorities with local outcomes that will meet local needs is important. Nearly every council that I can think of has talked about infrastructure needs. Do you think that the section on hypothecation and challenge funding is useful in the attempt to come to some agreement between national priorities and local needs?
The problem with hypothecation and challenge funding is that they concentrate too much on inputs—money—and do not concentrate on outputs, which is the difficult bit. Something should be done to develop more output controls. I accept that the Scottish Parliament has priorities that must filter down to local authorities, but the best approach that can be taken is to filter money down or, although this is more off beam, to assist through grant-aided expenditure figures. It would be worth researching ways of setting output targets for those priorities and allowing local authorities to determine how best to meet those output targets.
Could you give us examples of situations in which the cost that the council has incurred in preparing unsuccessful bids has been unhelpful and of any schemes that the council has introduced only because you have obtained challenge funding, not because the schemes were particularly high priorities for the council?
I am pleased that I do not have any elected members with me and am therefore able to give an example. I know that a park-and-ride scheme was introduced only because it was almost entirely funded by the Scottish Executive, which made available about £300,000 of additional borrowing consent for the scheme. There had to be a leap of faith with the park-and-ride scheme, which is not an initiative on which we would have placed a high priority if we had had to fund it from our own resources.
Are there any examples of situations in which an enormous amount of time was taken to prepare an unsuccessful challenge funding bid?
All of Aberdeenshire Council's bids are first-class.
There are examples, but I am having difficulty coming up with a suitable one. I will inform the committee of some examples at a later date.
I want to ask a couple of questions to clear up some loose ends from earlier questions.
I was talking about indicators, for example, population, school pupils and road miles.
My question leads on from something pursued by Sylvia Jackson. Iain Smith talked about this. What was the extra cost of the PFI scheme and the capital cost of the school that you talked about? If you do not have figures, you can perhaps give us information later, as you promised Sylvia Jackson.
The capital cost is around £20 million. The advisers' fees total just over £1 million so far. Had the school been procured through normal means, those advisers' fees would not have been required. The work required would have been done in-house. In the end, it still consumed a lot of our in-house time plus advisers' time.
If the council could change one thing in local government finance to make a difference, what would that be?
Section 94 controls should be abolished. At the moment, there is a double control. There is control through section 94 over capital spending. The revenue costs that that generates through loan charges are then effectively controlled through the revenue side. One control would be sufficient on the revenue side rather than the capital side.
Thank you for coming.
He is on a secret mission.
I welcome representatives from Argyll and Bute Council. Councillor Paul Coleshill is the chair of the policy and resources committee, which is an important council committee. Stewart McGregor is the director of finance.
To correct you, convener, the council reorganised last Thursday and I am no longer chair of the policy and resources committee. That committee no longer exists, however important it was, but I was the chair of the committee and that is why I am here.
Councillor Paul Coleshill and I appreciate the opportunity to give evidence to the committee and we welcome the committee's proactive approach to the complicated issue of local government finance. I want to say a few words in support of the submission. Paul Coleshill also has some remarks.
Thank you for allowing us to give evidence. In my day job, I am an economist. Being simple-minded, as economists are, I cannot understand why some form of gross domestic product is not used in the funding formula. Some sort of GDP, calculated per head for council areas, would seem to be a useful alteration to the funding formulation. It would enable councils such as Glasgow City Council and our own to put forward a case that we are poor or we are rich. People could see how much income people have, either per household or per head. The difficulty at the moment is that data are not fully available. I will return to that point if members' questioning suggests that that is appropriate.
No one has signalled that they want to start the questioning and, as I have not written anyone's name down yet, I will start with a quick first question. Now that I have said that, they will all start putting their pens up.
The convener winked at me.
I winked at Kenny Gibson for another reason. It was nothing to do with calling members.
Is the convener asking me why we should switch to either an individual or a household-based gross domestic product measure?
Yes.
The grant distribution system that we have had, and that we have moved to, leaves most councils dissatisfied, including Glasgow City Council and Argyll and Bute Council. There is no system that would not leave some councils dissatisfied, and that does not mean that the system is not working. The fact that those two councils are dissatisfied should lead members to believe that the current system is working appallingly badly. My suggestion is to introduce a relatively simple structural change, which would not be statistically impossible—indeed, in relative terms, it would be simplifying. It would address some of the issues that people have come here to tell the committee about.
I looked at those figures, which show that the average household income is about £23,000 in West Aberdeenshire, whereas in Pollok, in Glasgow, the average is £13,250—24.1 per cent below the Scottish average. What kind of weighting should be given to that kind of information? The Scottish average household income is £18,200. If the average in Argyll and Bute is 10 per cent below that, should Argyll and Bute receive a grant of 10 per cent above the Scottish average, or should it receive a grant of 20 per cent above the average?
With respect, that is not the way in which I shaped the question.
Indeed. Other factors must be taken into account, such as islandness and rurality. There are also issues of urban deprivation. How would the mix work?
Data have not been compiled to a sufficient level, therefore we do not have a result. If we had a result, we could compare the pattern that emerged with the pattern that has emerged from the current indicators. This may sound fanciful, but it is a bit like the difference between the Copernican system, whereby the earth orbits the sun, and the system that existed before, in which spheres were continually added to make the apparent motion of the planets fit what people actually saw. The present grant distribution system is complex, because so many spheres have been added by way of adjustments.
I am fascinated by your argument, which we will have to consider further. From your submission and from what you have just said, you seem to support the idea of a local income tax. You may have heard previous witnesses reject that idea without having taken evidence on the matter. What is the view of Argyll and Bute Council on the issue of a local income tax?
We also state in our submission that council tax collection has been improving over the years. A lot of councils had to replace their council tax systems, which had an effect on council tax collection. However, the rate of collection is improving and the system is settling down, and we must recognise that.
The point that you made about the political balance of Aberdeenshire Council applies very much to Argyll and Bute Council, which I represent.
I am also intrigued by something on page 2 of your submission. You say:
We think that the charges should be separated out, as it would help councils. It has become more difficult to collect arrears for water and sewerage charges. We do not get a very good return from the water authority, and the recognition of the costs that we incur in collecting those arrears could be improved. As the charges appear on one bill, people think that the council sets all of them.
You talked at some length about your belief that Argyll and Bute Council does not get a good deal from the distribution of grants and so on. On the last page of your submission, you say that
I tried to expand on that point in my opening remarks.
I know, but I was not quite sure what you were getting at.
Using the special islands needs allowance review as an example, we have shown how the distribution system could be improved and simplified through recognising other factors in areas where the formula-based system was failing. In late 1995 and early 1996, Argyll and Bute Council put forward the case that the current system did not adequately reflect the spending need in the area. No doubt many other councils will express the same view.
I asked the previous witnesses about council tax on second homes, which is a proposal that you support, but with reservations. Approximately how many second homes are there in Argyll and Bute, and what proportion of the housing stock do they represent?
You have put the question very carefully by referring to second homes, not holiday homes, about which there has been much comment. We cannot yet distinguish between holiday homes and second homes that receive a discount. However, we will have that information in a few months' time after the review that we are carrying out.
Have you any idea how the proportion compares with the average for Scotland?
No, I have not carried out that work or obtained any other information.
But it is relatively substantial, is it not?
I want to come back to the distribution formula. I am only half of an economist, so I get more confused than Paul Coleshill does, and I need simpler information. I am unclear whether you are arguing for a more complex distribution formula—because you seem to be arguing that certain other factors should be taken into account that currently are not—or for a simpler formula. Could you clarify that for someone who is as simple as I am?
We are conscious of the fact that a formula exists. What could we recommend that you might accept? Altering the current formula to include an extra element, and advising you to take out a number of spare elements, seems to be the best idea, so I advocate that you take into account GDP averaged for council area or households, which is information that is calculable now.
Not really, no.
I did all right, then.
At the end of the day, whatever changes are made, there will be winners and losers. Argyll and Bute Council and Glasgow City Council are asking for changes because they think that they are losers under the system. The change that you are advocating obviously is one that you think would benefit Argyll and Bute, but somebody else would lose.
I am suggesting a change that would be fairer and imply a socially inclusive programme, which I believe the Executive wishes to see. Because Argyll and Bute is poor, it would benefit, and because its social exclusion is not adequately measured at the moment, it would benefit. That is not an incidental effect of my recommendation.
Kenny Gibson indicated earlier that he did not have a particular line of questioning on this issue, and then proceeded to ask the question that I was going to ask. One issue is independent intervention with regard to grant distribution. Are you advocating a commission as an independent arbiter?
We are not being as specific as that. We have simply used the SINA review as an example of what could be done with some form of independent analysis. That analysis would be fair where the local policy choices could be separately identified, leaving real spending needs exposed. That would have to be done with some form of academic independence, with professional expertise in the area being employed. Certain areas of service delivery in particular councils would be investigated and reported on. I believe that such analysis would improve the distribution system.
I was going to ask for some examples. Obviously, Argyll and Bute receives SINA because of its rural nature and because of the disparity between one part of Argyll and Bute and another. Do you have specific examples of the impact of lack of economies of scale, sparsity and so on? Why would that need to be taken into account?
We have a large body of data.
Could you give us one example for the record today and send the rest?
The review of the special islands needs allowance identified that super-sparsity had a big impact on the cost of delivering services. Super-sparsity affects not only Argyll and Bute but other rural councils. Our council has done further research on that and has submitted a paper to Angus MacKay. Super-sparsity is where services have to be delivered to small pockets of communities beyond, say, the 25-mile distance. Super-sparsity drives costs up and is worthy of another study.
On a slightly different area, your authority seems to assume that a locally set non-domestic rate would discourage inward investment in some areas. Perhaps that is because of sparsity. Does Argyll and Bute Council believe that all local authorities would fail to take account of the likely impact of a local non-domestic rate poundage on the business community?
We have answered for Argyll and Bute in that respect. It may be of interest for the committee to know that of our total non-domestic rate—the contributable amount is £25 million to £26 million—between £7 million and £8 million relates to Faslane and Coulport, which are not actually businesses. If Faslane and Coulport are taken out, Argyll and Bute has a low non-domestic rate base. As a council, we are looking for all the support that we can get to attract inward investment and help to improve the economy of the area.
I am not trying to be difficult, but it seems that you argue that in some cases Argyll and Bute needs to be treated separately, but that in other cases it needs to be seen within the broader spectrum, which must be taken into account. Would not that lead you towards a national council tax, which would take such problems into account?
The submission is equivocal because the council is equivocal. In its thinking on non-domestic rates, the council has taken into account the fact that there is only a limited number of things that can be done to increase the percentage of council expenditure that is raised locally. Returning control of non-domestic rates to councils would be one of them, but you would have to give us full flexibility—or at least as much flexibility as is currently given with the council tax—in order for it to make a difference. If control were to be returned, we would ask whether there was an economic disadvantage for Argyll and Bute Council. To put it crudely, we would wonder whether our neighbouring councils would pinch stuff from us. Because of such considerations, our submission is equivocal on certain issues. I am sorry, but that is how it is.
If the grant distribution system took into account the specific spending needs and resources of your council, would that alter your views on the localisation of decisions on the tax rate?
Personal views have been given by other witnesses today, so I feel okay giving my personal view, which is that I want control of non-domestic rates returned to local authorities. I cannot see how that would be harmful. It would mean that decisions were taken at the level at which they should be taken. However, that is my personal view; it is not the view of Argyll and Bute Council. The council is equivocal.
Having an economist daughter, I share your thoughts about economists taking a simplistic view of the world.
I sympathise.
Several months ago, or perhaps even longer ago, the European Committee discussed rural deprivation indicators. At the time, the Scottish Executive was doing research into the whole issue, which, obviously, is complex. You have spoken about data that were collected to do with the islands allowances, and I think that you mentioned the Lothians as well. Was that data collection part of the research exercise, or was it separate from it? Are you considering issues that are wider than the issue of deprivation indicators? Are you considering particular needs in your area?
The special islands needs allowance is a special case. Argyll and Bute Council has been fighting for it for ever. In the past, all Scotland subsidised the Western Isles and half of Scotland subsidised about 30 islands. After the 1996 reorganisation that created 32 councils, only Argyll and Bute Council subsidised 26 of those islands. Because of the extra costs that islands entail, it seemed to us that we had a straightforward and overwhelming technical case. That case was ignored for years. We have fought bitterly about that. Because our case was ignored, we felt that something was wrong with the distribution system.
I think that you suggested earlier that not many data were available to help you to consider the wider issues.
Data on gross domestic product?
Yes—but I think that you were also talking about your particular case.
We have been working on the special islands needs allowance for five years and we have volumes of data–whole libraries. We could supply those data if necessary. I suspect that each council has volumes of data on its specific problem. All those data should be taken into account in a distribution system that made sense. The current distribution system does not make sense, because those data are not properly weighed. The data that are not there—on GDP—should be gathered. As a simplistic economist, it seems to me that GDP is a very useful piece of information, which could be particularised to council level and used as an information tool to make decisions on distribution.
If you take average values of gross domestic product, does that cause difficulties with regard to spread or degrees of deprivation? I am trying to link this with the bigger issue of rural deprivation indicators and so on.
Deprivation is a construct of the devices that people use to measure it. At the moment, the only devices that are readily available—they are not very readily available, but they are used—are urban. Under the Carstairs index of deprivation, which is not used for distribution—and which would terribly disadvantage Argyll and Bute—if someone owns a car, they are not deprived. Argyll and Bute is 120 miles by 120 miles of land and sea, with only 90,000 people, including people who are desperately poor but must struggle to own a car. The measure of deprivation, under the Carstairs index, would relate to the concentration of certain indices, including those covering various sorts of claimants. There is no concentration of population in Argyll and Bute bigger than Helensburgh, which has about 15,000 people. It is like Australia. We cannot use urban deprivation indices. It is nonsense to say that we do not have deprivation.
Could I recommend that we perhaps take the issue up later, when we see representatives of the Scottish Executive to find out a bit more about it?
This is a composite submission. I would say that the system has no advantages. However, that is not Argyll and Bute Council's view. As far as I am able to tell it to you, the council's view is that we are desperate for capital, will do anything necessary and will jump through any hoop. The pressure of European directives has led us to go for the waste management PFI. There was no other way. That has cost us £750,000 in external fees. It is an absolutely essential service, delivered by the public sector with public sector capital—but, okay, we have privatised it. However, nobody wants to do the islands, so we have to do them ourselves. As for the rest of the money, the Scottish Executive is putting in millions.
I remember seeing kangaroos on Loch Lomondside—did they come up to Argyll? I do not expect you to answer that, because you will not know the answer.
See the pink elephants out there.
It is true—I saw kangaroos on Loch Lomondside.
Were you at the bar earlier?
You folk do not know a lot about Scotland.
No.
Why is that?
Argyll and Bute is isolated, so it is not as badly placed as are other councils to deal with a local sales tax. The problem would be at the boundary; for example, people might buy their washing machines in Dumbarton and not in Argyll and Bute. In the majority of councils in Scotland, people would go 200yd, across the boundary, to buy their washing machines somewhere else. I cannot see how that would work.
Would it help if a national rate were set?
Do you mean a national sales tax that is handed generously to local government?
The point is this—
We would be happy with any tax that is handed generously to local government.
The point I am trying to make is that you do not have any levers at present. Governments can bring in all sorts of taxes and tell us that we are getting better treatment.
I am entirely in favour of taxes being handed entirely to local government.
Thanks—that will do.
In your written evidence, you say:
We have two answers.
The view was that the ring-fenced moneys were acting against other initiatives and the on-going delivery of services. One example comes from our education department. We have made a succession of cuts in recent years in education. Teachers' posts were cut as part of the general need to cut expenditure. However, at the same time, classroom assistants were coming in. The belief within the education department is that if we had been given more flexibility, we could have concentrated on outcomes.
To do the politician's trick of not quite answering the question, in capital terms, I would get rid of PFI. Secondly, in revenue terms, I know that it sounds odd, but I would get rid of the section 94 capital consent because it has an impact in revenue terms as well as capital terms.
Thank you.
Meeting adjourned.
On resuming—
I call the meeting to order. It is still quite cold, but we will press on.
The CIPFA directors of finance section very much welcomes the opportunity to give evidence to the committee.
Thank you for clarifying whether the setting of non-domestic rates should return to local control. What would be the main effects of that?
The main effect would be on accountability. It is difficult for us to be accountable for only some of the people in our area. Throughout the country, there have been different rates of increase in non-domestic rates compared with council tax. Explaining those differences involves challenges for us all. If local authorities are to be held accountable, they must have a level of funding that allows them to meet the requirements of accountability and decide on the level of expenditure.
The business community needs some reassurance that, if the setting of non-domestic rates was returned to local control, businesses would not suffer the difficulties that they experienced when local authorities had control before. Local authorities would need to show by their prudence that that would not be a concern.
If you had your ideal world and it was agreed that local authorities should set their own NDR, how much time would local authorities need to adjust to the new system? What practical difficulties do you envisage?
We must take account of the fact that we are in the first year of a three-year settlement. I would not envisage great difficulty in adjusting to the new system, because we would just take it into the funding mechanism. We already do the billing.
I agree. There would be no practical difficulties. However, the distributional effects of returning the setting of non-domestic rates to local councils would have to be considered carefully, because issues about disparities between councils must be thought through.
Have you given any thought to how local authorities would run the NDR system? Have you identified any difficulties in achieving uniformity in how the new system is employed?
I envisage no problem with the system of billing for or collecting non-domestic rates, because we are used to those and other functions. However, we would need to scrutinise any grant redistribution that would be required. If urban authorities could keep all the income from non-domestic rates to themselves, they would gain much more, to the detriment of some rural authorities that did not have similar opportunities. That would need to be part of a wider debate about available Government support.
Do you envisage any difficulty in adjusting the link between council tax and non-domestic rates? Should they be brought together? Should they be revalued at certain times? Should they overlap? What difficulties would be involved in doing that?
Our submission talks about council tax revaluation. We accept that non-domestic rates would also have to be revalued. We have touched on whether the valuation method for council tax should remain the capital value and whether the rental value should remain the basis of the non-domestic rates system.
The point is well made. I remember the effects of previous revaluations, when we collected domestic and non-domestic rates. Shifting the balance between the two sectors created distortions. We need to recognise the fact that if local authorities are once more to be given the ability to determine the business rate, the balance between the business sector and the domestic sector has to be thought through. Personally, I would prefer the balance to remain fixed over time so that there is no distortion between the two tax groups.
Your submission talks about the relationship between council tax and non-domestic rates, but I am not sure what your thinking is. I do not know whether you are suggesting that there should be a maximum amount of income that can be taken from non-domestic rates or whether you are saying that the increase has to be the same for both sectors, so that councils cannot lump all the increases on the non-domestic rate payer, in an election year, for example—not that politicians would dream of doing such a thing, of course.
If local authorities were given the opportunity to get non-domestic rate setting back, they would, in the main, take a prudential view. I do not think that the election-year scenario that you suggest would arise.
Paragraph 2.4 of your submission says that you believe that the council tax system is "relatively straightforward". Do you think that it is sustainable in the long term? Yearly, council tax seems to increase above the rate of inflation because of the gearing effect. If you believe that the system is not sustainable, have you given any thought to alternatives? There appears to be an attempt to tinker with the present system rather than to analyse alternative systems, such as the local income tax system, which was recommended by Layfield 25 years ago.
We are sitting here as officials, not as politicians. Your question should perhaps be directed towards those in the political arena. We will put in place the mechanisms by which local sales tax, local income tax or whatever can be collected. That is what local government officers do—usually to tight schedules.
Although I absolutely agree with your comments, given the world we are in, council tax increases below the rate of inflation might not be the norm. Despite what you say about politicians making decisions, which you follow, are not finance directors responsible for recommending options for systems? At the end of the day, we are lay people and you are the experts; it seems quite insular that no one has considered systems in other countries that might be more effective. As I said to Jack McConnell in September 1999 when this issue first arose, it might well be the case that the current system is the best and that it just needs some adjustments. However, should not we consider other systems first? Why has that not been done?
I agree that we should consider other systems. We have not been able to because of the pressure of work on council officials.
This is a difficult question for the directors of finance section of CIPFA to answer. Certainly we have not been encouraged by the Executive or others to pursue that initiative, but the submission from the Convention of Scottish Local Authorities makes clear the organisation's interest in exploring approaches in other countries. We feel that the current balance is wrong. We need to have a debate about how we can correct it. We are not hooked to the single solution of returning rates to local authority control and achieving a 50:50 balance.
We have fought quite hard for this independent review, which is why we hope people will look outside the ballpark. If people consider the issue from only a very narrow perspective, it makes the whole exercise not worthless, but less valuable than it should be.
That is a difficult question, because many councils are trying to maximise their income through direct charges, a number of which have been introduced and indeed increased. I am not aware of any other innovative ideas, if that is what you are asking about.
Given the financial constraints that we have been under for some years, an easily collected and locally imposed charge could be introduced. The question is more about a system of national taxation that could be administered locally. Perhaps the most effective system would be a slice of value added tax; some kind of local sales tax might be relatively acceptable, although councils would have to resolve some cross-boundary issues. However, there would be no such issues if there were a national tax with national standards. Such a system might achieve a better balance.
I was interested in your comments about the collection of non-domestic rates. You said that transferring the responsibility for non-domestic rates back to councils would give them an incentive for collection. When I asked about the amount of non-domestic rates that are uncollected, I was amazed to find that the figures are not available. Does either of you know the figures for your councils?
Our collection rate for non-domestic rates is generally between 98 and 99 per cent.
So there is no great incentive to improve your collection rate, as only 1 per cent is outstanding.
That 1 to 2 per cent is a lot of money.
There is a much greater incentive to collect council tax, which, as you said, you are not doing. Your collection rate is 10 per cent below that in England.
I must take issue with you—
The collection rate for council tax is 10 per cent below the figure for England. Where is the incentive to recover outstanding non-domestic rates?
The challenge in collecting tax lies at the margins, where tax is difficult to collect. Most businesses pay their rates, although some have to be pushed to do so. Resources must be devoted to maximising that collection. I am not encouraged to put that effort into the collection of non-domestic rates because I receive no direct benefit from it. The public sector generally receives a direct benefit from the collection of council tax, which is partly why improvements have been made in all council areas in the in-year collection of council tax over the past few years. There is still some way to go, but the legislation that the Executive has introduced is helping considerably.
I share the concerns of the Executive—that may seem strange—over the idea of returning control of non-domestic rates to councils. The uniform business rate was introduced to create a level playing field and to address the huge difference in rates between Scotland and England, which resulted from the large increases that were imposed over the years by mainly Labour-controlled councils.
We are advocating a true partnership between the Executive and local government. For any partnership to work, there must be trust, and the Scottish Executive must trust that local politicians will act prudently. If they do not, who will be the losers? As an official looking at politicians, I see a sea change—politicians are now much more responsive to what is happening than they were. I recognise the picture of the past that Mr Harding is painting, but I think that we are entering a different era in which we must work together with the single aim of improving public services. We should not argue over whether councils can be trusted to keep increases reasonable.
You mentioned hypothecation and ring-fenced moneys. Has the group considered under which circumstances it would be reasonable for the Executive to introduce or continue to use specific grants?
The section is generally against specific grants. First, they reduce the flexibility of local councils. Secondly, we are concerned about situations in the past—especially when we were receiving no inflation allowance in the central Government settlement—in which many specific grants were spent on manpower and there was no exit strategy for specific grant projects. After three years, what happens to that specific grant? Is it put back into the GAE pot as the total amount or as a lesser amount? We have had disagreements about what a new burden is and what the amount of a new burden is.
How do you think challenge funding should be managed? Who should be responsible for the appraisal and allocation of the process?
Our section does not have a view on challenge funding. It is a useful device if used sparingly but, when it is used to address issues that affect all councils and the outcomes are not spread fairly across all councils, it is not helpful. We have to be careful about which service areas and needs are selected for challenge funding.
Would you prefer an independent appraisal?
By that, do you mean an assessment of who should receive funding?
Yes.
Happily, I live in a political world where politicians have the good sense to come to the right decisions, having taken on board all the advice that they have been given.
Do you think that there should be a revaluation of the banding system and an increase in the number of bands? Should that occur at the same time as rates revaluation?
Our mailbags do not tell us that council tax bandings are a problem. However, as John Campbell said, we are clear that the banding levels need to be expanded; band A needs to be reduced and band H needs to be increased. It is increasingly problematic to explain to our council tax payers, when giving them their council tax notices, that their banding level is set not on the price that they would pay for their house today, but on the April 1991 price. Greater transparency and simplicity would result from a revaluation. It is not essential to revalue domestic properties at the same time as non-domestic rates are revalued; it would be important to undertake revaluation at the same time only if control of non-domestic rates were returned to local government.
Should revaluation be annual or biannual? Would that be helpful for people whose houses had deteriorated?
One of the clear advantages of the council tax system is that it is operated in bands. Changes seldom lead to a revision of the property banding level. However, there should be provision in the system to deal with any inadequacies.
Has the group considered what, if any, changes should be made to the capital financing system? Has the group considered the future role of public-private partnerships and private finance initiatives?
As I said in our introduction, we see PFI-PPP as a tool, but not the only tool, in the capital financing system. Our section is very much against the retention of section 94 controls. We also want to look in greater detail at the safeguards that could be introduced, as we expect that the Scottish Executive will want to have safeguards in the system.
How would you introduce safeguards to the prudential system and how would that operate? How would councils' existing debt be dealt with? The current system is not necessarily equitable. At reorganisation, a lot of councils inherited debt, which was not of their choosing but which has to be paid off. How do you balance those different factors?
Work is being done by the Executive, COSLA and the directors of finance section to develop suitable prudential indicators. A lot of work has been done in England and Wales through the Department of the Environment, Transport and the Regions to identify the relevant indicators.
A great amount of energy is spent trying to get round controls. Imagine what we could do if we were working just to improve the service rather than to beat a section 94 control. That is the key issue that we would like to leave in committee members' minds. We want to turn the situation around—rather than trying to find loopholes in order to achieve an objective, we could work together to achieve it.
SOLACE gave us some information on how we could move forward with a joint planning framework, which is one of your main suggestions. Do you have any other information about that? Would you be willing to provide us with more information on how the mechanism would work?
I am happy to take that away and to provide some further evidence to the committee on the lead that has been given this afternoon.
The joint planning framework seems to be an important issue, which we should pursue.
Let me start by commenting on something that we touched on earlier. There is far too much focus and time spent on grant distribution; in some cases, energies are almost wasted. Our submission referred to the need for a system that is transparent and intelligible, although not simplistic.
The distribution process has struggled to get through reorganisation and several years of severe reductions in support for local authorities. During that time, councils have been trying to make the best use of their share and to maximise their needs in terms of the grant distribution process. Had the political or economic circumstances of the past four years been different, I am sure that we would not be talking about the distribution process in the way that we are.
Thank you. I wish you a safe journey home.
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