Local Government Finance Inquiry
We have with us Andy Kerr, who is the Minister for Finance and Public Services, Neil Rennick, who is head of the local government expenditure and council tax branch of the Scottish Executive, and Christie Smith, who is head of the local government finance and performance division of the Scottish Executive. They are here today because, at last, we have seen the light at the end of the tunnel of our massive examination of local government finance.
I know that I join you at the end of your deliberations and I will rely on my officials to answer detailed questions that relate to matters that may have gone before.
I welcome the Local Government Committee's commitment to its investigation of local government finance and to the report that it will produce. I know that the committee has taken evidence from a wide range of organisations, agencies and individuals as well as commissioning research. There will be considerable interest in your report. Many people—including me—have been awaiting it with bated breath.
I hope that members found the paper that I submitted to the committee useful. I will attempt to keep my opening remarks brief, although I hope to cover the main points.
Members will be aware of the significant reforms that have been introduced into the local government finance system over the past two years. In particular, I refer to the establishment of three-year budgets and to additional flexibility for local budget decisions. Members will also be aware of our developing work on reviewing the arrangements for local authority capital controls and on establishing local outcome agreements with councils. I am pleased to report that we are making positive progress on those matters.
As well as reforming the local government finance system, we are committing substantial additional investment to local government and local services. It is clear that there will always be arguments for even more resources, just as there will always be worthwhile uses in our communities for additional resources. However, over the three years of the current spending review, the Scottish Executive revenue support grant for local government will increase by £1.4 billion to more than £7 billion, which is an increase of 25 per cent. The allocations for local authority capital investment are increasing by 40 per cent. I would argue that that is a substantial level of additional investment in anyone's terms.
Later this week, Parliament will have an opportunity to debate the revenue grant allocations for individual authorities—I know that a number of members present are looking forward to that debate. The changes that we have introduced to the grant distribution system will ensure that, as happened this year, all councils will receive increases that are well above the current rate of inflation.
The Executive is committed to ensuring high-quality public services. We are also committed to the vital role that local authorities play in delivering public services. We cannot focus narrowly on the local government finance system alone, or on local government services. We have announced our intention to introduce legislation to strengthen local democracy and to encourage local authorities to develop joint planning partnerships in their communities. We offer a stable financial platform for local government, which will be vital in taking our agenda forward.
That is all that I want to say as an opening statement, convener. I look forward to our discussion.
I will kick off with a general question—it is a big question, but I would be grateful if you could answer it in a few words.
Where do you envisage your vision for local government in Scotland and for local government finance leading? What are your ideas on those matters?
Those are indeed big questions. My vision for local government is that I want us to reach the point at which ministers are in regular contact with the Convention of Scottish Local Authorities in order to ensure that we understand one another's pressing requirements. That may involve discussing delivery of either the priorities to which the Scottish Executive is committed or the priorities to which local authorities are committed.
The work that we are doing on best value—the end of compulsory competitive tendering—is also critical. I believe that our work on community planning will become the heart of the delivery of high-quality and accountable local public services. A white paper will be produced in due course to examine local government governance issues, such as how local authorities are run. It will also take on thorny questions, such as councillors' allowances and expenses, which remain issues for local authorities, and electoral reform.
There is a big agenda for local authorities and, in my short time as Minister for Finance and Public Services, I have seen, and continue to see, the dynamism and innovation that exists in the delivery of public services and in the partnership work that we undertake. Local government, as a provider of public services, is one of the main vehicles for delivery, as far as the commitment of Executive resources is concerned. Eighty per cent of the Scottish Executive's budget goes to health or to local authorities and it is clear that local authorities play a massive role in the delivery of services.
The issues that are involved include community planning, best value, a power of well-being—allowing local authorities the freedom to provide for their communities—and how capital is controlled within local government. The Executive is trying to loosen up, engage positively and give power—that is what we are trying to achieve. However, local authorities and their partners will have to take on more responsibility with that power. We want to ensure that, through local outcome agreements, we garner the positive commitment to public services that we all hold dear in our hearts in order to deliver for real people. People who live in our communities use parks, bin services, social work services, education and other vital services. For many local authorities, providing those critical services is seen as a somewhat thankless task. It is only when services fail—which happens occasionally—that people miss them.
That is the bigger agenda. It is not all about money. We meet COSLA and individual authorities regularly and local authorities argue with me daily about other issues. We want to engage with front-line deliverers of services to reduce the burdens on them of organising services and to provide best practice across all public sectors—not just local government, but across departments and beyond. We want to achieve a good quality of service delivery—the way in which we manage our services and deliver them at a local level—backed up by a massive increase in resources.
People always argue that they can do more and I do not dispute that—they can do more. We have provided substantial extra resources to local authorities and I want to continue that process of the de-ring-fencing—or the unhypothecation—of resources. I want to become more engaged in discussion with local authorities about how we deliver services and about the use of local outcome agreements—there are substantial pilot schemes running in certain areas. That is the bigger vision that the Executive and I have for local government. We recognise the role of local authorities as key deliverers of services and we want to give them the power, responsibility and duty to undertake that.
I know that you dedicate a lot of time to your brief, minister, but if you are waiting for our report with bated breath you really should get out more.
I am glad that you touched on grant distribution because it has cropped up repeatedly in the evidence that we have heard. More than one contributor to our inquiry has pointed out the need for a review of the current revenue grant arrangements and the need for a reduction in the number of separate grant-aided expenditure allocation assessments. Do you have a view on that and do you accept that there is a need for such a review?
What I have learned in my short time as a minister is that there is a yin and a yang—everything that we do has another effect. My discussions with local authorities to date have confirmed that.
A certain amount of money is available and there is a formula for its distribution. As long as the formula is agreed, that is the mechanism that we will use. I am happy to discuss the distribution arrangements with COSLA, including options for simplification and alternative terminology and structure. COSLA, however, must command the support of all councils involved in the process. Many people sign up to the formula at a national level, but then approach me individually, telling me that it does not work for them. I am sure that we will hear more about that later on.
When we consider the issue we find that despite all the changes to the formula—the inclusion of deprivation, rurality and so on—that have been made over the past years, the actual amount of resource going into any authority has not changed dramatically. The yin and yang thing does not have much effect overall. I understand that COSLA provided the committee with a spreadsheet of the changes. The information that I have available shows that 15 authorities have seen no net change in their share of total grant; the shares of 12 authorities have changed by 0.1 per cent; the shares of four authorities have changed by 0.2 per cent and the share of one authority has changed by 0.6 per cent. Is that the best way to examine how to use our money effectively?
The grant-aided expenditure assessments create a lot of tension and division. They do not deliver any services for our communities and at the end of the day they do not deliver anything for the authorities concerned. I am happy to talk to local authorities that have ideas about how we could do GAE assessments more effectively. Is there value in the exercise? Will it work and will it make our services any better? According to COSLA's submission, the net change is fairly marginal.
You have been talking to COSLA and using its statistics. Has your department set aside any moneys for its own research, so that the dialogue with COSLA is based on information that you have determined?
When we engage with COSLA on the distribution formula, the research, advice and back-up are part of the engagement, so that we can ensure that the resource is available. Christie Smith might have something to add on that. We have not gone out proactively to do that research, on the basis that if the Executive was seen to be doing it, there would be a relationship problem. It is a question of a joint view by COSLA and the Executive. It would not help if the Executive was to act by itself.
If you were considering any proposals for changing the grant distribution system, would not you need to research that and produce information, so that that information was available when you met COSLA?
We do that.
Christie Smith (Scottish Executive Finance and Central Services Department):
Until we made the three-year settlement, we had an annual programme of distribution reviews. Over time, we have worked through all the GAE allocations and have reviewed some of them several times. Every year a research programme backs our programme of reviews. We use independent researchers and consultants, who consult all the authorities for evidence of the need for change and so on. Part of the benefit of the three-year settlement is not to have to review everything all the time. Since we announced the three-year settlement, we have not been engaging in distribution reviews. This year we will prepare for the next three-year settlement. We have been talking to COSLA about that. If we agree that there are any aspects of the distribution formula that need to be reviewed, we will put in place the research and the resources to do that.
When the first budget came out after the Scottish Parliament had come into being, an emerging issue was that there seemed to be an adverse effect for smaller councils, such as Stirling—as a result of disaggregation—and for those councils whose populations were increasing very quickly, such as West Lothian. It seemed that the budget distribution formula did not meet the needs of those councils. You have talked about research into the distribution formula. Will you say something about taking those factors on board? I remember that they were quite significant at the time.
In my short time as Minister for Finance and Public Services, I have learnt that every local authority is unique and has particular rural, deprivation, population, transport or education problems. We need some way of doing things and I am open to talking about and adopting a better way. The mechanisms that we have deployed to date and the reviews that we have had of those systems have not delivered anything more effective. That is where I start and finish on your point about individual authorities.
We try to build in certain resources around the fringe of local government finance—for example, through challenge fund projects or better neighbourhood moneys and resources—to allow intervention to be made outwith the system. Admittedly, that is very much on the margins; most of the work is done through the usual grant settlement process. I fully understand that certain areas feel that they are being let down by certain processes.
I have had many consultations with authorities about McCrone. As an Executive, we put into the McCrone settlement the money that is necessary and the system that was agreed with COSLA. Some authorities say that they have special problems. I recognise the difficulties that they have in their locality. However, those authorities who have received "too much money" have not returned to chap my door to admit that they have gained a bit more than they should have out of the settlement process and to invite me to give that resource to X authority down the road. Once we start to undo the process at one end, there is always an effect somewhere else.
I am trying to say that what has been done with the reviews so far and the COSLA profile that members have in their papers has not made a heck of a difference overall—despite the number of distribution formula reviews and all the effort that has gone into them over all that time.
In your submission, you draw attention to the improvements in local government finance that have come about since devolution, but say nothing about a number of the issues that have been raised by councils and others who have given written and/or oral evidence to the Local Government Committee. Many of the witnesses who gave evidence to the committee have expressed concern about the present balance between central and local funding of local government services in Scotland and have suggested that that balance weakens the accountability of councils to their local electorates.
Will you tell the committee the Executive's views on the funding balance and the effect that that has on the accountability of councils in Scotland?
That has always been an issue for local authorities. When I worked in a local authority, the relationship and the balance between central and local funding were issues. The COSLA evidence to the committee acknowledges that there are no simple solutions and, to a degree, I would argue that that is absolutely correct. If we start to change the balance, what will be the net effect on the yin and the yang?
I return to the fact that we are in the present position because of historical development. However, everything that we do in this relationship can change. Some people have said that we can take services out of local government control and centralise them. I do not believe in doing that, but it would change the balance of resources. If we start to play around with the big money in local government and the big services, it is possible to rebalance resources overall.
The issue is one of accountability and how local authorities work. Clearly, the levels of council tax that are set and the services that are provided in communities help to form people's relationship with their local council. So does the effectiveness or otherwise of their local councillor. When people go to the ballot box to vote for their local councillor, they do not have in the forefront of their minds the fact that there is a mighty imbalance between central Government resources and locally raised finance. They talk about the services that they are getting, the services that have been cut back or introduced, the innovations that the local authority has introduced and that may or may not have worked, and their relationship with their local councillor.
I do not mean to dismiss Keith Harding's question. I acknowledge that he raises a very significant issue and one that I discuss with local authorities. However, there has to be a balance between central and local government resources. If we changed the current balance of resources, that would have an effect. I am not sure that it would be a desirable effect.
I would like to pursue that. Many witnesses have expressed concern about the effect that the present balance of resources has on the gearing of council tax. Does the Executive accept that council tax is highly geared and that that high gearing is likely to give local taxpayers a misleading impression of their local council's spending decisions?
Having been a councillor myself, I fully accept that increases in the amount of resources raised locally are geared and understand how those affect council tax figures. However, when the Executive places commitments on local authorities to ensure delivery of Executive policy, those are fully funded and should not have a net effect on gearing locally. Gearing is affected when local authorities take their own decisions, which is why they exist.
To address what is called the democratic deficit, many councils and COSLA have suggested the return of business rates to local councils. When he was Minister for Finance, the First Minister ruled that out. Is that still the Executive's position?
That remains the Executive's position.
I am pleased to hear that. The Executive has my support.
The funding balance between central and local government in England is similar to that in Scotland. The Westminster Government has agreed to undertake further analysis of the effects of the present funding balance in England and to establish a high-level working group to consider all aspects of that balance, to review the evidence and to consider options for reform. Will the Executive undertake a similar review in Scotland?
We are in constant dialogue with our colleagues in local government. I have had a series of meetings with COSLA and will have further meetings with that body. At those meetings, issues are raised and we pick off specific work programmes. When matters relating to the funding balance between central and local government are raised, we will consider them seriously.
Some of the things that Keith Harding has suggested are on the agenda, but others are not. My immediate agenda is to discuss with local authorities what we can do for them and how we can assist them. That helps to build a relationship between a key service provider—the democratic institution of local government—and the Executive. Some of the issues that Keith Harding raises have been picked up, but my agenda for local government is based very much on my discussions with COSLA.
We all acknowledge that there has been an increase in local government funding. You referred to "massive increases". Can you explain why councils throughout the country are now examining their budgets and cutting central services because funding is insufficient? If the increases have been that great, why do they need to make cuts?
Let us get the facts on the table. A total of £7 billion has been made available to local authorities. That is a massive resource—going on for 40 per cent of the Executive's budget—which requires support. I cannot account for every decision that local councils make. My local council, which I know best, is involved in constant service improvement. It seeks constantly to ensure that its spending is adequate and that it is getting the most for the money that it raises locally and the resources that are given to it by the Executive. It is managing those resources.
I would not like to get into discussion about particular areas in particular local authorities. I am clear that we have increased resources. The level of increase is in excess of inflation. Local authorities are fully funded for any new burdens put on them by the Executive. It is therefore up to those local authorities to make decisions about how to deal with their budgets.
Thank you for your submission, minister.
You mentioned COSLA on numerous occasions. You will be aware of how concerned COSLA is about the extent of the ring fencing that the Executive seems to be imposing on local government. Your submission recognises that COSLA is concerned and refers to
"around £150m in ring-fenced programme funding transferring to unhypothecated general grant".
Your submission says that you are expecting something to come out of the outcome agreements. When do you expect to complete the review of the remaining ring-fenced grants? Have you set any terms of reference for that review?
I have two things to say as a preface to my answer. In my discussions with local authorities, I always have to re-emphasise that the Executive, too, has priorities. Those priorities require to be delivered and, as long as they are resourced adequately—and it so happens that local authorities are often the delivery vehicle for those initiatives—I am comfortable that those resources should be spent on those priorities.
I am determined to continue reviewing what is ring-fenced with the express wish of reducing it. That is not a start-and-finish process; it is a regular part of my discussions with officers and local authorities. The end of that process will not mean that there are no ring-fenced resources in local authorities—that is unrealistic.
We want to move on to discuss local outcome agreements, which are not simple or easy. They bind both parties into a commitment on service delivery. There are some good pilot schemes at the moment. The better neighbourhoods services fund has shown that local authorities can respond to the desire to develop local outcome agreements.
I have committed a substantial length of time to hammering out with COSLA and its advisers what we are talking about. I hear the figure of 10 per cent from the Executive, and I hear 30 per cent from COSLA. I want to get into real discussion about, for example, how police and fire services fit into the calculations. How do the other Executive initiatives fit into the calculations? Then, once the door is unlocked after hours of endless discussion and interesting comment, I hope that we will have an understanding of what we mean by ring fencing.
Ring fencing is a term that is bandied about, but there is legitimate ring fencing. Until local outcome agreements are delivered to the degree that they can be delivered, ring fencing will continue to exist. However, I think that local authorities will understand that the Executive, too, has priorities. Ring fencing is not a good thing—if we did not have to do it, we would not. We have to establish how we can deliver services through agreements, partnerships and outcome agreements.
I am committed to the Executive's priorities, which need to be funded fully. We will work extremely hard to roll out the principle and practice of local outcome agreements. There is a continuing instruction—that might be too strong a term—to reduce ring fencing as much as possible. That will all be underpinned by lengthy discussions with COSLA and its advisers to agree the issues we are discussing today. That will help the process along.
I have another simple question and, hopefully, I will not get such a long, convoluted answer. Are you setting up reviews of ring-fenced grants? You appear to be saying that the Executive's priorities will come first.
I have an example from the oral evidence from Argyll and Bute Council. The council representatives talked about ring-fenced money acting against other initiatives. One of the witnesses said:
"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."—[Official Report, Local Government Committee, 27 March 2001; c 1757.]
The belief was that, if the education department and the council had more flexibility, they could get on better in partnership.
The crucial question is whether ring fencing will continue. If not, will there be a review? If there is a review, will certain priorities be outwith ring fencing?
Thank you for your kind words. I have tried to present a vision of the Executive working in partnership with local authorities. That vision is based on understanding each other's priorities, on our requirement to resource local authorities and on revolutionising our relationship with local government by introducing local outcome agreements, which may or may not resolve some issues that you mentioned.
I am also committed to a rolling programme of examining ring-fenced areas, with a view to reducing them. That is not a start-and-end process. The Executive may have other initiatives that the Parliament rightly votes for and that require to be delivered through local authorities by ring fencing or local outcome agreements. Therefore, I am not giving a commitment to end ring fencing; I am committing myself to a substantial agenda that has never been followed in the history of local government. I am committed to getting round the table to discuss local outcome agreements and agree, through dialogue, what ring fencing is. Of the £6.5 billion that goes to local authorities, we are focusing on the 10 per cent that has control or ring fencing around it.
As I said in my statement to the chamber on specific grant funding, ring-fenced funding has been reduced by £150 million. We are also considering reviewing controls in the education excellence fund in an effort to de-ring some of that. Our commitments are being delivered. The process is continuing and I am signed up to it.
You mentioned the education excellence fund. The crux of the matter is that local authorities, COSLA and others are worried about your statement that you have given local authorities extra money. West Lothian Council, for example, was given an extra £10 million, but £1.6 million of that had to go to the excellence fund and was therefore wiped off the so-called extra funding. That worries COSLA and local authorities. If I understood what you said, you have given a commitment that ring fencing will not end. Is that correct?
You said that £1.6 million was wiped off funding, but that money was essential educational achievement funding for properties and for extra resources in schools, for example. It was not wiped off funding, although control of that money might have been wiped off.
There is nothing spectacular in that and you will not get a press release out of it. I have daily discussions with COSLA. To deliver the Executive's commitments, money must be ring-fenced or controlled until that happy day when local outcome agreements are agreed for all resources and we focus on what is important—service delivery, not inputs. It is important to the Executive and to the development of our relationship with local authorities that we discuss outcomes. People understand and want outcomes and regard as important how the Executive takes forward that issue.
The relationship between the Executive and local authorities should be understood. I make it clear to local authorities that we have commitments. As long as we fully fund those commitments and work in partnership with local government, we can proceed.
Through initiatives such as community planning, we can enhance the delivery of local services, bind them together and interact with the local level. Innovations will be forgotten unless we get away from focusing on inputs. Ultimately, outputs are the issue and we want to spend our money on them.
You mentioned discussions and partnership, but there is the matter of transparency and honesty. I think that you misunderstand COSLA, various departments and me. If an Executive press release states that local authorities are given extra moneys, they must say to their electorates that they have been given extra moneys, but that some of those have been ring-fenced. You do not seem to understand the issue of transparency. If you were honest with the public about ring fencing, perhaps the public would understand more. The Local Government Committee is considering ways to finance local government properly. You should listen to those who run local government and to COSLA rather than dictate, which you seem to be doing.
That was a startling seam of information. Everything in our budget is specified, so it is clear whether things are ring-fenced. There is little point in continuing with this dialogue. We are putting record amounts of money into local government services. That is what people are interested in.
You have answered the questions, but Sylvia Jackson would like to ask one more on the same subject.
I have two very quick questions. The first is on the proposals for new ring-fenced grants. Will you be using new criteria to judge those?
I welcome what you said about local outcome agreements, but I raise one of COSLA's concerns, which was about the infrastructure of local authorities. Although local outcome agreements will no doubt help local authorities to meet needs, that will be on a fairly small scale compared with the huge scale for non-trunk roads. There are other issues.
I hope that I understood your question about ring fencing. Christie Smith can join in if necessary. As I understand it, there is an established scheme to judge whether any ring-fenced grant is required for an area. If there is a bidding process, we require rigid analysis of various bids.
I agree with your second point. Perhaps Christie Smith will add to that.
A case has to be made within the Executive for ring fencing. Everyone has signed up to the general policy of reducing ring fencing or not using it as a first resort. Any spending proposal that might involve ring fencing has to be discussed with officials in local government finance and cleared with the Minister for Finance and Public Services. There is no first resort to ring fencing.
My question was essentially about the criteria against which you judge any new ring-fenced grants.
The main criterion is whether ring-fencing the funding is necessary to secure the commitment that the Executive wants to make. Other avenues for doing that are explored, including local outcome agreements or other forms of consultation—agreements with COSLA and so on. Ring fencing is the last resort in terms of control of the money.
If I understand you correctly, you are saying that from now on there will be much more thinking about local outcome agreements and how the proposals are put forward.
We are developing the local outcome agreement approach. We have four initiatives that are subject to local outcome agreements. They account for over £200 million of expenditure that might otherwise have been ring-fenced. We are working on two other ambitious pilots on educational attainment and children's services, which would account for major blocks of local government spending and could find a way through the ring-fencing argument.
The excellence fund, which accounts for about half of the existing ring-fenced amount, other than police grant, is being reviewed. A number of processes are in place to fulfil the commitment to bear down on the amount of ring fencing and to control it so that it does not just grow willy-nilly.
There are essentially no new criteria against which you will be judging new ring-fencing proposals.
There are no new criteria. We have always adopted those criteria in relation to ring fencing.
I just wanted to clarify that point.
I would like to start with a general question. I take it from your submission that the Executive is not examining alternative sources of local government taxation, such as the domestic consumers local income tax, or non-domestic revenue, such as land value taxation.
That is correct.
It is worth putting that in the Official Report.
I refer to non-domestic rates as they are at present. In your written submission you indicate your intention to make non-domestic rates more responsive to the circumstances of individual businesses. Will you expand on your proposals for that?
The issue of non-domestic rates is difficult, because, if the allocation were straightforward, some areas would benefit and others would not. We are in the early stages of discussions on business improvement districts, whereby authorities could provide innovations and resources that would increase the vitality of business, attract new investment or support and lever in other resources. We have an on-going dialogue with the local authorities about how we can develop that process. With regard to that aspect of the non-domestic rate, there is no fixed commitment as yet.
One of the proposals is for the new rates relief scheme for small businesses. For the record, as part of our inquiry, will you say how the new scheme is intended to operate? What proportion of the relevant rates bills will it affect and how will it be funded?
Seventy per cent of businesses will benefit—parliamentary questions have been lodged on the subject.
I know.
Did you lodge them?
Yes.
I apologise—I knew that it might have been you. The information is not held centrally.
The scheme that we settled on is designed to maximise benefit to those targeted areas where we think we can make an impact. There was a great deal of discussion about the rates relief scheme that was introduced by the Executive. However, the scheme was designed to help the greatest number of businesses and those that we understood from the business community and others would benefit from the relief.
We introduced a fairly novel relief scheme for rural areas, which will benefit rural communities. By allocating resources to fixed pockets, we did a good job to ensure that the resources hit the greatest number of businesses most effectively. I agree that there is always room to change schemes; for example, where bandings have a direct impact on local business, they could change.
On the basis of evidence of how the scheme could work for those involved, I think that the scheme is good. In particular, a number of innovations should be welcomed for rural areas, including those for single shops and farm-machinery circles. We tried to do our best to take account of the different needs in rural areas.
The minister will be aware that the Executive's proposed scheme has been criticised on the grounds that it has to be self-funding. That means that other business rate payers have to pay for the cost of relief to the smaller businesses. Have you considered whether the Executive could fund the scheme? Will you give an estimate of the supplementary rate for businesses above the £25,000 threshold?
On Iain Smith's first point, anything could be funded by the Executive out of its budgets. The Executive's job is to make difficult decisions about the allocation of resources. I do not have the figure to hand, but I can get back to the committee about what it would cost the Executive to introduce the scheme. I understand from Christie Smith that the cost would be about £45 million. That is £45 million from a fixed allocation of resources.
A number of letters have been published in newspapers misinterpreting the Executive scheme. Businesses above the £25,000 threshold should have no more than a 3 per cent increase. That is the indication that I have been given of how the scheme will roll out.
In your paper, you refer to a relief scheme that will benefit
"an estimated 70% of Scottish businesses, and various rate relief measures for rural communities."
What proportion of bills will be covered by the relief scheme?
It is all down to the rateable value of the property. We have set out a banded scheme, under which properties with a rateable value of less than £3,000 get 50 per cent relief. The relief spreads to properties with a rateable value between £7,000 and £10,000, which get 5 per cent relief. I can provide details of the staged bands and the impact on those businesses.
That would be helpful.
Are you not concerned that that will place large and medium-sized businesses on an even less competitive basis? Having been moved away from the UK universal business rate, they are already paying 9 per cent more than their counterparts down south and you have added another burden on to them.
I disagree with the comparison that Keith Harding made with the situation down south. Detailed information is available on that, which we will pass to him.
Earlier, we discussed gearing in local authorities, whereby much of the money that is available is raised locally and the rest comes from the Executive. The impact of what we can do is greater for a small business and less for a bigger business. We are trying to focus resources so that those who can get a net gain do so. There are many ways of doing that. I spent long, weary hours considering the schemes that are available, but it was felt that, given the resources that are available, this is a fair, affordable scheme. That money comes out of the pockets of other people in the business community, but it was felt that the effect of the scheme is to benefit small business and that the net effect on bigger business and on big business is marginal. The 3 per cent figure that I gave Iain Smith refers to the impact that the scheme would have on those businesses' rates.
Your submission says that the relief scheme will benefit an estimated 70 per cent of small Scottish businesses. You will know that the Forum of Private Business has always challenged that figure and continues to do so. It maintains that the 70 per cent would include those who are in the buffer zone and not just those who get relief. I would just like to get the record straight on that point. Could you give us background figures to prove what your submission states?
We can certainly supply those figures. Another business organisation, the Federation of Small Businesses, supports the scheme. In fact, the FSB represents far more businesses than the organisation that you mentioned.
The figures for each band are included in the answers to the parliamentary questions that I lodged some time ago and are therefore available to members.
I would like to move on to wider issues concerning improvements to the local government finance system. I would like to talk about the capital prudential system, but perhaps I could begin by examining in more detail the issue of business improvement districts. Are you considering—perhaps in relation to the power of well-being that the local government bill is likely to introduce—other areas in which local government could make a specific charge on specific groups or areas, in order to provide specific services? Business improvement districts are one example, but there are others. For instance, a local community might want to improve a local facility, but that might not fit into the council's main budget. However, if the community is willing to pay a certain amount of extra council tax over a certain number of years to fund it, would you consider giving powers to local authorities to raise that money, subject to referenda or other safeguards?
I shall invite Christie Smith to comment on that in a moment. The committee's report will have a fairly sizeable impact on how people will discuss local government finance. It is an area that the Executive has discussed with COSLA, and we are happy to pick up the points that the committee will make. I do not want to commit the Executive to anything at the moment, but I am sure that those matters will feature in the committee's report, and it will clearly be incumbent on the Executive to respond in detail to that. By the time we do that, we will have had a chance to mull the report over and discuss it with local authorities. Perhaps Christie Smith can tell us whether there is anything in the machine at the moment with regard to those issues.
We are aware that proposals for BIDs—business improvement districts—have been taken forward in England. We assume that the committee's report will deal with local taxation issues in general, and we shall consider BIDs in the light of that report. On charging, we may consider whether authorities should have more powers to charge for discretionary services, but we think that that would be a case for charging service users rather than a council tax issue. We have not previously heard the suggestion that there should be local enhancements in council tax for certain council tax payers. The debate has focused more on charging service users directly for services.
One improvement that is being considered is a move to a prudential scheme of capital funding. What is the Executive's current thinking on that? What proposals will you make and what sort of time scale would be involved for the introduction of such a scheme?
I was at the Finance Committee this morning to discuss the Budget Bill. I told that committee that the Executive is positively looking at those matters and is engaging with local authorities on them.
I hope to have a positive outcome, once we have fully thrashed out the issues internally and in partnership with COSLA. There is a positive agenda with regard to the issue and I hope to present the results of that process to the Parliament in due course. I am interested in the scheme and think that it can be done. We are working away at it. Iain Smith is pushing against an open door, because the Executive has a mind to investigate further and deal with the issue.
You are indicating clearly that you are still at an early stage of developing the proposals. What sort of guidelines would have to be applied to such a scheme? Would councils be able to set their borrowing levels, within the overall framework of the capital prudential system? If not, would you retain reserve powers to control local government borrowing?
To be honest, I would rather leave that issue until I have had further discussion with COSLA. In the past, COSLA complained—perhaps with justification—that it was not involved at the right stage of delivering policy decisions. We are in discussion about the matters that you referred to. It would be more appropriate to think them through and discuss them further with COSLA. There is an absolute, positive commitment to come back to Parliament with proposals about those matters, but they need to be more thoroughly fleshed out in that discussion process.
Have you any idea of what time scale we are talking about?
We have many discussions on many different issues, but the answer to your question is no. I am sure that the matter will be raised on Thursday. Perhaps I will then be able to have a further look at it, but I make no promises. However, I will come back to you in due course with a time scale.
You made no specific reference in your written submission to private finance initiative and public-private partnership schemes. However, the capital value of PFI/PPP done deals is £1.8 billion and the value of future deals is £866 million. West Lothian Council said that councils must give a commitment for 30 years, which means that the council must top-slice its budget one way or another for 30 years. Therefore, PFI/PPP will impact on local councils for a long time.
Councils gave evidence that they enter into PFI/PPP schemes because that is the only game in town. They expressed concern about the long-term nature of the schemes and about their flexibility. Other witnesses told us about the higher costs of financing PFI/PPP schemes. A witness from the Executive's PPP unit conceded that the demand-side risk remains with councils and their PFI/PPP schemes. What are the benefits of PFI/PPP?
The benefits can be seen in our streets and communities every day. We have new schools, new technology, new information technology, new access to computers for schoolchildren, new sports facilities for schools and new hospitals. In my constituency there is a new £67.5 million hospital, which has equipment that is worth £10 million.
The benefit of PFI is in drawing in additional resources to the envelope that is available to us. Members should remember that PFI represents only 10 per cent of our capital work. PFI allows local authorities to do things that they could not otherwise dream of doing. For example, Glasgow revolutionised and modernised its secondary school estate in three years. Even in the most generous financial settlements of recent history, it would have been impossible for a local authority to do that.
Another point is that the public sector owns the PFI process. The public sector provides the specification, the quality standards and the designs. The public sector controls the whole innovation and the job of the provider, which is the special purpose vehicle—SPV—is to respond to that. The control rests within the public sector, which sets the quality and the staffing resource. All those aspects are in the hands of the public sector. Therefore, PFI is not a privatisation route, but simply a levering-in of resources that we have not been able to access in the past.
Every project must be judged on a value-for-money basis. That is the local authority's responsibility for any resource that is within its control and spend. I see PFI/PPP as a route forward because it levers in additional resources that are outwith the massive increase in capital, to which I referred in my opening remarks, that we have put into the local government arena and other arenas that are within the Executive's control.
The benefit of PPP is to ensure that local authorities continue to have options. I disagree with Tricia Marwick's comment that PPP is the only game in town, as that is not a fair or adequate reflection of the situation. The public sector has a great ability to innovate, to develop and to take up new ideas and work with them, which is why it has survived many difficult periods in the recent and distant past. The public sector is getting much better at PFI/PPP projects. Local authorities use them to benefit their communities on a value-for-money basis that is assessed against traditional funding techniques.
PPP represents only 10 per cent of what we do, but we should consider the benefits for authorities. I work with trade unions and local authorities on the operation of the schemes, which we review and discuss regularly. The communities that I represent want top-class new public services. Consumer demand for public services is increasing dramatically; we must try to fulfil that demand. PPP is one route—there are many others—to providing investment and resources. It levers in money that we would not otherwise have and delivers for communities for which we could not otherwise deliver. It is a positive innovation for local authorities.
You said at least three times that PPP/PFI offers better value for money. Are you seriously arguing that it offers better value for money than the conventional arrangements?
People forget that the conventional arrangements have costs, too. There is no such thing as free money.
No, but is PPP/PFI better value for money than conventional arrangements?
Yes. As the convener of the Transport and the Environment Committee, I spent four months examining the water industry in great detail and I found that that is the case.
So you believe that all PFI/PPP projects offer better value for money than conventional funding routes.
One of the litmus tests of a project is to compare it against traditional funding routes. I spent four months examining the water industry with the aid of specialist advisers. The projects that we considered provided better services. The public sector agrees on the components of the asset—or whatever the service happens to be—and monitors the provision of the service. Whatever the relationship with the SPV, the asset returns to the public sector if that is part of the contract. PPP is about delivering the services that people need. It is not about being hide-bound by political strategies that, bluntly speaking, have resulted in so many of our public services being underfunded.
Another criticism of PFI/PPP is that the profits are not reinvested in services, but go to shareholders. Also, unless the service providers transfer to a private company, they are sometimes not included or are no longer part of the delivery of the service.
In his evidence to the committee, Dougald Middleton of the Ernst & Young partnership mentioned community investment trusts. I know that some councils are considering community investment trusts or public sector trusts. Does the minister favour those? Will he review the guidelines for councils on PFI/PPP projects to give more encouragement to public sector trusts?
There were many questions and issues in what you said. The Finance Committee is investigating PFI/PPP. It is doing a lot of hard work and I am interested in the findings. Part of that work is on public sector trusts. Some models are being developed, but the information is not yet available, because the trusts have not hit the streets. I am happy to consider such ideas.
Unlike some, I am not hide-bound to a delivery tool politically or by the way in which the Scottish Executive operates. If a tool works, we should use it. If it works to the benefit of our communities, we should use it. Work should be undertaken on deciding which services are included in PFIs, such as the soft services as they are classically defined in some PFI/PPP arrangements. Teachers, nurses and doctors are not part of PFI/PPP arrangements as we know them. It is essential to transfer some services with an asset because they involve the maintenance of the asset, but other services can be dealt with in other ways.
Tricia Marwick touched on the two-tier work force. The Scottish Executive has a high benchmark for staffing arrangements in the Hairmyres agreement. Work is being done nationally with trade unions on the staffing arrangements in PFIs and PPPs, so all those issues are being dealt with. The core of the matter is that we need to deliver the services. If we can use such a tool, we should use it. If something better comes along that is more cost-effective and delivers to our communities, I will be happy to consider it.
Dougald Middleton told the committee that community investment trusts or public sector trusts were not finding much favour with the Executive and that the Executive was, perhaps, slow to pick up on innovative ideas. I understand that the guidelines that are issued to councils do not encourage public sector trusts. Will you consider reviewing the guidelines to make public sector trusts an option for councils to propose as an alternative to PFI/PPP projects?
I argue that the Executive is not slow to pick up on innovation—that is why we are having our discussion. The Finance Committee is conducting an inquiry into PFI/PPP schemes and I will be in close contact with it.
I am unaware of the points that have been made about the Executive. I said to Christie Smith that we would consider such points, but they are not his responsibility. They are mine, as they relate to another part of my portfolio. I will discuss the matters, but I do not substantiate what Tricia Marwick said about the Executive's view.
I will change tack and talk about council tax. One aspect that has come screaming out from what I think has been a long inquiry into local government finance—I speak as a member of the Local Government Committee from day one—is the need to examine council tax. Most witnesses said that council tax needed to be studied and agreed that its administration system was good. I do not want to follow everything that Westminster does, but I know that the UK Government is reviewing council tax and considering revaluation and banding. Those involved hope to produce results in April 2007, which seems some time away.
As the minister knows, the committee has advisers who have produced a report on council tax. When we started the inquiry, that seemed a fundamental issue that had to be considered differently. Does the Executive have plans for revaluation and rebanding of council tax? The minister might not be able to answer my next question. Is the Executive considering extending council tax rebates to water and sewerage charges? That may be a reserved matter, but if so, Scottish ministers may be involved in dialogue with ministers at Westminster.
Both your questions relate to the basis for my interest in the committee's report. All that I have been able to do is read Official Reports and have summaries of people's responses to the committee. I am interested in how the committee views such matters. I wish to respond to the committee's report as quickly as possible.
I agree about the council tax system. It is regarded by most, including COSLA, as stable, effective and manageable. I pay close attention to what happens down south. We cannot separate the issues. On local government finance, I would rather consider the overview of what the committee and the evidence say and how the Executive should respond to that before I make specific commitments.
I want to raise a slightly different matter, although it partly relates to ring fencing: the amount of money allocated and disagreement between local authorities and the Executive over what is delivered. It relates to the burdens that the local authorities believe are placed on them. Has the minister considered the criteria applying to those burdens in the context of how the settlement for local authorities is calculated? Is there any mechanism in place for reviewing external burdens? I am thinking in particular of the aggregates tax and its impact on the funding of local authorities, given that any additional costs passed on from contractors must be met through the existing local government settlement.
There are two sides to this. First, there is the Executive's actions and commitments. For example, the care development group said what the number was for long-term care, and we negotiate with local authorities on how the sums involved are distributed. That number is £125 million a year for two years, and the money will be allocated via the delivery agents.
The other side is additional commitments, for example the McCrone settlement, for which we have to develop a distribution formula. In the case of McCrone, we agreed the distribution with COSLA, the money went in through the normal education channels and it came out the way that it came out. We have an absolute commitment to ensure that anything that the Executive does—our policy commitment—that requires actions from local authorities is resourced by the Executive.
External pressures and situations that arise have a bearing on the Executive as well as on local authorities—I have the same problem. External influences that bear upon us and affect the Executive budget include review body settlements for pay issues in the health service. My response to the question is that local authorities need to deal with matters that come up in their localities, just as we have to do for other matters.
When it comes to the next round of spending reviews, and when people are beginning to add up their budgets and find out what they need to do, issues surrounding additional costs come back out. Within the period of the spending review, when we allocate the resource, unless negotiations reach the point where we can agree some form of settlement, it is up to local authorities to deal with such matters in-house, by and large. I defer to Christie Smith to find out whether there are any more specific examples.
Whenever there is a burden, it is all costed and agreed with COSLA, and the cost of it is signed off. The aggregates tax, which Mr McMahon mentioned, is completely different. That is a tax that is intended to change behaviour. It would defeat the purpose of that tax to compensate local authorities for any costs associated with it. It acts as an incentive to do business in a different way.
I will give a practical example. If a contractor is building a mile of road for £X and if the aggregates tax is introduced as proposed—although I think there may be some re-examination of it—it will cost the contractor more for that mile of road. The local authority concerned may already have committed itself to building that mile of road, but the additional finance for doing so is not included in its settlement. How do we take account of that? Is there a mechanism in place to address such burdens?
Neil Rennick (Scottish Executive Finance and Central Services Department):
It will cost more if the authority continues to use virgin aggregates. If it finds an alternative to that, the aggregates tax will not apply and the project will not cost as much.
A comparison may also be drawn with the landfill tax. That was a burden on all communities, through their council tax payments, but it was designed to increase recycling rates and to reduce the need for landfill. As Christie Smith said—I did not pick up the point of Mr McMahon's question, but his dialogue with Christie illustrated it to me—these mechanisms are in place in order to change behaviour. If we are committed to sustainable development along with other Executive and Treasury priorities, then landfill tax, like the aggregates tax, is a suitable mechanism to deploy to change behaviour. That presumably has a net effect on the Scottish budget. We are involved in trunk road activities, and I am sure that we are having to find resources within our budget for those.
Could Neil Rennick expand on what he said? Neither Sylvia Jackson nor I understood his answer.
I was explaining that the aggregates tax only applies to certain materials, specifically to virgin aggregates, which have been newly quarried. The idea is to encourage local authorities and other bodies that use aggregates to find alternatives that will not have that tax applied to them, which will be cheaper.
I have two quick questions. First, in your submission you mention options for improving the framework for local authority capital investments through a prudential system. We have heard quite a bit about that in our inquiry. What progress are you making on a prudential system? Secondly—and you would expect me to ask this question—what issues do you expect to address in the forthcoming white paper?
I have already said what I have to say about the introduction of a prudential system. Perhaps Christie Smith can provide further details, as he has been involved in the direct negotiations on that issue.
We have a joint working group with COSLA on how to design a new system for regulating and supporting local authority capital investment. There is a considerable amount of technical work to do concerning the type of financial health indicators that local authorities could use to reassure themselves that the investment that they were undertaking and any borrowing to support it were affordable.
A new system for accounting, auditing and reporting the decisions of local authorities is also planned. At the moment, local authorities have complete cover for any decisions that they make after receiving consents from the Executive. We have to consider how the accounting for Scottish Executive public expenditure will be treated by the Treasury, because at the moment local authority capital investment is a line in the Scottish Executive's accounts. We are having discussions with the Treasury about that.
We have been talking about all those issues for a few months and are making good progress. However, we have to design a number of components for the new system. If we can design them properly, we are committed to introducing that system. As soon as we finish our work, the minister will be in a position to take decisions about it.
Do you have a time scale?
We are not committed to any time scale. We already have three years of capital allocations for local authorities under the existing system. We will want to give ministers the option of introducing a new system in time for the next three-year settlement. If ministers want to move more quickly than that, we will support them. At the moment the issue is how quickly we can finish designing a new system, which will put ministers in the position of being able to decide whether to go for it.
When do you think you will have finished designing the system?
Can we come back to you on that question? There is something fundamental happening here. I am trying to develop a very close relationship with local government, through frequent discussions with COSLA. The last thing that I want to do before this committee is talk about the detail of those discussions. The committee can rest assured that, as soon as we know what is happening on particular issues, it will be fully briefed on those matters. We need to work within the systems that we have. The more detailed dialogue and discussion I have with COSLA the better.
That leads me on to Sylvia Jackson's question about the white paper. The white paper builds on what we have been doing to date in partnership with local government. It builds on the best-value regime, community planning and the power of well-being. In the paper we want to consider issues of governance—the role of local government, where it fits in and how it works. We want to pick up some of the issues raised by Kerley and others, with which the committee is far more familiar than I am. We want to bring together the work that has been done in a consultation document.
I want the paper to consider issues such as how we make our local authorities more attractive and bring new people into local government. I call it the menu selector for local government. Some people come into local government to be back-bench councillors. That is their focus. Others want to be more involved—by serving as conveners of committees, for example. We need to work through such issues with people in local government, as they are on the front line and know better than I how things work. The white paper will try to address those bigger issues and to bring together the work that has been done by Kerley and others.
It is no great secret that the white paper will address the issue of allowances and pensions for councillors. As I recall, someone from Michael McMahon's part of the country has 55 years of local government service. That represents an astonishing commitment to local government. It is also no great secret that, through the white paper, the discussion of electoral systems that is taking place in the Executive will be taken out to local government and others.
Will the white paper also cover the possibility of secondments to get people into councillor roles?
Yes.
When will it be published?
The target date is March—that can be 1 March or 31 March.
March 2002 or March 2003?
Definitely March 2002. I make that commitment to Tricia Marwick.
Will the white paper deal with the issue of electoral reform?
Yes.
Minister, you are the last person to be cross-examined by the committee in our local government finance inquiry. I find it interesting that the last question that you were asked related to proportional representation, because the inquiry is leading us on to another issue that, to be honest, I would rather not face. However, I will have to face it.
I thank the minister and his officials for their attendance. As the minister is the last witness in our inquiry, I intend to celebrate by having a five-minute coffee break. After that break, the minister will return wearing another hat.
Meeting adjourned.
On resuming—