Select Committee on Transport, Local Government and the Regions Fifteenth Report

Part 3: Grants etc

Clauses 29-44: Proposals to merge the Revenue Support Grant and National Non-Domestic Rates

26. Clauses 29-44 will allow Government to merge revenue support grant and redistributed national non-domestic rates into a single stream-to be known as Formula Grant. These proposals had not been the subject of significant consultation before the publication of the draft Bill and within our evidence only one local authority was in favour of the proposal.[34] The other councils had two main concerns-the loss of transparency that would result arise from the merger of the two funding streams and concern that the merger would remove the possibility of the non-domestic rate returning to local control. The memorandum from Brighton and Hove City Council stated,

"The council is unhappy with the proposals to combine revenue support grant and national-non domestic rates into a formula grant. Being unable to identify the amount of national non-domestic rate receivable by an authority will not aid our discussions with the local business community. The council has agreed a policy to support the localisation of the business rate as a principle means of creating a more healthy local tax base. This proposal will move further away from this objective."[35]

27. Although opposed to the possibility of any return to local control of the non-domestic rate, the Confederation of British Industry has also objected to the merger of the two streams:

"We object to the Bill's presumption that business rate revenue amounts to simply one aspect of 'Government support' for local authorities. Revenue support grant constitutes Government support. Redistributed national non-domestic rates represent a separate business contribution to local authorities' funding. This tax should be transparent and should be clearly separated from revenue support. The effect of merging revenue support grant and the national non-domestic rate would be to lose sight of the business rate contribution to local government finance."[36]

28. The memorandum from Sefton Council stated:

"The introduction of a merged grant system appears to be a major change merely to simplify the administrative payment system. The explanatory notes published with the Bill indicates that this new grant 'will have no effect on the total amount of Government support and almost no effect on the amount of support which each authority receives."[37]

Mr Raynsford confirmed that the benefits of merging the two funding streams would be administrative and argued that they would, in the main, accrue to local authorities.[38] This is surprising, given the extent of the opposition to this proposal that we have heard from councils. We recommend that revenue support grant and the redistributed national-non domestic rates should not be merged.


29. Clauses 31 requires the Secretary of State to decide each year how much grant it to be paid to local authorities, to obtain the consent of the Treasury and to consult representatives of local government before reaching his decision. Clauses 32 and 33 require the Secretary of State to make a report to Parliament setting out how much grant is to be paid and the basis on which the amount available to local authorities is to be divided up. The draft Bill therefore sets out the mechanics but not the basis for the distribution of revenue grant. The Government published a separate paper on its proposed new basis for local government revenue funding, on 8 July 2002. We recommend that the principles by which the Government wishes to operate the distribution system be specified on the face of the Bill.

Clauses 48 and 49: Loans by Public Works Loan Commissioners and Payment towards local authority indebtedness

30. Clause 49 would enable the Secretary of State to make payments to local authorities that have transferred their housing stock under a Large Scale Voluntary Transfer (LSVT) to another registered social landlord, where the capital receipt generated by the sale of the housing is insufficient to repay the outstanding debt on the houses transferred to the new landlord, (the gap between the amount received from the asset sale and the outstanding debt is usually referred to as "overhanging debt").

31. A number of witnesses expressed concerns about the proposals. For example, CIPFA said,

"Points about transparency, equity and fairness can be made concerning the draft Bill's proposals for the Government to pay off 'overhanging debt.'" CIPFA continued, "From the perspective of the tenant who remains with the local authority, part of their rental payment services the historic housing debt rather than being applied to repairs, maintenance and improvements. The 'playing field' is not level and taxpayers' money is being used in a discriminatory fashion. There is also a measure of 'perverse incentive' in the proposal as it benefits authorities that have not maintained their housing stock in the past to a standard where the market value exceeds the historic debt."

32. The Committee recognises that there is a trade-off between the one-off payment in respect of "overhanging debt" and the subsidy a local authority would receive towards its debt financing costs if it were to retain its housing stock, but a number of witnesses suggested that the value of the "overhanging debt" write off exceeds the value of the subsidy.[39] Mr Raynsford offered to ask Lord Rooker, Minister of State for Housing, Planning and Regeneration, to send a note to the Committee on the balance of the benefit from overhanging debt write-off and breakage costs as against subsidy.[40] The Office of the Deputy Prime Minister did not provide any illustrative calculations [41] to either confirm or refute this point.[42] The proposals contained in Clauses 48 and 49 on the re-payment of 'overhanging' debt by central Government at the point of stock transfer result in an uneven choice for tenants between remaining with the local authority and choosing the stock transfer route.

34   LGB12 Back

35   LGB35 Back

36   LGB39 Back

37   LGB17 Back

38   LGB45 Back

39   Q236 Back

40   Q696 Back

41   LGB 45 Back

42   After we had agreed our report, we received a letter from Lord Rooker which is being published as a memorandum to this inquiry (LGB 45(b)) Back

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