Oral evidence: Business Rates, HC 665Monday 11 April 2016
Oral evidence, 11 April 2016.
Witnesses
Sir Edward Lister, Deputy Mayor, Policy and Planning, Greater London Authority, Guy Ware, Director for Finance, Performance and Procurement, London Councils, and Colin Stanbridge, Chief Executive, London Chamber of Commerce and Industry, gave evidence.
Chair
Thank you very much for being on our second panel this afternoon. Could you start off, going down the table, by saying who you are and the organisation you represent?
Colin Stanbridge
I am Colin Stanbridge; I am chief executive of the London Chamber of Commerce and Industry.
Sir Edward Lister
I am Edward Lister; I am chief of staff to the Mayor and am also Deputy Mayor for Policy and Planning.
Guy Ware
I am Guy Ware; I am director of finance, performance and procurement at London Councils.
Bob Blackman
Thank you for coming. Obviously we have had written evidence about the operation of the 50% business rates from various organisations, and I think during the discussion we are going to go on to look at what 100% looks like and what the implications are. But first, whoever wants to start, could you give us your impressions of how the 50% business rate retention has worked in London?
Sir Edward Lister
I’ll have a go. We are currently in the position where approximately half of the capital funding for Transport for London, about half of the London Fire Brigade and bits and pieces of the GLA are all funded through the business rates. That is all going very successfully; we have a commitment from the Chancellor in the Budget that he will move towards 100% funding for Transport for London. Very roughly, we get about £1.1 billion at the moment, and if we get the rest of the Transport for London capital grant and also the other bits and pieces, that is a similar sum of money that will flow to London. That is where we are; we are fairly pleased with it. Our biggest issue, of course, is the appeals mechanism and the amount of money we are having to put aside for appeals—but you are aware of that.
Bob Blackman
Many of those appeals, of course, have come in during the period of the 50% drop.
Sir Edward Lister
Basically, we currently have about £120 million for appeals, which is already locked up in provisions within our accounts. That will rise to about £250 million by this time next year and, if it continues at that rate, by about 2017 we will be having to set aside over £1 billion for the appeals. The bit that is obviously not working correctly is that the bulk of those appeals is really in three London boroughs: Westminster, City of London and Camden. Indeed, they are the bulk of the appeals for the whole country. It is a very slow process to try to get them resolved: hopefully the Enterprise Bill will speed it up, but, nevertheless, a lot of resources will need to be directed at central London if we are going to process all those appeals.
Bob Blackman
I think I know the answer to this question, but—just for clarity, for other people—what is the implication of having to set aside that money in the accounts?
Sir Edward Lister
I suppose, in its simplest form, it is money that we can’t spend. It is money that could be being directed towards regeneration schemes or towards projects but that cannot be directed anywhere and is having to sit in a bank account and await the outcome of the appeal structure.
Bob Blackman
Could I just clarify something else? If the appeal structure goes in such a way that that money is not required, would that then lead to a windfall of extra available money? Or is it money that, if it goes the other way, will not be available?
Sir Edward Lister
To a large extent, for example with things like the Transport for London capital grant, we have already taken it into account. If we do not get it—if I can put it that way—there are going to be capital projects that will have to be re-profiled, delayed or cancelled. That will be the net result if it does not work its way through the system. Obviously, we have done our own calculations as to how much of that we think will end up having to be repaid; but, for the bulk of it, we have assumed it has a purpose and we have targeted it accordingly.
Guy Ware
Perhaps I could add something, if I may, Chair. As Sir Edward said, there has been a major issue around appeals, which I think we are all familiar with. But another question is “Has it worked as intended?”, in terms of the description on the tin of encouraging and promoting growth and providing a reward for local authorities in which economic growth happens. Again, the answer, I think, is not yet. At the moment, in the first two years of operation in the system within London, there have been some huge variations between boroughs. Overall there has been no net increase in the retained business rates across London, and that is partly because of the amount set aside for appeals, but it is partly because of the kind of purely random effects of how the baselines were drawn, and when they were introduced. There have been some very significant timing effects. If you are Newham, for example, and the Westfield shopping centre comes into rating immediately after the baseline is drawn, you have done relatively well out of this. There are other boroughs where significant developments have taken major ratepayers out of the list just as the system was introduced, and so even though that may be because there is going to be long-term redevelopment and longer-term growth, in the meantime they have suffered quite noticeable reductions. We did a bit of analysis at London Councils to look at whether there was any correlation between increase in economic activity, in terms of gross value added, and the rents retained by boroughs, and the answer, at the borough level, is no, there is no real correlation. At the system level, the whole of London, there is a reasonable correlation, but there is stuff that we need to sort out before we can really say that it is operating as an incentive.
Q232Bob Blackman
It is probably not well known, of course, about the imbalance there is between tariff and top-up boroughs in London itself. The assumption is that all of London is some big business rates empire.
Guy Ware
Cash cow, yes.
Bob Blackman
Could you just clarify the impact of the top-up and tariff?
Guy Ware
I could. The boroughs and the corporation are basically net neutral to within about £10 million, in terms of top-ups and tariffs, so overall London collects £6.6 billion-worth of business rates at the moment—50% retained: £3.3 billion. Of that, a net aggregate tariff for the capital as a whole, including the GLA, is about £350 million, so that is what flows out of London to the rest of the country, but, as I say, the boroughs themselves balance each other out. So despite the fact that Westminster and Camden are collecting more than most other authorities in the country combined, it is cancelled out with the other worries around London.
Bob Blackman
Colin, you come from the business perspective.
Colin Stanbridge
From the business perspective, I think you would be hard pressed to find many businesses that knew that this was happening. We are talking about 50% but I suspect not many businesses talk about 50%, especially when you take into consideration the confusion there has already been; you always hear council leaders say “We get the rap, because we collect it—and the Government spend it.” I think there is still a lot of confusion about the business rate, and there is a lot of worry, obviously, about business rate anyway, because of the lack of revaluation and the fear that in a few months’ time many businesses could be hit with a large hike in it; but when it comes down to knowledge among the businesses, or to businesses coming to us saying “I have seen my council much more reactive towards my plans for how I can get the borough to export more,” or whatever—absolutely zero. Nothing.
Bob Blackman
I think we are going to explore some of those other areas. Guy, you mentioned the outflow of funding from London to elsewhere. Is it disproportionate?
Guy Ware
Is it disproportionate? How would you judge that? I think it is far lower than most people assume, as I think was inherent in your previous question, and I think, if you look at the overall outflow of taxation from the capital to the rest of the country, looking at the taxes in the round, London contributes £34 billion in terms of the difference between the taxes collected in the capital and the amount of money spent on public services in the capital. So proportionately in the business rates there is probably less of a net flow-out than with other taxes. I think—we may get on to this later—there are implications that flow from there being a net aggregate tariff in terms of the package of services that can be devolved to London in future, to be funded from those rates, and the amount that flows out obviously reduces that. I think we as London Councils and the Mayor—London government collectively—would certainly want to see and work through a proposition where all of those rates were retained within the capital and used to fund a set of services here.
Bob Blackman
You may have observed our previous witnesses. The Mayor of Liverpool, for example, made it clear that there was an imbalance in the Liverpool city region; I think he quoted £51 million. That has to be found from somewhere. Why shouldn’t it come from London?
Guy Ware
It has to be found from somewhere, or the level of services that it is funding have to be adjusted accordingly. There is a trade-off to be made there. What the Singh commission—the independent commission on local government financing—found is that the level of disparity between authorities’ needs and resources could be broadly contained within regions. You can do it nationally, which is what the current system does, but you could equally well do it within regions. Whether you could do it in every single one of what used to be the nine administrative regions depends on the scale of the services to be transferred and the impact of the changes that were being discussed at the end of the last session, but there is no reason in principle why you could not negotiate and construct a set of devolution and funding deals that allowed the level of resources available by region to support the services that they were there to fund.
Bob Blackman
Do you share that view?
Sir Edward Lister
Just to add to that, we have got a number of bids out on the table, as indeed have other cities, for various services that we would like to see devolved to the city: for example, further education, the skills agenda and services like that, which could very easily soak up that £350 million if that is how people want to go. To us, there is a certain logic; it would mean that we were containing business rates within the city, and I think it would make it a little more sellable to people. There is no doubt about it: people are facing what is potentially a big hike in their business rates in the fairly near future. Are businesses getting something for it? At the moment, there is no correlation between what they get and the business rates that they pay, so it would be nice to try to bring some of that together. Things like skills are an obvious area. That would also provide even more pressure on skills to deliver the services that businesses want, so it would work much better as a system of checks and balances if you went down that road. At the moment, the big service in London is Transport for London. The capital grant is now being paid for by business rates. The GLA is not a very large organisation. The biggest chunk of money then is the police, which is virtually not part of it, except for tiny bits, and the fire service, which has now gone over to the Home Office. So one can see pressures going the other way. People might actually want some of these services not to be part of the business rates system in due course. So there is quite a bit of movement and fluidity in the system.
Colin Stanbridge
I think that most people and businesses expect that London should subsidise the rest of the country; that goes without saying. The reason why we are and have been so in favour of fiscal devolution and the London Finance Commission proposals is that we think businesses need a new relationship with local government. It is hoped that what will happen if you have full devolution of the business rate, and if it is there to promote growth, is that a different relationship will develop between the businesses and their local councils, or the Mayor and the GLA. That is what we want to see. We want to see how those mechanisms can be put in place. Businesses will never get the vote. We accept that, but we also expect, if there is 100% retention—hopefully that will be the start of other fiscal devolutions, along the lines that Tony’s commission came up with—that you will have a relationship with businesses and they will feel a part of it in being able to promote and come up with ideas and expertise that will provide that growth and find the money going forward. We have not seen that in the past. You get the feeling that if we were talking about council tax, the people deciding on council tax would have a different relationship because the people with whom they have the relationship are voters. Because businesses do not have a vote, you can say, “Oh, well, business can pay for it.”
Jim McMahon
You do have a vote.
Colin Stanbridge
Absolutely.
Jim McMahon
Two votes.
Colin Stanbridge
No. I am saying we would not expect a vote. I am saying that we would expect a better form of consultation because it is business rates after all and a different relationship with the authority. On the idea of retaining it all in London, I don’t think anyone would ever say that. As a former Liverpudlian I certainly wouldn’t say that, but I do think that unless you make sure that London works properly and the infrastructure is there, you will not have that money in the first place to be able to redistribute it to Liverpool or wherever else it is being redistributed to.
Bob Blackman
Can I cut across you there? The key point is whether the amount of money going out of London on business rates is proportionate to the proposition and your members’ consent to the amount going out.
Colin Stanbridge
I don’t think my members know about the amounts going out and it strikes me it is a small part of the real taxation that £34 billion is composed of. I think they see it in the round rather than in particulars.
Q240Helen Hayes
We have received evidence from Westminster City Council that since the extension of permitted development rights to allow the conversion of office space to residential space without the need for planning consent, it lost over 1 million square feet of office space prior to introducing an article 4 direction to prevent the loss of further space in the West End. Can you comment, Sir Edward in particular, on how that extension of permitted development rights is having an impact on income from business rates across the city as a whole?
Sir Edward Lister
I think at the moment we probably can’t. It is not clear what effect that is having. It is fair to say that the central activity zone of London has always been exempt from office-to-residential conversions. I hope you don’t mind me saying so, but Westminster’s policies of conversion need to be looked at as well as national policy. As far as London is concerned, the central activity zone, the City fringe and some of the other areas like Canary Wharf were always exempt, so we haven’t seen the kind of conversions that have taken place in outer London, where there has been a more pronounced effect, and I think that is probably where the problem largely lies. The counter-argument, of course, is that much of the buildings were old 1960s office blocks which nobody wanted anyway. We don’t get business rates if a building stands empty and many of the buildings were empty. The trouble is that we have used all that up now and there is none left, so that is the danger we face. Perhaps I could chuck in a number for people to hold in their minds. By 2025 we will need another half a million jobs in London and they will all need somewhere to go, whether an office, factory or whatever. As much as we need housing in London, we also need commercial and industrial premises.
Helen Hayes
To what extent are you, as the GLA, monitoring those impacts and looking at them? As well as the issues that you have described in relation to the difference between inner London and outer London, in my constituency, which covers part of Lambeth and part of Southwark, which are inner London boroughs to the south, I can certainly think of examples of buildings that have been in active use as commercial buildings, but they are quite attractive and flexible building types so the owners have sought to take advantage of permitted development rights. I wonder about the extent to which that is an issue across London as a whole. The pressure for housing is obviously paramount and you are right to balance that with the need for jobs.
Sir Edward Lister
We do a regular monitoring report—I do not have it to hand, but I can send it to you—which shows the rate at which we are getting conversions across London. We do have that statistical data. We have used those as evidence to assist boroughs with article 4 directions. We are not only doing article 4 directions in the CAZ—the boroughs do the article 4 but we provide them with a lot of the data to support that—we are also doing them in places like Park Royal, which is the largest industrial estate in Europe. That has an article 4 direction being processed on it at the moment. So we are doing it in all sorts of different areas to provide protection to commercial premises.
Guy Ware
Again, I was going to make a point about outer London. It is quite widely spread, but it highlights part of the reason why we are arguing for a devolved system in the first place. What is going on, of course, is that at one level there is an interest in employment space, but a set of financial incentives are built in here that are not necessarily working together as they stand. If you have a building that is converted, you lose business rates, and in the new system you will lose even more business rates, but of course you gain council tax and, currently, the new homes bonus, which may or may not exist in the future. At the moment, those incentives are not necessarily coherent or working in the same direction, and we would want to be able to advocate a system where London can look at those incentives in the round, because the reality is that, inevitably, those jobs have to be somewhere, and those people have to live somewhere, and different bits of the capital are going to have different contributions to make in making an economy that can survive and continue to grow, and in which people who are given work here can afford to live here, and so on. It seems to me that that would be enhanced by an ability to control and influence the financial incentives that we give ourselves that affect the decision making on the use of a given building in any given part of the capital.
Helen Hayes
To what extent do you think London will have to increase development in order to earn additional income from business rates retention? How does that square with the competing pressure for residential space?
Sir Edward Lister
I am happy to have a go at the first bit of that question. Yes, London has to densify significantly. As we are growing at the rate of 70,000 people a year, that translates into just shy of 50,000 homes having to be built in the city each and every year. There is also the figure I gave you earlier about 500,000 people needing employment by 2025. When you have that taking place, it is saying very clearly that we have to have greater density of housing, particularly around transport nodes. You have to have more mixed-use developments in those areas, so it isn’t just residential or commercial; it is a bit of both. It means that we have to protect areas like the City and Canary Wharf, and that is going to lead to even larger office buildings having to be built in those areas to provide the jobs. All that translates, of course, into the rail infrastructure, which has to be there both to open up the areas of London in which we will have to build the homes—one of the reasons why the homes are not being built in those places at the moment is because people can’t get to them—and to get the people into the right locations for employment. That is why the City is championing, or has championed, Crossrail 1, which opens in 2018, and is championing Crossrail 2. We have other suggestions for additional rail lines, some of them paid for out of a business rate uplift—I am thinking of things like the Northern line, of which nearly £1 billion is being funded out of TIF. It will change the city, but hopefully the business rates and, indeed, the additional homes providing council tax, the new homes bonus and all the other things will enable us to do it.
Colin Stanbridge
There will have to be densification if we are going to grow in the way that everyone predicts, and of course office space, factory space and work space are important to businesses. Interestingly, we did some work in our thought leadership campaign last year, London Tomorrow, and we polled Londoners as a whole, businesses and councillors. When we asked whether commercial office space is one of the top three barriers to London’s competitiveness, 42% of Londoners—the general public—said that it was, compared with 49% of businesses and 34% of councillors, so there is a disconnect somewhere in there. I will make one point about the change from office to residential. There is no doubt from our polling that businesses are increasingly worried about their ability to attract the right sort of staff. That is down to whether there is an affordable place for them to live, and there is no doubt that the next Mayor will have to do something about that. Eddie and Boris have done a lot to start out, but this is the start of the journey and we need to go further. So it is high on their agenda and that has to be seen in that context—whether it is a good or bad thing. However, I will also make the point that I know a number of our businesses that have sold their offices to small businesses, because they want to derive the value out of it so that they can reinvest in the business. I mean, it is a bit like a Londoner and a house, isn’t it? You’ve got all that money tied up; if you can extract it and get somewhere else to live, then you are probably thinking about doing it. Well, businesses are doing exactly the same. They are saying, “I have had this premises for a long time. They were quite cheap when I bought them, but now I see they are worth a lot of money. So, I can help my business grow by taking that out and going somewhere else.” Of course, you have to find the place to go somewhere else, but they are going further out in some cases. So the “yah boo sucks” of it are quite complex sometimes.
Kevin Hollinrake
It was announced in the Budget that there would be piloting approaches to 100% business rates retention, and GLA was one of the organisations mentioned. How is that pilot going? Where are we with it?
Sir Edward Lister
The current position is that the bulk of our money is Transport for London and roughly 50% of that is already coming through business rates. Hopefully, in the fairly near future 100% will come from that route. That is really important, because in an organisation like that, where the money is being spent on infrastructure predominantly, you need long-term funding, so that we do not suddenly have a cliff, as we have in 2020, when all the funding suddenly comes to an end. It means that we know that funding will roll on for many years to come, and therefore we can borrow and plan accordingly, and just go on for more projects, which we’ve got to have. However, we can lead from one project to the other and not have a cliff between them, whereby we suddenly have to demobilise staff and get rid of people. That is the biggest danger for us all the time. We just need that continuity. How is it going so far? Well, we are just at the start of the journey. I can’t say it is going great at the moment; as we touched on earlier, we have quite a lot of money tied up in business rate appeals. But we think the journey is the one that we really want to have and that journey will ultimately be for the good of London.
Kevin Hollinrake
With the extra money raised, over and above what you are getting from TfL, how much of that will the GLA retain?
Sir Edward Lister
It is relatively small sums of money. Currently, we get about £130 million on top of the TfL money, but if we get all of the rest of the RSG, which is roughly about another £130 million to £140 million, that would make us 100% funded through business rates and council tax.
Kevin Hollinrake
We have obviously got the backdrop of the revaluation of business rates. How will that impact on all the other plans that you have got? You talked about appeals, but are there significant amounts of extra money likely to come in as a result of revaluation? I think there will be a 7.5% increase, supposedly.
Sir Edward Lister
I don’t think any of us are completely sure how this will work its way through. On the one hand, we fully welcome—as indeed does everybody, I think—taking a large number of businesses out of the business rates system. That has got to be good, both in bureaucratic terms and for those businesses. But how that will be paid for in the longer term is a bit of an uncertainty, as is what that will actually do to our funding. And you take that uncertainty and add it to the continuing uncertainty over the appeals mechanism, and I think we are having to lock more and more money up to try to make allowances for that.
Colin Stanbridge
I think you will see a large increase in appeals; if it is bad now, it will get a hell of a lot worse when there has been a revaluation. That is part of the argument about why you need to change that regime of revaluation, and there is a lot to be said for annual revaluation. The property market is very sophisticated in valuing properties, so surely we should be able to do that so it becomes annual. To my mind, therefore, one would hope that the change will be smaller and there will therefore be less desire to appeal. We have to have that root and branch change, because if you are faced with a very large hike, your first reaction will be, “How can I appeal against it?”
Kevin Hollinrake
Has the relationship with the Treasury formed a key part of the pilot to move towards 100%? In other words, it can be up to you.
Sir Edward Lister
We have obviously been lobbying very hard for this, as we have in various projects in London that have involved trying to capture the uplift in business rates to pay for some of the much-needed capital infrastructure. I touched earlier on the Northern line. That is a £1 billion scheme, paid for by a combination of the community infrastructure levy and business rate uplift, and it is creating 25,000 new jobs in the Battersea area. We have a similar scheme up in Cricklewood, in Barnet. It is supporting infrastructure with 7,000 new homes on the back of the Brent Cross shopping centre. We have something similar in Croydon, where Croydon Council are putting forward a proposal for nearly £150 million of road improvements, again on the back of commercial improvements. All this is about business rate uplift, so we are very much trying to capture some of that now and put it into the infrastructure. If we do not put the infrastructure in, none of those schemes work. We have a real chicken and egg situation. Do I think this is working with the Treasury? Yes, I do. They give us a fairly hard time, as you would expect, but are they willing to look at schemes like this? Are they willing to look at business rates in the round in London? Are they willing to look at it in a fairly adventurous way? I think the answer is yes.
Guy Ware
Just picking up on that point, I think it is important that we look at this in the round. There were two significant announcements in the Budget paper. One was around the transport grants of £1 billion a year being funded in the very short term from April 2017. Beyond that, the other was a willingness to explore with London as a whole developing an approach to 100% retention. At that point, whether it comes early in London or at the same time as the rest of the country, roughly two thirds of local government services will be funded directly by business rates raised in the area, and roughly a third will be by council tax. Yes, there are really important infrastructure investment requirements that we can use a growth in business rates to fund, but those funds will also have another pull on them, which is day-to-day services. Part of the key issue here—we touched earlier on the package of responsibilities that can be transferred—that we will need to address and explore with Government is how we create a system that allows London or any other region to look at the inevitable trade-offs between investment to keep the place working and to improve its ability to grow and remain liveable, and funding for the day-to-day services for people being drawn into the city. They need their rubbish collected, their schools, their health and education and so on. There is a big package of reforms that we will need to look at in terms of how we manage those trade-offs and how we build a devolved system to make those priority decisions.
Mary Robinson
As we heard, the Government said that as extra business rates revenue will be larger than the grants it will replace, councils must take on additional responsibilities. These have been referred to as checks and balances or trade-offs. Sir Edward, you talked about further education and the skills agenda. From the panel’s viewpoint, what additional responsibilities should London take on in return for the extra business rates revenue?
Guy Ware
There are three criteria that we would want to look at. The London councils—the leaders of the London boroughs—have a formal position, which is that the starting point for those discussions should be the services that local government—in this case, London—has already said it is interested in the devolution of. That includes things like education, skills, employment support and so on that are directly related to the business agenda, and also includes packages around, say, health and social care integration, which are things that we think we can make a better fist of managing in a devolved way. So there is that as the starting point—those things that we have said we want to run should be the things that we are given a chance to run. Within that there are, again, those that help to contribute to ongoing growth. TfL and capital grants have been mentioned a couple of times, and clearly, that sits within that. Working out how we crack the housing problem is going to be another. The third criterion is that there needs to be some reasonable correlation between the revenue-generating capacity that is being devolved and the future demand in the services that it is supposed to be funding. Clearly, we can’t be certain about either of those parts of the equation—that is a game of futurology—but we know that under existing rules, we can make estimates about how much business rates are likely to grow and about how much the costs of social care are likely to go up. If there is too big a gap between those two, even after allowing for a reasonable expectation that we make savings and efficiency gains all the time—if there is too great a gap between a specific service that we are being asked to take on and the sorts of funding that will fund it in future—that will create problems. Again, I would put the payment of disability benefits, for example, which has been floated, into that category—one where there is limited control at a local level and a potentially very high increase in demand that could easily outstrip the increases in business rates that would be required to pay for it.
Mary Robinson
How do you see that negotiation taking place?
Guy Ware
There are two parallel sets that will happen. The Department for Communities and Local Government and the Local Government Association are jointly initiating a set of implementation steering and working groups, the first one of which meets tomorrow morning. Through that process, they will examine precisely that question at a national level to say what kind of services could, or should, be fitted into the scheme. But as I have said before, I think there needs to be the ability to vary that by region, so we will need a parallel set of discussions with CLG and the Treasury on what could be realistic for London.
Sir Edward Lister
I was just going to answer from the viewpoint of the Mayor’s office, because we look at it slightly differently to the boroughs because we have different services that we are concerned about. Our first priority was to try and give ourselves as much assurance as possible over our capital grants, which was predominantly the TfL money. The second one would always be the housing grant money, because we are also the HCA for London, and that is the second big area that we would like greater certainty over—and again, longevity of, so that we knew where we were with it. The big one after that is the skills agenda, which also chimes very well with business who also would like to see us much more involved with the skills agenda. That also involves working with the boroughs as well. These things are not either/or; some things are better done at a mayoral level, whereas other things are better done at a borough level. We would sort that out between us. So those are our priorities, and that is where we would like to see additional funding going.
Colin Stanbridge
I would echo Sir Edward on education and skills. In all our polling of our members, it always comes in the top three of their concerns, along with transport and crime, but it does highlight the issue that we keep wanting to raise. I suspect your report is going to say that there is an awful lot that we don’t know about how this is going to work, because the Government have not told us. The thing that we want to know from local government is how they are going to make sure that if, for example, they have more control over education and skills that they are getting what business really wants, because there is no doubt that there is a big divide between the education world and business on what should be provided, and there are some very good arguments on both sides about that. What we are very keen to see is, if the business rates are going to be part of that—and we can see a very logical argument to say that yes, education and skills are crucial to growing the economy and growing the wealth of London—you had better be talking to business. You had better have a way of consulting with the businesses. I go back to the point—we are not asking for votes, but there had better be a better way, a more formal way, of getting the views of those people, who are actually going to be the end consumers of it, about what they need in the first place. I don’t see really much debate about that or much knowledge of that yet.
Mary Robinson
What would you suggest would happen to make that—
Colin Stanbridge
There are a number of models, which could be to do with referenda, or to do with consultation, or to do with getting a broad consensus of business. It is interesting that in the ability of elected mayors to be able to raise 2p, it goes to the LEP. Well I don’t know many people in London who know what the LEP is or who is on it. In fact, I had to ask my team to tell me the people—and we helped create it, in the sense that there was never going to be a London LEP and we lobbied the Mayor and said, “You’d better get in there because we are going to have all sorts of little LEPs and that will destroy what we have all been fighting for, which is a Mayor with real power.” It is all very easy for politicians and civil servants to say, “We have created these LEPs.” But there is no transparency in them, people don’t know what they are and we don’t know what their powers are. We need a big review of that and so maybe out of that we will be able to find some sort of mechanism that will work. We are never going to have a mechanism that means that business says, “Yeah, we’ll do this and we’ll get that out of it.” But at least we can move towards consulting with businesses. We have done survey work on the relationship between local businesses and councils and there is a huge distrust. They feel that—just as many local businesses feel about the police—it is all about the residents because the residents have votes, obviously. It is not about businesses. We try and say—we said earlier—that residents and businesses, especially in outer London, are the same people. But there are different functions and there have to be different ways of being able to consult with them.
Q250Mary Robinson
Just looking at the responsibilities again—there is going to be a steering group beginning tomorrow, the process will begin—there was a bit of a crossover between the potential responsibilities that would be taken on by the Mayor and by the councils. How do you see these responsibilities being divided between the two—and the three, with the GLA?
Sir Edward Lister
To a large extent, we have sort of agreed it between ourselves. Yes, health was named, and predominantly we see that very much as being a borough-led initiative. Maybe certain little bits of public health across the city are needed to be done at City Hall level, but it is predominantly borough-led. We see skills as being more City Hall-led because that works with the FE colleges and they don’t really follow borough boundaries in the same way, but hard to reach groups are better off done with by the boroughs, and so on. To a large extent, we have sorted this out among ourselves.
Guy Ware
That is a reasonable summation. But also, going forward, if there is greater headroom—I need to come back to the quantum of that in a moment—and therefore the capacity to negotiate the transfer of responsibilities beyond those that we have already asked for, clearly we will need to repeat that process and agree between the Mayor and the boroughs who is best placed to deliver that service and the division of the spoils, if you like—the distribution of the business rate income that follows—will then need to meet and reflect that division of responsibilities, rather than determining a kind of arbitrary split and then having top-ups and tariffs between us, which we currently do. As I said, on the question of the quantum—this again goes back to my point about the need to look at this as a package for the Government as well as for London—there have been a number of things that have been floated that could be transferred, including attendance allowance and including public health funding, which are fairly sizeable chunks. If you take all of those things that have been mentioned, roll in the current grants that will still be in play in 2020—not just RSG, but the new homes bonus and the better care fund, the new one that has just been invented—and take off the amount of money that the Chancellor has just taken out of the pot that we talked about earlier, as a result of the Budget changes—if you add that lot up, you get to a deficit of £2.2 billion, according to our projections, so the shopping list could already have been exceeded, I think wholly unintentionally and without the Government realising that they may have already done that. It is really important that we get a chance—as I said, hopefully that process will start tomorrow—
Chair
Could you set those figures out for us? It might be helpful if you could send us a little note on those figures, because I think they’re quite interesting.
Guy Ware
Yes, certainly.
Bob Blackman
Are those annual figures?
Guy Ware
Yes. Very broadly—off the top of my head—there is projected in the Government’s Budget figures a £10.7 billion surplus in 2020, against which you could set, as I said, the new homes bonus, which is about £900 million, the better care fund, which is £1.5 billion, attendance allowance, which is £5 billion, and the public health grant, which is £3 billion and a bit. The TfL grant, which has already been agreed, is £1 billion, and then there’s an amount for the administration of housing benefit for pensioners, which is negligible in these terms; it’s about £60 million. If you add up all those numbers, you actually get to a negative figure.
Chair
We look forward to that being set out in a helpful note.
Mary Robinson
We have talked about London needing to work properly, and infrastructure is part of that. What are the benefits of acquiring the responsibility for funding TfL capital projects?
Sir Edward Lister
The advantages?
Mary Robinson
Yes.
Sir Edward Lister
The primary advantage is the certainty of it. It is as simple as that. If we have that certainty, it enables us to plan long term. Any kind of infrastructure plan runs over many years—probably over a decade. We need to have that certainty to be able to plan and to commit resources well into the future, and that is what this does.
Colin Stanbridge
We have long argued that—as the Chamber of Commerce, we obviously lobby on a number of issues, transport being perhaps the major issue. In the past, the position has always been, “Well, if the Mayor is on our side or the Mayor agrees with us, that’s great, but it doesn’t really matter, because the people we’re really lobbying are the Secretary of State and the Department for Transport.” Let’s be clear: this is going to change the whole relationship between TfL and its masters, or mistresses. When we have been talking to TfL about spending reviews and how we could help, during spending reviews, to make the case, the position has always been: “Make the case to Government.” We had a big poster campaign—some of you may remember it—a few years ago, talking about investment in London. Now, our firepower is going to be, quite rightly, on the Mayor and his or her officers, and that is a good thing; that is what we have been fighting for. There is a danger—we are all questioning what the lacunae are, and many questions will be asked about 100% retention and, hopefully, other fiscal devolution, but the direction of travel is exactly what we want. We want to lobby not central Government, but the Mayor, and I think that that will improve the quality of the decisions, because the decisions will become very, very important.
Bob Blackman
I want to move on to what we are calling the infrastructure premium proposal. Obviously, at the moment, the Mayor has used a measure to fund Crossrail but that is the only measure that has been put in place. There is talk of a further 2% retention being available. Can we clarify, first, whether your understanding, Sir Edward, is that this would be in addition to the infrastructure levy to fund Crossrail, or would it replace that?
Sir Edward Lister
Or would it extend it?
Bob Blackman
Or extend it, yes.
Sir Edward Lister
I’m afraid the answer is, we don’t know—to be blunt. We are currently raising about £220 million a year from that supplement. That is actually having to finance £4.1 billion of Crossrail 1 expenditure, which is about a third of Crossrail 1 expenditure. We are busy lobbying to move to Crossrail 2, but of course we are going to move to Crossrail 2 long before we have paid off Crossrail 1, and the Treasury is making it pretty clear that it expects at least 50% of Crossrail 2 to be funded by London by one means or another. So we need to revisit that particular supplement. We do not know whether that is going to be additional—if it was, that would be very helpful to us; if it wasn’t, then we will have to think of some other mechanisms.
Bob Blackman
But “very helpful” would mean the current supplement continuing, then a further 2% supplement on the whole of business rates across London.
Sir Edward Lister
Yes. I mean, we would need the current one to continue—we have always assumed that it would continue.
Bob Blackman
For how long?
Sir Edward Lister
I think—
Colin Stanbridge
2032.
Sir Edward Lister
Yes, it is in the early 2030s before we are finished on that.
Colin Stanbridge
It was 2038, and I remember that when we were last giving evidence—to the GLA—I was told that it was now 2032. I think business at some time, again, will want to have a say on that. Business understands—they are the first people to understand—that transport is vital. They want Crossrail 2, and 3, as much as anyone else, but one would hope that the Government will also look at those more innovative ways of funding; for example, the uplift of stamp duty along the line, which we know from Crossrail 1—we know that it has been huge and that Crossrail 2 will be the same. Is there a way of capturing that? Again, it is down to giving the Mayor and the officers more power to be able to do those sorts of deals, rather than just saying, “Oh, it’s all right, business will just pay for it. That’ll be okay, won’t it?”
Sir Edward Lister
I am not arguing that. I fully accept that to pay—I mean, at the current moment, the Crossrail 2 bill will be circa £30 billion, roughly double what Crossrail 1 is. It is an even bigger scheme, so we don’t just need business rates; we are going to have to do what we started the journey on with Crossrail 1, of capturing the uplift in property values. We did it fairly crudely with a London-wide CIL. That worked quite well, but now we have to get a lot more sophisticated; we have to get an even bigger and more elaborate CIL arrangement—we really have to capture value, because we know that value does rocket near a new railway line. That is the value that we have got to have a share of, and a greater share than we have ever had before. That will be the whole Crossrail 2 negotiation with Treasury.
Colin Stanbridge
That is partly the advantage of what we are all fighting. We tend to lose sight of the endgame, which is the fact that local politicians, local mayors, have a greater knowledge of what their voters will put up with or will want to happen. One hopes that that will be able to feed through into other mechanisms for raising the money, based on what businesses, people, residents and everyone else tell the Mayor. Then, if the Mayor does not do it properly, we get rid of the Mayor.
Bob Blackman
But what is your reaction, in the business community, to potentially having a 2% levy on top of the existing 2% levy?
Colin Stanbridge
We would have to look at the detail.
Guy Ware
It is probably worth adding that the 2% proposal is a national proposal, and we have been invited to discuss a different deal for London. It is worth keeping the options alive that a more radical change might be agreed, which would look at providing the Mayor and the boroughs with access to resources that matched the kind of services and investment needs that—going back to what I was saying earlier—we should be responsible for. While I think there is a kind of minimal position of a 2% levy, which we have already had, and we cannot have anything else until 2030-something, is probably not an acceptable answer, from London’s point of view. I think we should also be setting an ambition slightly beyond what might have been presented so far.
Colin Stanbridge
But we also would not want it on a vote of the LEP—to go back to my previous remarks. If we are going to have checks and balances, and this is going to be the check on it, then we do not think that the check is—it was not invented to do that and it has not been doing that. We will have to have a far more sophisticated system of getting the business voice.
Bob Blackman
Moving to the multiplier to be applied, Guy, in London Councils’ submission, you suggested that councils should be able to adjust the multiplier upwards. Should it be set by each local authority in London? Should it be done by the Mayor? Or some sort of split between?
Guy Ware
To be determined is the short answer. My personal view is that tax competition at the level of a borough is probably not going to be the way that we would want to see London work, but we certainly need to explore the possibilities of devolved governance arrangements for London that manages to balance both mayoral and borough needs in order to fund the things that, as I have said a number of times, we have agreed to take on to fund, whether they be infrastructure investment or services. Again, picking up Colin’s point, the more flexibility that was agreed within London, the greater the need for that accountability and its checks and balances, and arrangements that allow a realistic prospect of coming to decisions around that in a co-ordinated way between different parts of Government, and with the appropriate input from the business community.
Bob Blackman
Some would say the council tax is set by the London boroughs, so why shouldn’t the multiplier business rates be set by each London borough?
Guy Ware
I think it is realistic. It is a respectable proposition. If we look at whether we are using the tax in part as a tool to promote growth, then we perhaps need to bring in a degree of co-ordination, because otherwise you will potentially get conflicting incentives and conflicting attractions or demerits of particular parts of the capital that might distort investment in business decisions in ways that were not productive.
Bob Blackman
Sir Edward, do you have a view from the Mayor’s perspective?
Sir Edward Lister
Roughly, about 60% of the business rates would be driven by the boroughs and about 40% by the Mayor, so I think that if you were going to allow a degree of flexibility, then you would almost have to have the borough multiplier and a mayoral multiplier, which I think would probably be horribly complicated. That is the only point I would make. We need to work together on this. It is worth making the point that quite sophisticated mechanisms exist in London already between the boroughs and City Hall. There are ways in which these things are negotiated and we can get a common line together. The more we can achieve that, the better it is for London.
Bob Blackman
Colin, what do your members think about the impact of multipliers set by different boroughs across London?
Colin Stanbridge
Three boroughs really matter. The rest is very small. Once you’ve sorted those out, you’ve sorted it all. I don’t know whether we would have a pooling. We heard about a pooling in Greater Manchester. Whether that works and whether you just have a percentage, I don’t know. On what my members would be looking at, one of the interesting things is that if councils have the ability to reduce the business rate, are we going to see some competitive business rates around London? What would be the effect of competitive business rates? I think there would be a worry about that and what services councils, having sucked in businesses, would be able to provide. As Sir Edward said, there will have to be a consensus in some way. Westminster is £1.8 billion. It is huge. It is the GDP of a small country. So you’d better get Westminster on side first.
Chair
Just coming back to the changes in the Budget, the Government committed to a 100% business rate retention. We are moving towards that. Then, suddenly, we get in the Budget significant changes. The Government have said they will compensate for the small business rate relief changes up to 2020 and then there will simply be fewer services devolved after 2020, but there is no mention of whether there will be any compensation for the CPI/RPI change. Presumably, local government will have to bear the consequences of that. Are you unhappy with the way that was done, or with the whole principle of sudden changes at the beginning of quite a complicated journey towards more devolution of business rates?
Sir Edward Lister
It is all unbelievably complicated, and none of this helps; it just makes it even more complicated. We are very supportive of the small business rate relief from a City Hall point of view, because it has real advantages to a lot of businesses, particularly those that are struggling. For us, that was quite an important move. There was also a relaxation in certain other ones—the ones between £12,000 and £15,000, which are more tapered. Those things were positive, but, as you say, we are not clear at the moment about what compensation we are going to get for that; nor are we clear about whether there is going to be any compensation for the RPI/CPI change.
Guy Ware
There are three bits to this. There are the changes to the tax base up to the point when 100% retention comes in, arising from the small business reliefs, and, although it is not labelled as such, the numbers appear to suggest that there has been an increase in the local government DEL from 2017-18 that will fund the level of section 31 grant that will be needed to compensate local government collectively for that loss of business rates in the short term. We then get to implementation, at which point a lower quantum of services can be devolved to local government. Beyond that, I do not think there is any prospect whatever of the Government thinking that it is their job to compensate for a change between RPI and CPI indexation, and it simply becomes part of the negotiation about what may become affordable to local government in future, when that is the basis of its funding stream. On the basis of the forecast difference between the interest rates and extending that out, so these numbers are projections, £370 million has already been saved in the first year, and that rapidly increases. We estimate that over 10 years we would be raising £3.3 billion a year less than we would have been otherwise, and over 20 years—who knows what will happen to inflation rates, but on current projections—that would rise to over £9 billion a year. So, over 20 years, the cumulative loss to local government—or, looked at another way, the cumulative gain to businesses that are paying business rates—is £78 billion.
Chair
Can I just come on to one final question? The Chancellor made those changes in the Budget and from 2020 local authorities are going to have an even greater reliance on business rates. Generally, people are supportive of that. But there is nothing, is there, to stop another Chancellor after 2020 making another change to the business rates system? Sir Edward, you rightly used the word “certainty”; what local government is welcoming with the proposed changes currently is that it will have greater certainty over its income. But if that income is still reliant on the Government deciding on the business rates system or the multipliers at any one time, the certainty really is not there, is it? You are only as certain as the next Budget statement by a Chancellor.
Sir Edward Lister
I suppose my answer is that we are just a little bit more certain about business rates than we are about RSG or any of the other funding sources we have. We feel, at least, that we stand more of a fighting chance to see what is around the corner.
Chair
I am pushing you a bit because in the end, if local government really wants devolution, shouldn’t it be looking to take control of the business rates system and multiplier, rather than just accepting the income that comes from it?
Sir Edward Lister
That is right, but there has to be some checks. Indeed, I think it was picked up in previous reports that there have to be some checks and balances, so that we don’t go back to the problem we had in the 1980s, when business rates suddenly escalated way beyond council tax, or the equivalent of council tax—
Chair
Sorry, but they didn’t. At that time, there were domestic and non-domestic rates and they were linked to each other.
Sir Edward Lister
All I was trying to lead on to was that there needs to be a linkage between the two. The point I was leading on to was that you cannot put up one without the other. Provided one has that, that will also stop a lot of the fears of the business community .
Colin Stanbridge
Had there been a linkage, I think it is fair to say that the business rate would have been a lot lower than it is now, hence my argument about, “Well, why is that?” “Because the voters”—
Chair
So linking them together might not be a bad idea.
Colin Stanbridge
I hope that there is a genuine, complete change in the business rates system, because I think it is a particularly stupid way of going about things based on something that says, “It doesn’t matter how well you are doing, you are going to pay the money, come what may.” That seems to me to be not necessarily the most sensible of systems.
Guy Ware
I would echo the Chair’s comment. To my mind, it does emphasise the need for control in order to balance the risk that we are being asked to bear—indeed, that we are asking to bear, because this is not being foisted on local government; it is something that we have long argued for. To manage that risk, real control is necessary. As Colin has already said, and as has been set out in the London Finance Commission and elsewhere, in the longer term there needs to be a range of ways of raising revenue, so that there isn’t over-reliance on any one source.
Chair
Thank you all very much for giving evidence this afternoon. That brings us to the end of our public proceedings. Oral evidence: Business Rates, HC 665 21