27 May 2002 Ministers Assembly Statement
The Minister of Finance and Personnel (Dr Farren):
On behalf of the Executive, I open public consultation on our local rating system.
The Executive agreed in 2000 that a full review of our revenue system was needed. After detailed research and discussion involving the Committee for Finance and Personnel, the Departments and the Ministers, we launch the consultation paper on the review of rating policy. The paper that Members have is the final version of the text — although it will appear in a better, printed form in the next couple of weeks.
The Executive decided to embark on this review in recognition of the fact that the present system is unfair, out of date and does not meet our current needs. The subject is not easy to address: it is complex and provokes strong reactions. However, we are not in Government so that we can avoid the difficult issues. Any proposals for a local taxation system, which is what the rating system is, will touch the lives of all the households and businesses in Northern Ireland. Therefore, we have been mindful of the consequences of radical change.
I have been asked why the Executive cannot be more imaginative in seeking ways of raising local revenue. I have been asked why we have to look to the rates. The answer is that we do not have to restrict ourselves to rating property. However, our options are limited by the Northern Ireland Act 1998 — we cannot readily introduce anything like income tax or VAT.
More importantly, international experience tells us that almost all developed countries continue successfully to operate property-value-based local taxes to help pay for local services. The consultation paper focuses on such systems, but other ideas are not ruled out, providing they can be easily administered, are stable, recurring, and fair to all, and do not have undesirable economic, social or environmental effects.
The consultation paper is not exclusively a Department of Finance and Personnel product. It is an Executive paper, and all Ministers have been consulted and have had an opportunity to have an input. We have worked with the Committee for Finance and Personnel, which has employed a team of rating experts from outside Northern Ireland. The Committee has helped shape the document, and I appreciate its input.
It has been our intention to address the issues in a considered, balanced, open and transparent way. The consultation paper does not make any proposals or recommendations, but it expresses the issues and available options as neutrally as possible, setting out objectively the pros and cons of the possible changes that might be considered.
Nothing was ruled in by the Executive, and nothing was ruled out, apart from domestic water metering and the rating of agricultural property. The consensus among Ministers was that those issues should not be put forward as options in the paper. I reassure Members that any decisions on changing the system, or elements of it, will take full account of the views expressed in the consultative process.
Twelve key issues are identified in the report. Although the question of how individual bills compare with what ratepayers and council-tax payers contribute in GB is addressed, the core of the review is about developing a system that distributes local revenue requirements in a fairer way.
I will not go through all the key issues covered in the paper. However, it might be useful if I mentioned two of the more difficult choices that we face — domestic rating and industrial derating. The present domestic rating system is very hard to defend. In presenting the options in the paper, we have included a dispassionate description of the existing system. However, it is quite difficult to find any defence for the existing domestic system. It does not target social need. On the contrary, in the distribution of the tax burden, it tends to disadvantage the less well off. Although there is a gradual upward curve, the amounts levied flatten out quite markedly for those in more expensive housing.
Therefore, ratepayers with low incomes that are just above the housing benefit threshold pay more than they would do under a fairer system. In taxation language, the system is not progressive. The valuation list is relatively flat and discriminates little between market levels and sectors. A revaluation is long overdue. The last one occurred in 1976 and was based on late 1960s rental values that reflected prevailing social and economic conditions.
The system lacks clarity and transparency. The figures in the valuation list are meaningless to the ratepayer. The rateable values are artificial, so most people cannot understand the basis on which they are asked to pay. That has an impact on an individual’s ability to decide whether his or her assessment is fair, and it affects the public attitude to the appeal process.
Although we have presented the options neutrally, it is widely accepted that a revaluation cannot be conducted on the basis of rental value because an active private rental market exists in only certain areas and market sectors. If the independent market evidence were not widely available, the system would be rendered arbitrary. The main case for domestic revaluation is based on redistribution and the relative contributions of those in prosperous areas compared to those in less well-off areas. However, the inequities of the current system will be exposed even more if the Assembly increases revenues significantly using the current tax base. After all, the review began after the outcry about the increases proposed in autumn 2000. For that reason, the First Minister, the Deputy First Minister and I have given assurances that there will be no abnormal increase unless, and until, a fairer system is introduced.
If colleagues doubt the difficulty of defending the present system, they may refer to the many occasions in the Assembly when my predecessor and I faced questions on, and criticism of, the system. The calls to review the system urgently were clear and strong, as they have been for many months. Furthermore, if we agree to consider redistributing the domestic rating burden, we must ensure that there are appropriate safeguards for vulnerable groups and individuals who are beyond benefit support. That means taking into account people’s ability to pay, the avoidance of genuine hardship and ensuring that we do not distort benefit calculations to our disadvantage, by comparison with other regions.
Industrial derating has existed since 1929 and is unique to Northern Ireland — no other region provides that tax break. It costs Northern Ireland £64 million a year, an issue that is likely to generate strong views. It was felt that the matter was so sensitive that it was examined separately, with assistance from external consultants. We wanted to determine the need for industrial derating, its purpose, its continuing relevance and its effectiveness.
A copy of the report will be made available with the consultation paper to inform debate, and I have arranged for copies to be placed in the Library today. The study found that the justification for continued industrial derating was questionable, and there are strong arguments in favour of phasing it out. Furthermore, the consultants argued that the overall economic impact of its removal would be negligible in the medium term and that it is not a cost-effective tool of economic development.
I acknowledge that there are strongly held opposing views. A variety of interested parties believe that derating is a significant incentive to attract inward investment, a useful counter-measure to the attractive fiscal regime available in the South, and a partial compensation of the additional costs faced by industries here. The review will take all those views into account.
I mentioned two of the more difficult issues in the consultation paper, which also outlines what we pay rates on, existing and potential rate relief, and how best to deal with vacant rating and/or making owners ultimately liable.
The paper includes an examination of relief for particular groups, ranging from broad reliefs, such as the single person allowance, to more selective ones, such as assistance to pensioners or those who find it hard to make ends meet. The paper also covers some ideas for new reliefs for the commercial sector, such as small business and hardship relief. The list is not exhaustive, and consideration of different reliefs may emerge from public consultation. Again, we shall welcome any views on that.
I understand that the pressure for introducing additional reliefs or a different set of reliefs will be immense and diverse, but we must maintain a careful balance. After all, the rating system is the mechanism through which businesses and households pay their contributions to regional and local services, so if reliefs are wide ranging, they put an unfair burden on remaining ratepayers.
Funding of water services is also considered in the paper. The Assembly is well aware of the investment requirements of the water and sewerage systems, and the Minister for Regional Development has estimated that investment will amount to some £3 billion over the next 15 to 20 years. Water services in Great Britain are no longer in the public sector, so we do not receive any consequential funding under the Barnett formula, and all funding must be found from within our departmental expenditure limit. We must face that difficult issue, and the paper sets out some of the options we can consider. Others may be identified during the consultation.
The Executive are not in the business of creating financial hardship for anyone, and I emphasise that for any change in the rating system after the review, there will be carefully planned transitional arrangements to avoid hardship and to allow time for those paying to adjust.
The consultation period will run beyond the summer until mid-September. Three or four public seminars will take place around Northern Ireland in June, followed by a series of meetings with interest groups and organisations. A web site is ready to provide information and elicit feedback. Assessment of the responses will begin in the early autumn, and a range of options will be identified. An impact analysis will be carried out on those options, and a report will be made to the Executive, involving the Committee for Finance and Personnel, in the autumn.
The programme will be sensitive to the results of consultation and feedback and to the extent of amendments and additional work deemed necessary. The legislative process will follow throughout 2003 and possibly early 2004 when final decisions will be made.
During the various stages, some useful links can be made between the rating policy and public administration reviews. Some aspects of those reviews, however, are distinct. I do not agree that conclusions from the review of public administration are needed before we can make progress on the rating issues. One is a matter of ratepayer contribution; the other involves distributing revenue in the most appropriate way to any new structures that emerge. We must address the basis on which we raise revenue for regional services as well as those covered by the councils. Those services will continue no matter what structures are in place.
I fully expect the consultation on rating to be complex and contentious. Time will be needed to assess the implications of the response to consultation from both an official and a political point of view. It seems realistic to plan on the basis that we will need to consider carefully when to take substantive decisions and how implementation of possible options might be phased. Responses to the consultation will clarify matters, and that in turn will affect the timetable for decisions. Furthermore, the neutrality and openness of the consultation are underscored by our deciding in the autumn the phasing on which any substantive decisions will be taken.
The recently announced reinvestment and reform initiative was not conceived until the rating review was well advanced. There is, however, a relationship between the two, in the sense that any additional revenue we decide to raise locally must come from a reformed and fairer system. The manner in which we address the review of rating will be a measure of how responsibly we are prepared to face difficult issues. The issues are complex, and the challenge is considerable. I am keen to hear Members’ views, now and over the coming months.
