Hansard

I offer an apology to the spokespersons of the Opposition parties for getting copies of the statement to them rather late. The Executive has experienced some information technology difficulties over the past hour and a half. Copies of what I am about to say and other information will be available at the back of the chamber, but slightly later than would normally be the case.

The purpose of this statement is to announce the local government finance settlements for the next three years and the outcome of the five-yearly rating revaluation of business properties and the revised rate poundage for next year. I will set out the details of the core revenue allocations to local authorities, or aggregate external finance, which is the proportion of local authority revenue expenditure that the Executive supports. That is supplemented by council tax income, and the two combine to become grant-aided expenditure, which is the indicative amount that the Executive believes local government needs to spend in specific areas such as roads and social work. As the Presiding Officer said, I will be happy to take questions following the statement.

The Scottish Executive is committed to the delivery of excellence in public services. Local authorities are one of the main delivery agents of those services, and the people of Scotland rely heavily on the services that are provided. Those core services, including education, community care, police, fire, transport and environmental services, are crucial to improving the quality of life in our society, providing new opportunities and offering stability and security to all Scottish citizens. My predecessor, Andy Kerr, announced the outcome of the Executive's 2004 spending review on 29 September. That statement set out the aggregate levels of local government core revenue support for 2006-07 and 2007-08. The figures for 2005-06 were set as part of the 2002 spending review.

Since the end of September, we have been working on dividing the aggregate external finance resources between services and on distributing those funds between Scotland's 32 local authorities according to a formula agreed with the Convention of Scottish Local Authorities. I am now in a position to set out the detail of that work.

First, I can confirm that the total level of Scottish Executive funding for local government core revenue in the next three years is as follows: in 2005-06 it will be £8.1 billion; in 2006-07 it will be £8.3 billion; and in 2007-08 it will be £8.5 billion. Those figures represent year-on-year increases of 4.4 per cent, 3.3 per cent and 2.4 per cent respectively. That is a cumulative increase of 10.4 per cent over the period. Those increases build on the substantial sums that have been invested in local government in previous years. In the current year, funding has increased by £2.1 billion, or almost 40 per cent in the five years since 1999. By the end of the current spending review period, funding will have increased by more than £3 billion, an increase of almost 55 per cent compared with 1999.

Back in 2000, we introduced three-year financial settlements for local government. It is important that we take that improvement to the budgeting process into account and recognise that it provides councils with greater certainty and allows them to plan ahead. Another significant factor is that the various initiatives surrounding the efficient government regime will have come to fruition by 2007-08 and, through that, councils will be able to reinvest significant savings in front-line services.

The overall local government finance settlements for 2006-07 and 2007-08 mean that councils should be able to increase their revenue spending on core services by more than £300 million and £540 million respectively. That additional grant funding is intended to support the increased levels of revenue spending that the Executive considers are necessary to maintain and improve the levels of service currently being provided to the people of Scotland.

The increased spending will be funded by the revenue grants that I outlined earlier plus a proportionate contribution from council tax of not more than 2.5 per cent in 2006-07 and 2007-08. In 2005-06, we expect councils to keep council tax rises as low as possible. I also urge them to take all possible steps to improve their council tax collection rates, which lag behind those of other parts of the United Kingdom. Such an improvement would minimise the need for any rises. Of course, the setting of council tax levels is a matter for local authorities, but ministers have repeatedly said that we expect councils to keep council tax rises to reasonable levels, and that remains the case.

Today my officials will be informing all 32 councils, by means of a finance circular, of their provisional grant allocations for each of the next three years. In keeping with previous settlements, the Executive and COSLA have agreed that a stability measure—the floor calculation—should be included to ensure that councils with declining populations are protected from much smaller than average increases in grant support. The 3.4 per cent floor for 2005-06 was set in the previous settlement and remains unchanged. I confirm that the floor calculation has been set at 2 per cent in 2006-07 and 1.75 per cent in 2007-08. That will give specific benefit to six councils in each year. In 2006-07, those will be Comhairle nan Eilean Siar, Dundee City Council, Glasgow City Council, West Dunbartonshire Council, Aberdeen City Council and Shetland Islands Council; and in 2007-08 they will be Comhairle nan Eilean Siar, Glasgow City Council, Dundee City Council, West Dunbartonshire Council, East Dunbartonshire Council and Shetland Islands Council. That guarantees that all councils will receive increased grant support in those years by at least the floor amounts.

The distribution arrangements that are applied in the three-year settlement to divide the amount of grant between councils use a needs-based formula that has been discussed and agreed with COSLA and which reflects the most recent information, including updated data on pupil numbers and the 2001 population census.

The continuation of the quality-of-life fund in the settlement reflects our commitment to allow local communities to focus on improving the environment and promoting community well-being. It will allow councils and their partners to be responsive to local needs and to build safer, stronger communities.

We support the use of outcome agreements as a positive approach to turn national priorities into local action. Over the past three years, we have piloted an outcome-based approach in areas such as homelessness, regeneration and adult learning, but I am now interested in developing that approach further. Positive progress on an outcome-based model is vital to ensure that funding supports a more streamlined and useful performance and quality measurement system. Over the coming months, I will work with local government to agree workable procedures to monitor progress in each of those areas. I look forward to seeing the evidence of measurable change in communities across Scotland.

The figures announced today are provisional, so local authorities and COSLA will have the opportunity to comment on the detail. The final figures will be debated during the parliamentary debate on the local government finance order in early February next year. That debate will provide the statutory basis for the revenue support grant payments that will be made during 2005-06.

I am happy to say that other revenue grants will be provided to local government in addition to the revenue funding for core services within the local government finance settlement. Such grants will amount to around £1 billion in each of the next three years to allow local councils to fulfil a number of spending commitments on behalf of the Executive. A few decisions have still to be confirmed, but I am delighted to say that we have been able to confirm that revenue grants outwith core aggregate external finance will rise from £978 million in 2004-05 to £1.1 billion in 2007-08, which is an increase of 12.3 per cent over the period.

On capital expenditure, I can confirm that there will be overall significant increases in capital expenditure support across Scotland, which will help to underpin the key 2004 spending review priority of supporting investment in capital infrastructure. Today, I can announce that total support for capital to councils will exceed £2 billion over the next three years. That will mean record levels of capital support, as capital grants will increase by 35 per cent over the period. By 2007-08, local government will receive loan charge support to provide for more than £900 million of new capital investment over the period.

The prudential borrowing regime, which came into effect in April this year, is now providing substantial flexibility for local authorities. Of course, local authorities are required to have full regard to the auspices of the prudential code, but the new regime is more good news for Scotland's local authorities, as it further increases their flexibility and room for manoeuvre. That will ensure a strong and steady planned programme of capital investment in infrastructure by councils over the next three years, which will be backed by increased central support from the Executive.

In total, revenue and capital funding outwith aggregate external finance will increase by 15.9 per cent over the three-year period. Taken together with aggregate external finance increases, overall funding to local authorities will stand at almost £10.4 billion by 2007-08, which represents an increase of 11.3 per cent over the period. Further details of the funding streams have been shared with the Convention of Scottish Local Authorities and will be published shortly in an official-level circular.

Under the Executive's efficient government plan, which I announced last week, we have set ambitious targets to reduce inefficiency and bureaucracy and to redirect savings of more than £1 billion to front-line public services. Let me re-emphasise the important part that local government must play in that process.

Local government spends one third of the total Scottish budget, so it is crucial that such a significant sum is well managed and well spent. Making public services more efficient means delivering more for our customers. That means more teachers, police officers and fire officers. It means better schools and improved transport links. Together, the Executive and local authorities can take positive action to regenerate and enhance Scottish communities.

A challenging local government efficiency savings target of £325 million has been identified, so it will be important to demonstrate that we set the same challenges to other parts of the public sector. After discussions with COSLA and individual local authorities, I am aware that the funding package for 2007-08 is perceived as tight. I intend to continue that dialogue and will consider representations on the matter in the context of the overall Scottish budget and local government's progress in implementing efficient government.

In addition, I look forward to receiving high-quality, innovative bids from local government for allocations from the efficient government fund. I know that there are already examples of best-value excellence in the public sector and I encourage councils to work together to share their knowledge and to integrate good ideas.

Turning to non-domestic rates, I recognise the issue's importance to Scottish business—and even more so in light of the 2005 revaluation. As a result of that revaluation, some key policy decisions require to be made and over the past two years we have consulted widely on a number of them. That said, I am able to announce today the outcome of the revaluation; the non-domestic poundage rate for 2005-06; the transitional arrangements that will follow the revaluation; and adjustments to the small business and rural rate relief schemes.

The revaluation has shown that, on average, rateable values in Scotland have increased by 13.3 per cent, compared with 17.7 per cent in England. Each year, we set a uniform poundage rate that is applied throughout Scotland. This year, because of the revaluation, we are reducing the poundage rate to offset the increase in rateable value. That will ensure that there is no overall increase in the rates burden on Scottish business. However, the poundage rate for 2005-06 also depends on a range of other factors, including the expected level of revaluation appeals and a provision for inflation.

After taking account of those adjustments. I can announce that the poundage rate for Scotland for 2005-06 will be 46.1p, which is a 5 per cent reduction on the current year's poundage rate of 48.8p. Unlike England, Scotland is not tied by statute to having the retail prices index, which is referenced to September 2004, as its inflation indicator. As a result, England has to use an inflation allowance of 3.1 per cent in calculating its poundage rate. In Scotland, we will apply a smaller figure of only 2 per cent, which more than meets our partnership agreement commitment to increase the poundage rate in 2005-06 by no more than the rate of inflation.

Indeed, this will be the third consecutive year in which we have adjusted the poundage rate in Scotland by less than the retail prices index: in 2003-04, we froze the poundage rate and in 2004-05 we held the increase at 2.1 per cent, compared with the RPI of 2.8 per cent. Those decisions mean that, over the period, rates will be 4 per cent lower than they would have been. I hope that Scottish business will acknowledge the impact of that decision.

As in previous years, we have put in place transitional arrangements. As revaluation can result in sudden changes in rates bills, the aim of such arrangements is to protect ratepayers from sudden sharp increases in their bills in the period immediately following the revaluation. That gives ratepayers the time to plan how to accommodate the true bill over a longer period.

I am pleased to confirm that, following our extensive consultation on the matter over the summer, the Scottish Executive will put transitional arrangements in place on 1 April 2005. Under the scheme, increases in rates bills of more than 12.5 per cent in real terms will be phased in over a three-year period. That transitional protection will be funded by phasing in real-terms decreases of more than 10 per cent over the same period. We estimate that about 35 per cent of non-domestic subjects will be affected by these transitional arrangements. The rates of the majority—65 per cent—of ratepayers will increase or decrease within the percentages that I have just referred to.

Since 1997, small businesses in Scotland—unlike their English counterparts—have benefited from a discount in the poundage rate. In April 2003, the Scottish Executive introduced a more focused rate relief scheme for small business that provided rate relief of between 5 per cent and 50 per cent.

Independent consultants were appointed to carry out an initial evaluation of the scheme and a copy of the evaluation report is available on the Executive website. I will not announce any structural changes to the scheme today; rather, I would like to allow interested parties time to look at the evaluation report. Executive officials will shortly be writing to invite representatives of the business community to meet them during January to hear their views on how the small business rate relief scheme might be improved. Depending on the outcome of those discussions, the intention would be to issue a short consultation paper around 2005.

Today, I am pleased to announce that the rateable value thresholds for the small business rate relief scheme will be uprated to reflect revaluation. We will also adjust the rateable value thresholds for the rural rate relief schemes in line with the general increase in valuations. Following the short rural consultation exercise undertaken by the Executive in the summer, I am pleased to announce that we will remove the 1km rule. Based on the revised boundary and population data provided by the General Register Office for Scotland, we estimate that dropping that rule will result in petrol filling stations, hotels, public houses, small food stores, post offices and general stores in approximately 12 additional settlements qualifying for 50 per cent mandatory rate relief. In addition, the sites of cashline machines located in those settlements will now be exempt from rates.

I am aware that there are strong voices within the business community who believe that we are at a competitive disadvantage compared with England and who would like to see further changes. I have made it clear that I want to continue a dialogue that allows them to quantify their case. I assure them now that, within the resource constraints that we face, our minds are open and that I am willing to listen to the evidence that they provide.

As I have outlined today, we have increased the poundage rate by less than inflation for the past three years, putting Scotland at a competitive advantage. We have schemes for small business rate relief, rural rate relief and transitional relief that target assistance with rates. As further evidence of our willingness to assist the competitive position, I will be considering the case for expanding rate relief to support companies involved in research and development. We will begin exploring that issue with the business community in the new year.

I would like to say a word or two about the information available to ratepayers on the 2005 revaluation. Information on indicative rateable values for 1 April 2005 is available on the Scottish Assessors Association internet portal, which went live at the end of October. A link from the portal will take ratepayers to the local government website, and a rates calculator will give ratepayers an indication of their rates bill, based on the information provided by the ratepayer. However, I stress that a ratepayer's exact liability can be provided only by their local authority when it issues a formal rates bill. We are also providing a local government website that provides useful information on local taxation matters, including business rates. Technical notes showing the calculations behind the poundage rate for 2005-06 will also be available on the Executive's website. We will also produce a number of information leaflets, which will be issued to ratepayers during the period January to April 2005, either by their local authority assessor or by the business rates section within their local authority. Copies of the leaflets will be placed on the Scottish Executive and local government websites.

Good partnership in whatever we do is vital and we recognise that the Executive must work hand-in-hand with the Convention of Scottish Local Authorities and individual local authorities to achieve our goals. Of course, there will be times when our respective positions differ, but it is important that, as our constitutional position matures, we look for an increased understanding of the need to identify new ways of serving people here in Scotland. Local government finance is complex and we are both committed to reviewing the terminology and the presentation in a way that will allow the public to understand the system better.

The funding streams announced today will provide a real increase in investment that will lead to better services for the people of Scotland. I have set out a number of challenges and opportunities for local government and I will expect it to play its part in this important period; after all, our priorities are the same: to provide services that are the cornerstone of our society; to improve the quality of life; to provide new opportunities; and to offer stability and security to all people in Scotland.