JOINT COMMITTEE ON ENVIRONMENT AND LOCAL GOVERNMENT debate -
Wednesday, 16 Apr 2003

Vol. 1 No. 7

Chambers of Commerce: Presentation.

Chairman

On behalf of the committee I welcome Mr. John Dunne, chief executive of the chambers of commerce, and the members of his delegation. They have gender balance, something we have not been able to achieve on the committee. We will take a contribution from Mr. Dunne and follow that with questions from the committee.

I draw attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official, by name in such a way as to make him or her identifiable.

Mr. John Dunne

Thank you Chairman. I will introduce the delegation. Peter Byrne chairs a sub-committee of the chambers of commerce movement. This is the rate payers council and it is concerned with local government funding and value for money in local government, which goes beyond rates. Carmel Mulroy is our head of policy and communications and Pauline Dooley is working on the policy team in the chamber on rates.

We have a short note by way of an aide memoire. Shall I distribute it now or after I speak?

Chairman

It has been distributed.

Mr. Dunne

I will allow as much time as possible for questions and just hit the highlights in terms of our concerns. Local government financing is one of those Cinderella issues but from our point of view it is turning into a crisis which came to a head this year in the way local government funding was handled. If the policy that was used this year continues into the next two years there will be a wholesale disaster for the local government system. That is at the heart of our concerns. The current system of funding is inequitable, full of inconsistencies and is no longer sustainable. The core of the issue is rates. Dermot McCarthy describes domestic rates as the tax that dare not mention its name. Rates is paid on only 8% of property here. The businesses who pay the rates on 8% of the property contribute 25% of the local government budget and also pay another 25% of the local government budget through charges. To talk about local government being financed even by commercial rates does not hold water from our point of view.

The rate increases this year went as high as 25% in certain areas. The Department say the average was about 7% but given that the range was from 5% to 25% it is a strangely weighted average, though we have not managed to unpack that one with the Department yet.

In terms of additional service charges - our agenda is about the totality of local government financing, not just about rates - we point out that this week Carlow announced an increase in development charges of between 900% and 1,400% which is not remotely related to any cost of living index. Successive Governments have a record of reneging on their undertakings in this regard. When domestic rates were abolished the undertaking was given that Government would make that up and businesses would not be left to pick up the tab. In the Local Government Act 1983 that commitment was formally rescinded. The Local Government Act 1998 gave a commitment to put in place a local government fund which would be indexed to take account of CPI and other increases in the cost of local government business. We believe that commitment has not been honoured by the Government. Obviously the Government does not agree but we are fairly confident on our grounds. We are raising the issue today but we do not know what the outcome will be. We also propose to raise it with the ombudsman and ultimately in the courts because we think there is an issue in terms of the interpretation of the law.

To say the least, the Government has been misleading in respect of its commitments in regard to motor taxation. We think that the heart of the problem this year has to do with a mismanagement of local government finances. The mismanagement is a fundamental issue in regard to the governance of this country. That is why we consider it an appropriate issue to bring to the Oireachtas. The nub of it is that the cost base of local government has been expanded with the agreement of the Government and, as we all know, local authorities cannot sneeze loudly without prior permission from the Department of the Environment and Local Government. With that cost base now expanded the argument we are getting from Government is that the funding we gave over the past four years to increase the cost base is the funding that is needed this year to meet the index costs but it has got it already. There is no acknowledgement of the fact that the cost base has been expanded and, therefore, the indexation needs to apply to the higher cost base or else - there is a valid alternative - the cost base needs to be reduced, in which case the Government needs to take decisions in that regard.

An obvious example of concern is that the Government has negotiated a benchmarking pay award for the public service, the cost of which in pay terms for local authority staff this year will be €23 million. The Government did not make a penny provision towards that €23 million. It was left to local authorities to fund it. This is where we see the biggest threat in future years because next year the incremental cost will be €57 million and the following year it will be a further €40 million. If the Government continues the line that it does not have to fund the benchmarking pay award it will have to be funded from some other source within the local government financing system. If business is contributing up to 50% of that cost, we see it as a cost coming straight back to business.

In 2002 an allowance was introduced to remunerate members of local authorities, an issue with which we have absolutely no difficulty or disagreement. The cost in 2002 was €11 million and the Government paid that to the local authorities to fund it. The following year local authorities were told to continue to pay this allowance to members but the Government was not providing any money for it. This is what we mean by financial mismanagement. If one looks at all the commitments from 2003 to 2005 one is looking at a bill in the order of €250 million to be funded with no indication, based on what the Government has said to date, that it will step up to the plate and behave responsibly in regard to this.

As a not insignificant unrelated issue the Government exempts itself from paying rates on public properties. The cost of that for Dublin City alone is estimated at just under €20 million per year. When the Government says how much it gives to local authorities this is not a cost that is factored out and shown separately and we think it should be.

What needs to be done? The chambers of commerce is a locally based movement throughout the country. We are in favour of strong local government and we want it to be there and accountable to its electorate. In order to do that it has to have a proper relationship with the electorate in terms of taxation and providing value for money.

The Government has been speaking for some time about its intention to review local authority financing. We are calling for the terms of reference for that study to be published without delay and for an ambitious timeframe to be put in place. We recognise the reality of next year's local government elections and we are looking at them from our own point of view as well as in terms of a way of bringing this issue more sharply into focus. It should be possible to have a review completed by the second half of 2004 with a view to having a new system in place by January 2005. We are looking for a commitment from the Government in that regard and would be interested to hear the views of the joint committee.

The system of accounting and presenting the finances of local government is not very transparent at present, to the point where we have to provide training for chamber volunteers and staff around the country to enable them to interpret these figures. That needs to be resolved. To take a classic case which has got more profile in the health service, we are not convinced that the Department or anybody else actually knows how many people are working in the local government system this year. They collate the statistics but they tend to collect them after the event. In terms of the preparation of the figures and the relating costs and expenses, the current system does not present what one would call a clear set of management accounts.

We have a real difficulty with the way the Government is choosing to interpret its responsibilities for indexing Exchequer contributions under the Local Government Act 1998. That is an issue we will be pursuing independently but we are bringing it to the attention of the joint committee as the Oireachtas committee overseeing Government policy in this area. The rates base needs to be broadened and the anomalies in the system as they currently exist, for example, in regard to bed and breakfast, farming and Government property, also need to be addressed.

Lest it need to be put on the record we are in favour of universal service charges. We have always said business does not object to paying rates in principle, it just wants to pay its fair share and it wants to get value for money. It follows we want to see other people paying their fair share also.

The formula for the distribution of resources between local authorities, the needs and resources model, is creating numerous anomalies, many of which are cutting across other Government objectives, and this must be reviewed. As we understand it a technical review is taking place in the Department but there is little transparency about the process which is taking place there. More needs to be done to ensure value for money. If people saw value for money at local level there should be less resistance to paying service charges.

Chairman

Thank you. I understand Mr. Dunne met some members of the joint committee previously.

Deputy Gilmore

We met previously. I have one general and one specific question. Is the problem not one of taxation? The argument Mr. Dunne has made in respect of local government, that the chambers of commerce are bearing a disproportionate burden of the cost of local government, is analogous to the argument PAYE workers have made for many years, that they bear a disproportionate burden of the payment of income tax and the cost of national government. Is the basic problem essentially that the Government has been guilty of telling a national lie in recent years in respect of taxation, in that we have been led to believe, particularly by the Government, that taxes are being cut when the delivery of services, particularly at local level and through local authorities, has to be funded through increases in commercial rates in the case of local authorities or the introduction of specific service charges, and that this lie is coming home to roost? We have all been partying on the basis that our taxes are being reduced while public services are being disimproved or frozen, or alternative forms of taxation are effectively being found. The issue of commercial and industrial rates is one Mr. Dunne highlighted. What we need to address is essentially a taxation problem and the proportion of taxation which should belong to the local government system for the delivery of local services at local level.

One issue which arose at this committee previously, and which will arise again shortly in the context of the new local government Bill, is the idea that there should be a reportage system for local authorities to a committee of the Oireachtas. All public bodies with the exception of local authorities deliver their accounts through the Comptroller and Auditor General system to the Committee of Public Accounts. There is no corresponding mechanism in respect of the local government system. The Committee of Public Accounts can bring a delegation from a vocational education committee before it in respect of its accounts but it cannot bring a delegation from a local authority before it in respect of its accounts. Would the chambers of commerce be supportive of a proposal which would require local authorities to lay before the Houses of the Oireachtas their annual reports and audited accounts in order that the appropriate committees of the Houses would have some general means to address the kinds of anomalies and inconsistencies Mr. Dunne highlighted?

Mr. Dunne

With regard to whether this is a problem of taxation and analogous to the argument made by PAYE workers, we would say, in the same way that PAYE workers would say, that the burden of taxation that applies to a particular tax base is unfair. We favour local financing of local government as far as possible. The nub of our argument - it is a far more extreme example than the PAYE one - is that 8% of property pays 50% of the costs, which is major inequity and imbalance.

In terms of the national lie in respect of taxation, tax rates have gone down - that is not a lie. The argument and debate is not that tax rates need to go back up because our economic strategy is predicated on our current rates of tax, it has more to do with the tax base. We are saying the base of taxes and charges for local authorities needs to be broadened. That is the principle for which we argue. We are not even saying businesses should pay less; we are simply saying others should pay a fair share of what is going to be a rapidly increasing bill.

This is not only about the taxation side. It is extraordinary that nowhere in the public sector chapter of the new Sustaining Progress document is the word "productivity" mentioned. One will find the words "improving services", "better government" and all sorts of nice, positive messages but when one unpacks them, one discovers that what is being talked about is perhaps longer reception desk opening hours in a local authority. In order to do this, additional staff will need to be recruited. Public staff will get a pay rise to do this because it is part of better government. However, the cost will increase twice but it is debatable whether the benefit to the public will increase. Even if it does, there has been no factoring in of the cost benefit, I refer to the ratio between the two. There is a problem of taxation which centres on the fact that 8% of property funds up to 50% of local government running costs. That is a ridiculous anomaly.

In terms of delivering accounts to the Comptroller and Auditor General and reporting to the Committee of Public Accounts, in principle, we would not have a difficulty with this but we have two qualifications. I mean no disrespect to the Committee of Public Accounts which has distinguished itself on a number of occasions in major inquiries but as a system for generating effective oversight in terms of efficiency, as distinct from issues such as propriety, it moves and responds quite slowly. Unless there is a major issue which needs to be reviewed retrospectively and major new guidelines need to be issued, I am not sure it would be a very effective way of holding individual local authorities to account on their performances. While I have not thought this through, it strikes me that there would be an issue in terms of the responsibilities and autonomy of local government in managing its affairs, its ultimate accountability and whether this would be exercised through the Minister as part of the constitutional structure of Government or through the Oireachtas in terms of local authorities being accountable to it. I am not sure about the principle - I would need to think about it but from an operational point of view, I would not envisage a problem with suggesting that local authorities should file annual reports and accounts and lay them in the Library of the Oireachtas. If the Committee of Public Accounts wished to examine them, it could do so directly with the local authorities or through the Minister for the Environment and Local Govenrment.

Deputy Allen

Commercial rates have increased by about 7% nationally this year. That is the approximate figure, is it not?

Mr. Dunne

That is the average figure.

Deputy Allen

I presume there is a hidden factor in that there has been an ongoing review of the rateable valuation. How has this impacted on the commercial rate burden of the chambers of commerce?

Mr. Dunne

In the past four years the level of expenditure in local authorities has increased by 50%, quite an impressive rate of growth. Two forces come into play - the rateable valuation levied on individual businesses and the commercial rates base which is expanding. There is significant expansion in certain areas. This brings us back to the point made about the sharing of resources. The difficulty is there is significant expansion in areas such as south Dublin and Fingal where there is strong commercial, residential and industrial development. However, in other parts of the country there is probably a reduction in the commercial rates base - the multiplier is working the wrong way.

One of the interesting anomalies in regard to the Government's proposals on decentralisation is that if the Government decentralises an office to a relatively small town, it will reduce the rates base because whatever property it will take over will suddenly become exempt from rates with the result that the charge will go up for other businesses. This is a point we have mentioned to representatives of towns and villages. Some have decided that this would be a negative move while others have decided it would be a negative move with which they could live. However, it is an anomaly that perhaps was not part of the Government's original calculations. It would not be a unqualified success for the local economy.

Senator Bannon

In recent months two local government Bills passed through the Seanad and even though real reform of local government was promised, nothing has happened. As everybody is aware, we have probably one of the most centralised systems of local government in Europe. Councils are over-dependent on central govenrment for funding. When rates were abolished many years ago - water charges have since been abolished countrywide - we were promised adequate funds would be delivered from central government. Mr. Dunne proposes that we should broaden our rate base and return to the position that applied prior to the abolition of rates. What other options are available? Citizens still believe they are over-taxed.

I had an opportunity to meet the delegation previously at the Local Authority Members Association, of which I am secretary. We have afforded members of the delegation an opportunity to address local authorities throughout the country at their main meetings. What other options does the group suggest for funding local authorities? The focus of local authorities is the quality of life, services and so forth but even in the case of the national development plan, many local authorities are starved of cash to implement major projects in their counties. It is a problem.

There are major infrastructural projects to be done in County Longford but it probably has one of the lowest rates bases in the country, at about 7%. We have major problems but there is no real reform. Reform of local government should come from the Government. I heard my colleague, Deputy Allen, put a question to the Tánaiste on that issue this morning in the Dáil but she did not give a clear answer as to when reform will start. It is the Government's responsibility to bring forward reform. The reason for the current bottleneck is that there are no clearcut decisions on the funding of local authorities.

Senator Brady

I notice from the tables provided in the presentation that commercial rates as a percentage of gross expenditure have decreased in the major cities. Is that set to continue? Mr. Dunne mentioned the increase in local government spending in the last four years.

My experience is in central Dublin and in the last five years huge improvements have taken place. That includes simple things like footpaths. Does Mr. Dunne accept that this has improved things for the business community generally?

Mr. Dunne

Yes, there have been improvements. We accept that but we challenge the net cost to the business community of some of the improvements. This is not about us coming here on behalf of the business community and saying we do not want to pay charges. In fact, the local authority with the highest rates increase this year agreed that increase with the local chamber of commerce. A 25% increase was agreed based on specific services and local development works being undertaken by the local authority. The next local authority to charge a larger than 20% increase did not bother to have such negotiations.

It is possible to get the business community to agree to pay an increase. John Fitzgerald sat down with the Dublin Chamber of Commerce and agreed a once off additional 1% levy in return for street cleaning. There was no difficulty with that because there was a clear link between what was being paid for and what was being delivered. We acknowledge the improvements but some of them have come at an unjustifiably high cost while others have come based on negotiation with the business community in a package that has been acceptable to everybody.

A question was asked about whether rates as a percentage of total expenditure would continue to decrease. It is likely to continue. That is not a reassuring message from our point of view. The rates bill is still increasing ahead of any index of inflation but local government spending is increasing at a much faster rate. A large part of that is being funded by way of charges on the business community through other development levies and charges. Our campaign is not solely about rates but about the principle of local government financing. Rates comprise between 24% and 25% of the local government budget and another 25%, a percentage that is growing much more quickly, is related to service charges.

This leads to Senator Bannon's question. We looked at the property base and 8% is inequitable for the burden that is being placed on it. However, in debating it, we also took the principled position that the principal domestic dwelling of every individual in the country should not be liable to a property tax or rates. Beyond that, however, everything else should be. There are two ways of looking at it. Charges would yield a significant gain in funding for local authorities to a point where one could even look at assigning different functions to local authorities without requiring Exchequer transfers. Alternatively, it would allow the rates bill on the existing 8% who are paying the charge to be reduced considerably and we would be open to negotiate which way that went.

The key issue going forward, however, relates to service charges. We believe they are unstoppable, notwithstanding the hesitancy of most parties in this House on the principle of the issue. Given the polluter pays principle and the EU legal framework, it is inevitable that everybody will have to pay a fair share of the cost of providing services at local level. With regard to issues such as infrastructure and water services, there is no doubt that business derives a disproportionate benefit from or disproportionately uses these facilities and, therefore, will pay more. We do not have a problem in principle with that. However, everybody should pay their fair share.

Deputy Gilmore

Among the figures that were included in the larger document, there is a figure of 23.42% for rates as a percentage of the gross expenditure of local authorities. Given the way in which local authority accounts are done on the basis of income and expenditure, how did Mr. Dunne arrive at a figure of 50% on the income side, given that local authorities are required to balance income and expenditure?

Mr. Dunne

The other 25% is charges and levies.

Deputy Gilmore

Are development levies included in those charges and levies?

Mr. Dunne

If the Deputy looks at all the sources of income for local authorities and then looks at what is paid by business, Government and domestic users, if one can divide them into those three sectors, about 50% comes from charges that are levied on business.

Deputy Gilmore

Are development levies on residential development, for example, included in that?

Mr. Dunne

Yes. That points to another interesting anomaly in terms of Government policy. Every house built in a local authority area in this country costs the local authority money going forward, in terms of providing services, which is not made up through a corresponding set of income. The business community is in favour of tackling the housing crisis. However, in any local authority area, given the desirability of targeting housing development in certain areas, one is looking at a situation where the business community, if it sits back and lets that happen, is signing a seal on the deterioration of the financial position of its local authority which will, in turn, rebound as extra costs on the business payer.

Deputy Gilmore

Does Mr. Dunne have a figure for the levies and charges which are paid by businesses which are also paying commercial rates?

Mr. Dunne

No. We cannot get breakdowns to that extent. We take the view that most of the businesses that are paying commercial rates are also paying the charges. However, there would obviously be an imbalance. A builder with a certain amount of property such as a yard would be paying far more, as a developer, in development levies than in commercial rates. However, he would be within the commercial rates paying sector.

Deputy Gilmore

The figures of rates paid to the urban authorities are much higher than for the county authorities. The proportion of the expenditure based on rates in urban authorities is 41% and only 18.7% in county councils. What is the reason for that? Is it because there are fewer businesses in the county councils or is it because the allocation of the local government fund is skewed in favour of county councils as opposed to urban councils?

Mr. Dunne

It is probably a bit of both. It is definitely one of the unintended consequences in the way the local government fund is allocated. Under the requirement in regard to social housing, for example, the developer has the option, with the agreement of the local authority, of either building social housing or paying a contribution in lieu of doing so. If the contribution is made instead of the social housing being built, that is treated as income to the local authority and it is taken off the grant to that local authority. It is a bizarre misdirection of consequences. In practice, it means that having collected the levy, the local authority is then out of pocket and cannot proceed to use that levy to spend on social housing in its area.

The ratio of rates in terms of income in urban district councils reflects the fact that the rates base is smaller in those areas. The highest concentration is in city and county councils. It is also where the highest intensity and rate of service demand are but, on balance, they do relatively better. We are beginning to do some research on per capita overheads concerning relative value for money. Our local government system is spread so thinly and tiered so widely that the overheads in some of the smaller authorities are arguably disproportionate and being levied on a smaller rate-paying base or business community base. In that regard, I have to acknowledge that, to our minds, Better Local Government represented a significant step by transferring the staffing structures to a more integrated county structure.

A comment was made about promises of improving local government but I heard it said at various local authority meetings that no budgetary provision had been made for Better Local Government. It is being implemented and the costs are quite considerable. In staffing terms alone, the numbers employed in local authorities increased by 1.5% between 1998 and 1999. They increased by a further 3% from 1999 to 2000 and went up by another 6% from 2000 to 2001. They increased by at least as much again last year but nobody has the figures yet.

This has to do with new staffing structures, which were never properly planned and certainly never costed, being put in place. Thus, an additional cost was landed by the Government. We have no difficulty with this in the context of reform but the Local Government Act 1998 states the Government will take responsibility for making sure the local government fund is indexed to take account of increases in the consumer price index - a pretty poor index but which relates to indexation and inflation - and any other increases that arise in the course of the ordinary running of a local authority. In other words, a local authority cannot decide to build a two lane ring road around the county and expect the Government to pay for it.

It escapes me how one can argue that a national pay agreement that the Government has negotiated and imposed on local authorities, new staffing structures which the Government has designed and imposed on local authorities, and new payment schemes for members which the Government has approved and imposed on local authorities, are not what one would call increases in the normal running of a local authority, yet the Government has stated consistently that it does not accept responsibility for paying for them.

Chairman

Any there any further questions?

Senator Bannon

I would like to hear Mr. Dunne's view on whether Better Local Government is working. What is the view of the chambers? Mr. Dunne has highlighted the issue of increased staffing during the years but are we receiving a better service? In the past one always met the human face of local authorities but now one comes across telephone answering machines which ask people to leave a message. This is bureaucracy and red tape at its worst. We were informed that new structures were being put in place, including the National Roads Authority and a revamped An Bord Pleanála, but at the same time waste management powers were taken from the hands of elected representatives and given to central government. What is Mr. Dunne's honest opinion on the scenario for Better Local Government?

Mr. Dunne

My honest opinion?

Senator Bannon

It is important that it comes from bodies which are——

Chairman

I thought Mr. Dunne was expressing his honest opinion from the word go.

Senator Bannon

The scenario has not improved. Many of the services and infrastructural developments were put in place by local authorities such as water and sewerage schemes, public lighting and roads but now powers are being taken from them. On the one hand, we are told that local government is being enhanced but, on the other, actual power is being taken from local authorities. It does not make sense.

Chairman

Perhaps we will give Mr. Dunne an opportunity to answer the question.

Mr. Dunne

Local government, like the curate's egg, has been good in places. We welcomed the fact that there had been an attempt to have a coherent, integrated review. Even at the time it was being rolled out, we believed too many experiments were taking place. At this stage it would be timely to take stock of the effectiveness of the SPC structure vis-à-vis county development boards and area committees. On the other side of the coin, in principle, the move to consolidate staffing structures within local authorities at county level has been a good one.

We do not have a particular principle and would probably welcome the abolition of the dual hierarchy in terms of technical and general service staff which has been achieved, albeit at something of an extraordinary cost, in creating new directors of services. However, it probably needs a little more time to bed down to see how effective it will be.

The issue of giving powers to local authorities or taking powers from them reflects a fairly patchy record by local authorities in being willing or able - I recognise the political realities - to tackle issues such as waste management plans. We do not have much discretion over such vital issues.

There are plenty of things we could criticise, in principle, but in general terms we believe local government reform is moving in the right direction, although perhaps not quickly enough. There is probably not enough of a critical review process which would allow us to say, "This is not working, let us try something better," but we are generally moving in the right direction.

Local government administration will never work properly until the financial aspect is sorted out. While that is the key element, it has been completely ignored. This year it was simply cut loose by the Government. Up until now it has been relatively easy - a win-win situation for everybody in terms of having lots of money that could be spread out. However, even with regard to spending, no clear view was kept of the bottom line. I defy this committee or anybody else to tell me that it is a good idea to introduce a scheme which has year-on-year costs and say, "We will fund it in the first year and after that you have got to keep it going but we are not paying for it." That cannot be described as anything other than mismanagement.

Senator Bannon

I agree with Mr. Dunne.

Chairman

It sounds a little like a dowry, does it not?

Senator Bannon

Mr. Dunne said he would be keeping an eye on the local elections next year. Do the chambers intend to run candidates?

Mr. Dunne

We are trying to encourage candidates to stand for the political parties - in other words, to get more business people involved in local government. Frankly, however, having talked to the business community about it, we are getting fairly mixed reactions. I certainly would not rule out individual chambers choosing to do so. As a matter of policy, it would not be our intention but I would not rule it out.

Chairman

Perhaps we could bring the meeting to a conclusion.

Deputy Gilmore

There was a passing reference to the possibility of legal action. What was Mr. Dunne hinting at?

Mr. Dunne

I am not hinting at all. We believe the Government is in breach of section 4 of the Local Government Act 1998, on which we would appreciate the committee's view - not today but it might think about it. Failing that, we would then ask the Ombudsman because it is a question of administrative law and procedures. Failing that - we might move on it sooner rather than later in terms of getting a date in the diary - it would seem to us that the next step, if we do have the courage of our convictions, would be a legal challenge.

Deputy Gilmore

That is the section which requires the local government fund to be——

Mr. Dunne

Indexed properly.

Deputy Gilmore

——indexed each year.

Mr. Dunne

Yes.

Chairman

I thank Mr. Dunne and the rest of the delegation for making their presentations to the committee and for the honest and forthright way with which our questions were dealt.

The joint committee adjourned at 3.20 p.m. sine die.