Ministers speech at the IRRV conference

I am delighted to have been asked to address this event, particularly given the important agenda that is being discussed today by the Institute.

I know your organisation has been closely involved, and has made a positive and significant contribution, to the recent development of rating policy here – and on both sides of the fence as well; starting off as advisor body to the Finance and Personnel Committee, employed as consultants by DFP and now engaged in important work in this field by Belfast City Council.

In television there is an old adage, never work with children or animals. Anyone who ever saw the elephant on Blue Peter will know what this means. In politics I’m quite sure that it would be equally appropriate to advise - never try to reform local taxes!

Seeking to change any Rating system is fraught with difficulties and political danger. Even though the old arrangements, based on rental values and an outdated valuation list, were far from perfect, it might have been safer to do nothing than to seek to reform them. But once the change to a capital system was made, no credible case could be made for reverting to the old arrangements. We were left, at least in the short-term, to make the best of the new provisions and having made a manifesto commitment in March to review the new system I am left with a considerable challenge.

But devolution is about facing up to such challenges. Make no mistake if direct rule were still in place today water charges would already have been fully introduced in addition to the Regional Rate. Regional Rates would have continued to increase at a dramatic pace and there would have been no prospect of additional reliefs.

Issues around local taxation, water charges and revenues are amongst the most important facing the Executive and are all inter-connected. Indeed, I have previously described our ability to improve the domestic rating arrangements as a litmus test for devolution. This was one of the issues that faced the local 2

parties in the run-up to the election and now that we are in government we intend to address it directly.

As I am sure you will all appreciate, it’s not an easy task, nor, as anyone who has sought to reform local taxes will know, a popular one. No one likes paying taxes and we’ve got to ensure that the system is fair and balanced in terms of what people pay in rates.

Proposing change is not an easy option. As Sir Michael Lyons pointed out in his report – Any change in taxation creates winners” and losers”, with those who pay more tending to react much more strongly to change than those who benefit.”

We also need to safeguard the interests of those who genuinely are unable to pay without unreasonably punishing those who have saved all their lives and invested in their homes.

Of course there is a limit to what we can do in fashioning a taxation system. Absolute fairness is not attainable and we all know that the only fair tax is one that someone else pays!

I think I should say at the outset that I recognise the limitations of property taxes, especially when the burden on taxpayers from this approach is too great. While many countries have property taxes at a local level, relatively few rely solely on this to raise local expenditure.

I do not believe that a taxation system based solely on capital values is fair; but I do believe that a system based on capital values, with a maximum cap and appropriate reliefs can be fair.

In recent years the United Kingdom as a whole has been in great danger of demanding too much from property taxes. This is clear from the experience in some parts of Great Britain.

While property taxes are a feature of most taxation systems in the modern world, they are a rather blunt taxation measure and therefore need to have checks and balances so that the concept of ability to pay is not overlooked. 3

However, in saying that, I recognise the option of some form of a property tax may have fewer drawbacks than some of the alternatives on offer. Replacing the capital system with something radically different is no panacea and will merely lead to a different set of winners and losers.

One alternative being put forward is a local income tax system. I have to say that I am not persuaded at this point in time about the practicalities of that route. There are many arguments for and against but even some of those who support it recognise that it would only work at a regional level, not for District Councils. That must seriously draw it into question in terms of cost alone. However, it is an issue for consideration in the longer-term. I will also closely follow how Scotland proposes to approach this issue in the coming years.

So, when we look at all the possibilities available to us, it may well be that the most realistic outcome in the short term at least is to make some changes to improve what we already have, rather than opt for a radical alternative. What really matters to people at the end of the day is the level of rates they have to pay, so in any changes annual rate increases need to be kept to a minimum.

In the negotiations with the Treasury before the restoration of devolution we won the vital concession that the link between the level of the Regional Rate and the ability to borrow under the Reinvestment and Reform Initiative was broken. This link, which was established under the last Executive, was ill-conceived and simply created the conditions where there was no incentive for government to save money. Northern Ireland Rate increases were not determined by spending plans here. They were instead tied into increases in Great Britain. Higher Rates became an end in itself.

Let’s not forget that the Regional Rate increased by more than 37% over the last three years under the Direct Rule administration. Given this past trend of excessive, erratic and unpredictable Rate increases I believe there may be a case for setting out during this budget cycle what we propose the level of 4

the Regional Rate should be for each of the three years of the Spending Review.

One of my priorities as DFP Minister will be to control the level of the Regional Rate in Northern Ireland. When I present the draft Budget at the end of October I intend to fulfil this commitment.

So what have we been doing about it since devolution returned in May?

We have not been idle. Within weeks of taking office I agreed terms of reference for a review of the system with my Ministerial colleagues in the Executive. Indeed, the public consultation process concluded at the end of last month.

My Department received responses from a wide range of ratepayers and organisations. Forty two organisations responded representing a wide spectrum of society, including 2 political parties, 11 Councils, Age Concern, the Consumer Council, The Fair Rates Campaign, the Student Movement, NILGA, NIPSA and the Ulster Farmers Union. This compares favourably with 40 organisations who responded to the main consultation on the capital value system in 2004.

In addition, 77 ratepayers, many of whom were pensioners, took the trouble to respond to the Review. I am very grateful to all who responded. I expected and hoped even more people would have responded. The reasons that relatively few individual Ratepayers responded are unclear – maybe it was the assumption that organisations will represent their views or perhaps that people doubt the value of consultations. Perhaps it’s an indication that the system isn’t as unacceptable as some would have us believe. However, I prefer to believe that it is a demonstration of the faith and confidence people have that I will take the right decisions - but I will leave that for others to judge.

I have looked with great interest at the responses we received and will be publishing a consultation report shortly which will summarise the views received, issue by issue. In addition the responses will be published in full on the Department’s web site. 5

This report will be sent to the DFP Committee to scrutinise and take further evidence. All of this will take place in the next month.

Following that I will bring proposals to the Executive for final decision. We must make some decisions fairly quickly if I am to deliver improvements in time for next year’s bills. Some changes will take longer and may require new primary legislation to be passed. I think it is important to understand that the process of getting Executive and Assembly agreement for some of the changes that I may propose will not be easy given the need for cross-community support.

Reaching consensus on a system, which is broadly acceptable, stable and easy to administer as a local tax (for both this Assembly and the District Councils) is a tall order. We should be under no illusions, about the difficulties that will lie ahead if we wish to transform the system, but it is a challenge I believe we must face up to.

Over the next few months I will be considering the matter carefully and continuing to listen to all who have constructive ideas on this most difficult of issues. But we must not lose sight of the time constraints. For devolution to be of real value it has to be about taking decisions – even difficult ones not avoiding them through endless reviews – I do not want to fail through analysis paralysis.

It might be helpful if I give a flavour of what came out of the consultation?

A number of broad themes dominated the consultation. The issues which raised the most responses were a single person discount, the merits or otherwise of the new capital value system itself, the ability to pay, the student relief scheme, a local income tax, the disabled persons allowance and the maximum cap.

In addition, other issues raised included the rating of vacant property, a pensioner discount scheme, a deferred rates payment scheme and last but not least the difficult issue of 6

paying for water. As you can see, the calls for more relief was a significant feature in the responses.

Significantly, the Rates system is distinct from other forms of taxation as the total amount of money that has to be raised is decided each year first as part of the budget process – of the Assembly and by District Councils - the individual bills are worked out afterwards. Therefore with an agreed total take from the system, - providing more reliefs will add to everyone else’s bills.

I am presently looking at the effectiveness of the new relief packages which were introduced in April and I will be considering if there are better ways to deliver relief and mechanisms for targeting those with the greatest difficulty in paying.

Raising the savings limit for eligibility is one option I am attracted to. Also, I would like to be able to see if we can provide more support to our oldest citizens, particularly those who live alone.

I am looking at ways of encouraging the most vulnerable, particularly the elderly, to take up the reliefs that they are entitled to and I will be announcing some ways in which the situation might be improved.

I am also reconsidering the level of the cap. Currently it is fixed at a level which equates to a capital value of £500k. I am not convinced this is the right level and I think there is merit in the argument that as rates pay for services, so there must be recognition that there is a limit to the benefit a ratepayer can derive from those services.

However, given the issues involved I must be realistic, it may not be possible to get support from Executive colleagues for all of the changes I may recommend. Watch this space.

Looking into the future, if we do finally decide to retain elements of the capital value system, this raises the issue of periodic revaluations. I know some have expressed concerns that whenever it comes to the next revaluation, there will be 7

substantial increases in rates for everyone due to the steep rise in property values. It is important that the public understand that this does not mean automatic rate rises all round. The system merely redistributes, no more money will be raised. Some ratepayers will pay more but others will pay less depending on whether their house has increased in value compared to the average.

Finally, one overriding issue that is to the fore in my mind is the question of value for money. As people have been asked to pay more in rates in recent years, then they should expect to see better and more modern public services in return. All money raised is additional to Northern Ireland and used for investment in public services. I want to ensure that our community gets a good return on that investment.

Rates provide a vital source of revenues for the Assembly and local councils and enable both tiers of government to provide priority services. Similar sorts of taxes are used internationally as a means of supporting expenditure by local government, so we are not unique in that respect.

When we came to power in May this year I gave a firm commitment to urgently take a fundamental look at the reforms introduced by the previous Administration to see what improvements, if any, could be achieved.

The consultees have now spoken and over the coming weeks there is much to be done to see what can be achieved for the next round of bills going out in April 2008, as well of course, as looking longer term.

Discussion and debate is always important and that is what you are here to do today, so may I wish you well for your Conference and I trust that it will be a profitable day.