COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT

(Hansard)

Rates Relief and Rating of Second Homes

12 November 2008

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson)
Mr Simon Hamilton (Deputy Chairperson)
Dr Stephen Farry
Mr Fra McCann
Ms Jennifer McCann
Mr David McNarry
Mr Declan O’Loan
Mr Ian Paisley Jnr
Ms Dawn Purvis
Mr Peter Weir

Witnesses:

Mr Victor Hewitt ) Economic Research Institute of Northern Ireland
Mr Brian McClure ) Department of Finance and Personnel
Mr Gary McLeod ) FGS McClure Watters

The Chairperson (Mr McLaughlin):

We turn to the report on rates relief for full-time education students, those under 18, and young people who are leaving care. The Committee will also hear evidence from Department of Finance and Personnel (DFP) officials on the cost of rating second homes. The Committee has agreed that the session will be recorded by Hansard. Mobile phones must be turned off completely.

I refer Committee members to the DFP briefing paper at tab 5 of the meeting pack, and to the DFP response on the consideration of stand-alone rates relief for carers at tab 6. Officials will also provide an update on the cost of rating second homes. I welcome Mr Brian McClure, head of the rating policy division of DFP; Victor Hewitt, director of the Economic Research Institute; and Gary McLeod from FGS McClure Watters.

Mr Brian McClure (Department of Finance and Personnel):

Good morning, and thank you for the opportunity to update the Committee on various matters. In addition to the two matters on the agenda, I am more than happy to answer questions on other issues that have been raised during recent Committee meetings.

The Chairperson:

Be careful, Brian, that sounds like an open-ended offer. [Laughter.]

Mr McClure:

I will update the Committee on student relief. Although that is its name, it covers those in full-time education training, young people who are leaving care, and those under 18. For brevity, I will call it the student relief scheme.

The Department commissioned FGS McClure Watters and the Economic Research Institute to undertake an evaluation of that scheme. As the Committee is aware from the Executive’s review of the rating system, the scheme came under criticism in many of the responses that we have received about the effectiveness of, and need for, the student relief scheme. That is why we commissioned that work.

One of the reasons that the Department decided to go through a procurement process and commission consultants to do that work is because the Department is under judicial review in respect of the scheme. Therefore, we thought that a measure of independence was doubly required. That work has now been completed. Members have in front of them a preliminary report, but that is, in many ways, a misnomer. The report is extensive, and there is little missing from it. My colleagues will fill in the Committee on the missing details. The Department has just taken delivery of the final report, and we provide the Committee with that. The findings are exactly the same as those in the preliminary report, but we thought it important that the Committee be given an early opportunity to consider them.

I will let the consultants address the main findings. However, we view this as a two-stage assessment. One part of that assessment concerns whether the existing rate relief scheme is fit for purpose; the second is whether an alternative is required, and if so, what that alternative might be. It is therefore a two-stage decision-making process, and the report is very helpful in assisting us in reaching those decisions.

At the moment, the Minister has not given a view on this matter because he first wants to hear the views of the Committee. He has written to relevant ministerial colleagues and the Minister for Employment and Learning has looked at the report and responded that it fits with his Department’s review of support measures for students, and that the report is therefore timely.

Without further ado, I will allow the consultants to give the Committee a flavour of the report and take questions.

Mr Gary McLeod (FGS McClure Watters):

I want to give an overview of the study process that was conducted, and a summary of the review’s findings.

We commenced our review with a detailed examination of the policy and of the original intent, rationale and purpose behind the scheme, in order to obtain a good understanding of what it was about and of the intended benefits for and impacts on the three groups targeted by the policy.

We reviewed the operational aspects of the scheme, including its administration, the application process and its overall implementation, to identify and detail the various issues and implications in respect of the scheme’s management and delivery. A detailed assessment and evaluation of the impacts of the scheme was then conducted, including the nature and extent of incidence of the relief to its intended recipients. That examined the levels of demand and uptake of the scheme across the three target groups to determine the benefits — if any — derived for each and the impact generated. Specifically, we examined the contribution that the scheme had made to the policy aims and objectives, namely incentivising persons in full-time education and providing support to vulnerable groups.

Following that process, we conducted a programme of consultations with key stakeholders representing the three target groups. That included Government Departments and agencies, the education sector — including universities, colleges and representative bodies — and other organisations within the vulnerable sectors.

The purpose of the consultations was to garner views on, for example, awareness and understanding; demand and uptake; administration and delivery; benefits and impacts; and the effectiveness of the scheme in contributing to policy aims. The consultation programme also sought views and suggestions on possible alternative options for the scheme.

Based on those findings, the study identified a series of potential future alternatives or options for the ETLC scheme. In brief, those included a do-nothing option; an abandonment of the existing scheme; modification of the existing scheme; and replacement of the existing scheme.

Several alternatives were suggested during consideration of the replacement option, two of which were outlined in some detail — accommodation voucher scheme, and a support fund scheme. Each potential option was assessed, with due regard to the intended policy aims and objectives, and with particular emphasis on the possible issues and risks associated with each option.

That process was followed by a second phase of consultation with representative and sectoral stakeholders, during which each of the potential alternative options and associated implications was presented, discussed and considered. That provided stakeholders with the opportunity to voice concerns or issues related to the nature, scope and details of each of the proposed alternatives. There was also an opportunity to note the benefits, impacts and contributions that those options might make to the original policy aims and objectives.

Following the second round of consultations, and in light of the feedback from the consultees, we further refined and developed the alternative options. That led us to identify a preferred approach or means that would allow the delivery of such a scheme to the three target groups, and produce a method by which we could better meet the intended aims and objectives of the scheme.

The final aspect of our work was the submission of our final report to the Department. In summary, the review found that on the basis of the evidence to date, the existing ETLC scheme falls short of being fit for purpose. The scheme lacks a firm rationale, being an indirect way of improving participation in higher education. The scale of the relief that is available is viewed as unlikely to effectively incentivise or encourage participation in higher education, given the levels of tuition fees and other costs associated with academic study.

The costs of the administrative and operational aspects of the scheme are high, specifically in relation to the amount of relief and pass-back to the target recipients. There also appears to be no means to effectively police the scheme in its current format. The high level of student owners that was identified indicates a significant level of dead weight, which, perversely, introduces a regressive element into the scheme. There is a risk that landlords could capture a significant proportion of the relief through higher rents or other costs associated with accommodation. Indeed, the extent of the alleged high-compliance burden on landlords is such that some landlords and agents are not participating in or operating the scheme. Support for vulnerable groups is already provided through the social services and social security systems. With those issues in mind, the existing ETLC scheme cannot be considered to be effective in achieving its aims or objectives, nor efficient or economic in its operation.

Finally, we determined that any adjustments to the existing scheme would be unlikely to overcome its weaknesses. Based on the review’s findings, we favour closure of the scheme, with appropriate safeguards for those who are already participating in it. Should the Executive wish to move to a new scheme of support for students, they should do so on the basis of a clean break from the existing scheme. That could be achieved by terminating the existing scheme in one academic year, and replacing it in the next.

Mr Victor Hewitt (Economic Research Institute of Northern Ireland):

Members of the Committee probably have enough experience of the rating system by now that they can understand how difficult it is to use as a tool for the achievement of other objectives. It is a bit like pushing a piece of string in the hope that the other end moves in the desired direction. The interaction of the market here has the effect of shifting of the incidence of a benefit that is passed through the rating system. There is not a vast amount of control over who eventually receives the true benefit, even though it is directed towards a specific group.

The other interesting matter to come out of this exercise was the unintended consequence that the major beneficiary group were, in fact, students who owned their own properties, or whose parents had bought the properties for them. Although those people were capturing the full value of the rate relief, we can assume that they were at the higher end of the student-income spectrum and were, therefore, not the group that the scheme was intended to benefit.

Those are some matters that members might wish to bear in mind when asking questions about technical matters, which we are happy to take.

Mr O’Loan:

I am content to accept the report’s conclusion that the scheme is not achieving its stated policy objectives. Consequently, it might be better to pursue routes other than the rating system.

The Committee has shown great interest in the Land and Property Services’ performance in the past, and the report provides further evidence that that performance is still not good: it failed in its key duty to police the system and ensure that benefits went to students, rather than to landlords; its computer systems were not up to the task, so the job had to be done manually; and there were delays and inaccuracies when dealing with applications. Although the witnesses are not here to discuss such matters, that evidence feeds into our ongoing thoughts about Land and Property Services, and I wish to place that evidence on the record.

How much did the review cost?

Mr McClure:

Do you mean the fee that was paid to the consultants?

Mr O’Loan:

I do not know what other costs might have been incurred.

Mr McClure:

I am more than happy to write to the Committee about that matter; however, given that this meeting is being reported by Hansard, I am not sure that I should divulge any commercial considerations.

Mr O’Loan:

That is fair enough. I do not wish to intrude on sensitive matters.

Mr McClure:

I can say, however, that FGS McClure Watters was not necessarily awarded the contract because it submitted the lowest bid; it won the commission because of the strength of its proposal in the consultation process, and that was assessed by the Department and the Central Procurement Directorate.

Mr O’Loan:

I would appreciate it if you would write to us about the cost. Although I read the report, I cannot remember what it said about the cost of administering the scheme.

Mr Hewitt:

The cost is quite high.

Mr McLeod:

£227,000 per annum.

Mr Hewitt:

That compares to £384,000 paid in benefits, so the ratio is not particularly good.

Mr O’Loan:

On those grounds alone, the scheme does not stack up. I rest my case.

The Chairperson:

Everyone’s case, I think.

Mr Hamilton:

This is more of a comment than a question. The scheme’s assessment is damning, containing few chinks of positive light. As Declan O’Loan said, although the scheme had a noble objective, it failed badly to achieve that objective. It did not directly benefit the people whom it was supposed to benefit — acting instead as a sweetener for landlords. Furthermore, its administration was confused, and it depended on landlords’ good faith to declare when students had moved out of properties. In addition, mixed-tenure situations arose whereby some tenants were employed and some were not. Clearly, the scheme was messy, and I will not protest if it is revoked — far from it.

Nevertheless, there is merit in exploring possible alternatives, and the report mentioned and elaborated on two: a voucher scheme, and the use of existing student-support mechanisms. Both are worth considering, and we should not stop trying to pass on benefits to a particular section of society just because a previous attempt failed to work. Of the two suggestions, perhaps the voucher scheme would be better, because it would be easier to administer and would directly benefit students.

What is the current thinking on the relative merits and demerits of the two options?

Mr McClure:

We regard this as a two-stage decision-making process. The first stage is a decision on whether the scheme is fit for purpose, and the report clearly recommends that it is not. After hearing the Committee’s views on that, the Minister will make a decision. The second decision to make is whether there is a need for an alternative and, if so, what should it be. We regard that decision as outside the remit of DFP and we have already corresponded with DEL about that. The DEL Minister asked us to set up a meeting with his officials as soon as possible to discuss the alternatives and to determine whether any solution can fit into DEL’s current review of student support services.

As for the merits and demerits of the alternatives, perhaps Victor will talk about the voucher scheme versus increased funding to student support. I would have thought that the latter might be easier to administer.

Mr Hewitt:

The voucher is a halfway house between the current system and giving more direct support to students. The voucher scheme will create a market for vouchers, rather than a market for student accommodation. The degree to which the voucher is passed on will depend on the degree of competitiveness in student accommodation. In a highly competitive market, the student can use the voucher to get a good deal. However, in an uncompetitive market, the landlord can receive more or less the full cost of the voucher. Although it is not a perfectly competitive market, it is reasonably competitive, and the value of the voucher would be shared.

The other approach is entirely different in that it recognises the existing mechanism for supporting students who are having difficulties with accommodation, etc. It also acknowledges the staff involved who have ongoing experience of working with students. Therefore, enhancing the funds for such support may, ultimately, produce better bang for the buck — as the Americans would say.

More investigation is required, and the Departments must negotiate on the responsibility for administration, as the responsibility for student support would not necessarily lie with DFP. We are trying to think outside the box to a certain extent.

The Chairperson:

The Committee’s position is that it wants the current arrangement to end and be replaced with a more targeted system that is directed at, and encourages, students. I am a bit concerned by your reference to cross-departmental responsibility — that creates a maze and a haze, and I worry that students may lose out. Gary McLeod indicated that the existing scheme would be phased out in one term and a new one introduced in the next. That is fair enough, but can you assure the Committee that the cross-departmental dialogue or negotiation will not create a new problem, rather than a solution?

Mr McClure:

I hope not. The aspiration to abandon a scheme one year and replace it the next is unrealistic, given the level of complexity involved. In response to your point about hazy cross-departmental working, DFP wants to work directly with DEL on this issue. Clearly, there are issues in respect of the funding that could be transferred, and it would almost be a question of channelling funding from the existing rates relief scheme into a new scheme. We need to hear DEL’s view, but using some of the existing support mechanisms might be the best way of securing a quick alternative.

A recurrent theme in the report is that subsidising housing costs as a means of encouraging people to remain in education may not be the most direct way to help, and a voucher scheme may suffer from the same disadvantages. At this early stage, if encouraging students to remain in education is the priority, supplementing existing support mechanisms might be the best way to do that.

The Chairperson:

To take a decision to end the current system implies that its replacement is available. Students should not end up being penalised.

Mr McClure:

That is a valid point, and we are at pains to say that we will, literally, let existing participants run their course, because the protection of existing participants in the rates relief scheme is an important consideration.

Dr Farry:

We need to be wary of people who end up being professional students for many years — the “lifers”. There is an argument to be made about why the system should subsidise housing costs for students, as opposed to offering assistance on other financial pressures that befall them. Clearly, housing stresses may be a problem for some, but other people’s circumstances may be different, and the students may wish to have flexibility to choose to help themselves out where the pressure is greatest, rather than have the state say that they will receive help only with housing costs.

Theoretically, if the take-up of the scheme had been at 100% — it was clearly less than that — what would have been the potential loss in revenue, or the cost of the benefit, to the system?

Mr Hewitt:

It was between £3 million and £4 million.

Dr Farry:

It is a fairly marginal issue, then. The second aspect is that there are two streams within the scheme: people under the age of 18, and people leaving care. The reported take-up is incredibly low in both of those categories. Have any conclusions been reached about what will be done in relation to that? Is the scheme likely to continue with those two categories, or is there a need to rethink that on account of the low level of take-up?

Mr McClure:

There are reasons of promotion, but there is also existing provision for vulnerable people in those groups to get support through the health trusts and the social security system. There is, therefore, duplication. The numbers of take-up are low as a consequence of that duplication, because those people are already catered for through full funding for rating costs from the trusts or from the Social Security Agency.

Dr Farry:

So you see no real benefits in keeping those two aspects of the scheme?

Mr McClure:

We are not jumping to conclusions yet, but we can see the argument that there would not be much of a benefit. Clearly, we would want to protect even the small number of people who are receiving such benefit.

Dr Farry:

If the Minister decides that the scheme needs to be phased out, what would the mechanism be for that? Would the Assembly need to take any decisions, or would the Minister have that ability under the existing legislation?

Mr McClure:

The legislation would have to be amended, and the forthcoming rates amendment Bill would be the vehicle for doing that.

Mr Weir:

As the Deputy Chairperson has indicated, the scheme may have been established for a noble purpose, but it did not meet the Noble Index. I attended the Danny Kennedy school of weak jokes. [Laughter.]

When the targeted groups are students, various financial mechanisms can sometimes be seen as very blunt instruments, which do not have the full level of impact on the intended group. It strikes me that this is not simply a blunt instrument, but, in many ways, it completely misses the target group.

Although I appreciate the concerns that whatever comes on stream must do so quickly, I agree that it has to be ultimately delivered by DEL. I think that it should be decoupled from housing and put into more general student need, because the way in which the scheme worked was almost the reverse of addressing need.

The indications have been that the students who potentially benefit the most from the scheme are those who own — or whose parents own — the property in which they live. That tends to benefit the most well off students.

Rates relief should be decoupled from housing, because students who are at the other end of the scale will have to make choices about their accommodation because of a range of factors. That particularly applies to those students who do not use student accommodation because they study and live at home.

Students may decide to remain at home for a range of reasons. Many do so because they are from poor backgrounds and cannot afford to live in student accommodation. One of the major flaws of the present system, and the reason why rates relief must be decoupled from housing, is that some students who sit at the bottom end of the financial scale are completely excluded from availing of the scheme.

Therefore, on one hand, a “Richie Rich” character can fully benefit from the scheme, while, on the other, students who are at the lowest end of the scale have no opportunity to benefit from it. For those reasons, criticism of the voucher system may be weak.

I agree with the Chairman — we must see swift action in consultation with the Department for Employment and Learning. Rates relief should be decoupled from accommodation, because that can have unfortunate consequences and target the wrong people. We must ensure that any financial help that is given to students is administered on the basis of need.

Ms J McCann:

An alternative must be found that targets students who have greater need. The main beneficiaries of the rates relief system were landlords or students who owned their own properties. I am concerned about the lack of regulation of rents that landlords are allowed to charge. If the scheme is ended, will landlords simply increase their rents? Have you contacted the Department for Social Development to assess whether those rents could be regulated so that landlords would be unable to increase their rents to compensate for the money that they would lose if the rates relief scheme were revoked?

Mr McClure:

That is a very valid point. We have written to the Minister for Social Development to ask for comments on that issue. The scheme will not be stopped suddenly; rather, it will be closed to new applicants. There will not be a situation whereby beneficiaries receive rates relief one year, but not the next. Existing participants will continue to use the scheme. I do not think that that will create a market effect. It may be interesting to hear Victor’s views on whether he thinks that there will be a market effect.

Mr Hewitt:

Obviously, there is some market effect whenever a subsidy is removed. However, the extent to which that happens depends on how competitive the market is and who receives the benefit of the subsidy. If a landlord is the major beneficiary of the subsidy, and the market is slightly uncompetitive, he will attempt to use his market power to restore his position. However, if the market is fairly competitive, he will not have the market power to restore his position.

I would be slightly concerned if two schemes ran simultaneously and students living in the same accommodation were, essentially, being treated differently. A student could sign up to a scheme at the start of his or her university career that is not available to another student who starts the next year. That would be an uncomfortable position in which to be. It would be more satisfactory to close one scheme during one academic year, and open a new one for the next academic year. However, that is an administrative matter.

Mr F McCann:

Obviously, I support what Jennifer said about examining ways in which to deal with landlords who have participated not only in this scheme, but in future schemes, through legislation or regulations.

A number of groups advise and assist students and others — for example, the housing rights groups. Were they included in the consultation process? Did they give their opinion on the difficulties and problems that may arise?

Mr McLeod:

Yes, we spoke to the SHAC housing association and the National Union of Students and Union of Students in Ireland. They deal with student accommodation, welfare, finance, and so on. We listened to their perspective on the issues.

Mr F McCann:

Did they make any suggestions? Unless there are regulations, any scheme that is introduced will be open to abuse from landlords.

Mr McLeod:

There is a view that better regulation is needed to ensure that such abuse does not happen. At the moment, the scheme is fraught with flaws, which means that there is the potential for abuse to occur. As for regulation, there is an obligation on landlords to demonstrate, through rent books, the breakdown of costs associated with tenancy agreements. That is one angle that the student bodies are considering as a means to police the situation to an extent. There is a view that better regulation is needed, but we did not note specific details on how that would work.

Ms Purvis:

I am glad that you have given an assurance that students who are participating in the scheme will be able to continue to do so until they finish their courses.

Mr McClure:

We will probably set a time limit. Mention was made of perpetual students. We will perhaps let the scheme run for two or three years or until current courses finish; we will not let that be open ended. Although, as Victor said, there are issues in respect of running two schemes at once, on balance, we must ensure that we do not cause hardship for people who rely on that level of support. The scheme would have to run for a while, and we would wish to run it for two to three years.

Ms Purvis:

I want to highlight a particular concern. Sometimes when another Department becomes involved in an issue, it gets lost in the ether. The scheme was designed solely to alleviate the costs of student accommodation and thereby incentivise people to go on to further and higher education. We are now moving away from that purpose completely. The discussions that have taken place are about providing a subsidy or relief for students in need. In a sense, we are separating that matter from the issues of rates, costs for accommodation and incentives, and moving responsibility for it to another Department that already has a scheme for student support. I am concerned that it could get lost in the move.

Mr McClure:

I take your point entirely. We must ensure that the fundamentally worthy aims of the scheme are not lost. It appears from the report that the scheme does not work, so we must ensure that any substitute scheme establishes proper aims and targets for any alternative measures that are put in place. That is what we hope to do, and we intend to hold a meeting with officials from the Department for Employment and Learning this month.

The Chairperson:

We might come back to you for an update on that issue.

Mr McClure:

That begs a question about liaison with the Committee for Employment and Learning, and so on. We will take your advice on that.

The Chairperson:

We should reflect on that matter as well, because we could end up getting tied up in bureaucracy in our attempts to avoid infringing on other people’s responsibilities.

Mr F McCann:

We simply want to find out how we monitor the situation to ensure that lessons are learned from all the mistakes of the past so that any new scheme will encounter as few difficulties and problems as possible.

The Chairperson:

I know that Brian is always happy to come back to talk to the Committee. However, we should write to the Committee for Employment and Learning to flag up our concerns so as to ensure that the scrutiny Committees have the fullest understanding of how to engage on the issue.

Mr McClure:

It must not be lost between two stools.

The Chairperson:

That is absolutely correct. Brian, I understand that you planned to update the Committee on the cost of rating second homes.

Mr McClure:

I can provide a verbal update on the situation in respect of second homes. The Minister has a report, which we will send to the Committee in due course.

The Executive reviewed the matter and decided not to proceed with any proposed levy on second homes. Northern Ireland’s rating system is occupation based. Therefore, it would be easy to evade the levy by registering a second home in someone else’s name. Even if it could be effectively administered, it is unclear whether a levy would affect behaviours. People presumably have a problem with second homes because they create an imbalance in communities, particularly on the north cost. However, evidence that emerged from a University of Ulster study suggests that that may not be the case.

The Committee asked for an assessment of the likely costs and benefits of the Executive’s response. I will update the Committee in that regard, even though the Executive decided not to proceed with the introduction of a levy. Our assessment has taken a long time because it is heavily reliant on work commissioned by the Housing Executive and undertaken by the University of Ulster. We simply do not know how many second homes there are in Northern Ireland, although the latest University of Ulster report suggests that there 20,000. We have calculated figures on that basis.

We forecast that the initial set-up costs of introducing a levy would be around £200,000, and that the ongoing administration and policing costs would be nearly £100,000 a year. The associated revenue depends on how effectively the levy could be policed and how many second homes there are. However, we project that revenue could be anywhere between £3 million and £7·5 million.

That is a brief outline, but we will provide the full written report to the Committee in due course. The Minister currently has that report because Jeffrey Donaldson corresponded that one of his constituents — after hearing about the introduction of levies on second homes in Donegal — was concerned that levies would be introduced here.

Mr Paisley Jnr:

Gerry Adams? [Laughter.]

The Chairperson:

Ian said that he did not know that Gerry Adams was a constituent of Lagan Valley. [Laughter.]

Mr McClure:

I am happy to answer any questions, but we will fulfil our commitment and provide the full written report to the Committee.

The Chairperson:

That would be helpful.

Mr Paisley Jnr:

You should kick it into touch. [Laughter.]

The Chairperson:

David McNarry could not stay for this session, but he indicated that he wanted discuss the carers’ allowance at the Committee meeting on 3 December.

Mr McClure:

Do we need to prepare anything for that meeting or does the Committee just want to ask questions?

The Chairperson:

This meeting is being recorded by Hansard, so I am not going to answer that question. I would not want to answer for David McNarry, although I suggest that you prepare for that meeting. [Laughter.]

Mr McClure:

We will brace ourselves.

The Chairperson:

I thank Gary, Brian and Victor for attending this meeting; it was a very helpful session.