Local Government Finance Settlement Briefing

Transcription

1 Local Government Finance Settlement Briefing Dr David Chapman Headlines o Local authorities generate their own funding locally through Council Tax and charging for services, and receive needs-based grants from Central Government. o The distribution of income across different sources is unique for each local authority, and highly variable. o This year the Department of Communities and Local Government (CLG) has substantially reformed the grant funding system abolishing many grants, rolling others into Formula Grant, transferring money from the NHS budget, and reforming the system whereby Formula Grant is allocated. o The net effect of this is that no local authority has received a cut in spending power of greater than 8.9 per cent in the latest Local Government Finance Settlement, though CLG s method of determining spending power is controversial. o In general more deprived local authorities have received larger percentage cuts to their spending power : this is in part a function of the greater proportion of their income they receive from Central Government. o Overall the Finance Settlement is more progressive than had been predicted by a number of experts in the field, but significantly less progressive than it could be. How is Local Government Financed? Local authority income can be broadly split into self-generated (i.e. raised by the council) income and grants from Central Government. Self-generated income comprises Council Tax revenues, fees and charges (for services ranging from planning applications to leisure centre use and car parking), and income from any investments the council might have.

2 The largest grant local authorities receive is the Formula Grant, which is assigned on the basis of need, and is largely funded from national business rate receipts. The Labour Government also introduced many ring-fenced grants for specific purposes, the largest being the Dedicated Schools Grant for providing school-level education. As part of their Local Government funding reforms the Coalition Government has cancelled many of these grants, and rolled most of the rest into Formula Grant. This year the three main grants to councils are: Formula Grant; Schools Grant; and a public health/adult social services grant funding by the Department of Health. Do all local authorities depend on the same sources of funding? Typically urban authorities derive a greater proportion of their funding from central grants. This is because they have greater social and economic needs, and therefore receive larger sums of deprivation-targeted grants. County and district councils receive small amounts of grant, as they tend to have fewer deprived areas, or fewer statutory services to provide. However every council has a unique income profile. Some district councils rely on grants as much as major urban authorities. In the district council with the greatest reliance on Formula Grant (Breckland) received 54 per cent of its funding from this source, compared to Newham (the most FG-reliant unitary authority), which received 52 per cent of its funding from Formula Grant. 1 Councils dependence on other funding sources is also very variable. Some councils have large reserves that generate significant income streams: Basingstoke and Deane District Council received almost 30 per cent of its income from interest. Others rely heavily on charging for services: in Adur District Council received two-thirds of its income from sales and charges. How much has local authorities funding been cut? The Autumn 2010 Spending Review set out plans for a 26.8 per cent cumulative real cut in Formula Grant by But, the Local Government Finance Settlement for and states: no council faces a reduction of more than 8.9 per cent in spending power in or What causes this difference? There are several reasons why the decreases in local authority funding reported in the Finance Settlement are lower than previous forecasts 2 and than those proposed in the Spending Review. Firstly, changes to councils funding are reported in the Finance Settlement not in terms of grant reduction, but in terms of what is referred to as spending power. CLG define a local authority s spending power as the sum of its council tax receipts, and its allocations for Formula Grant, other central grants and the new adult social service/public health grant. While CLG may be applauded for analysing local authority funding at the level of total useable income, rather than that of individual revenue streams, in reality its definition of spending power is quite a long way from 1 Data drawn from CLG RG 2008/09 final release data by LA (inc Regional Class totals), and CLG Revenue Outturn Summary (RS): 2008/09. Provided by CLG. 2 Hope, N., Kirkland, J. and Chapman, D. (2010) Scanning Financial Horizons: Modelling the local consequences of fiscal consolidation, New Local Government Network

3 describing the complete picture of the funds available to a given council. Why is this so? Secondly, when comparing the level of both Formula Grant and other grants a council receives between years the CLG analysis use a like-for-like method. This means that only grants that exist in both years are counted, and any that exist in just one year are ignored. Any grant councils received in that has been entirely abolished in will not be counted, with the result that the council s spending power seems higher than it actually is. The justification for doing this is that only grants targeted against issues that are no longer relevant have been cancelled, so that their cancellation does not affect a council s spending power. Whether or not Central Government can accurately describe the on-the-ground state of individual social problems is, of course, questionable. Spending power as described by CLG also does not include income from either fees and charges, or investments, which can be a significant portion of a local authority s income. The level of income generated by both has been greatly reduced by the recession, as the stock market collapse shrunk investment returns and demand for services such as planning applications and parking fell. Therefore, excluding these major sources of income from spending power ignores what is potentially a large hole in councils budgets. While many grants and revenue sources have been excluded from the spending power analysis, 1.27bn from the Department of Health has been included. This money was previously part of NHS funding and will now be provided to local authorities to tackle public health and adult social service needs. This significantly raises councils perceived spending power. However, it is also money that was previously spent providing these services through the NHS. While some efficiencies may be achieved by allowing councils to integrate the previously DoH-funded services it can provide with services funded from other sources, it is highly unlikely this grant will be able to make up for the cuts to other grants being proposed. Furthermore, the way in which Formula Grant is allocated to councils has been reformed this year, with effects on individual councils spending power, and a 99m (split over two years - 85m in and 14m in ) Transition Grant has been used to smooth changes in spending power. Changes in spending power between and later years have also not been reported in real terms. Once inflation is accounted for, all councils will experience a greater percentage funding cut than reported. Reform of Formula Grant Allocation This year the method by which individual councils Formula Grant entitlements are allocated has been changed. Historically all councils were treated equally in Formula Grant allocation, regardless of the level of services they provide and their individual circumstances. This year CLG has made some attempt to segment local authorities into groups of similar authorities with similar service provision and funding needs. Previously each local authority had its Formula Grant entitlement calculated using a formula that estimated its relative needs by indices of multiple deprivation, subtracted by its ability to raise funds from council tax (its relative resources ). A per capita central allocation was then added to ensure all councils got some money, alongside a floor damping to ensure no council s year-on-year grant variation was too great.

4 The new system operates along the same basic lines, but with some nuances. Before the formula is applied all local authorities are split into four groups based on the services they provide: 1. Authorities providing education and personal social services (county councils and unitary authorities) 2. Police Authorities 3. Fire Authorities 4. Authorities not providing education and personal social services (district councils) Each of these groups is then split into four bands based on reliance upon Formula Grant. The distribution formula is then applied, but with a different floor damping level for each band. The floor damping mechanism operates by redistributing Formula Grant from councils whose grant change has been calculated to be above the floor to councils whose grant change has been calculated to be below it. This ensures that no council receives a change in grant above a certain threshold. This threshold is lower for more Formula Grant-reliant bands, so that these more dependent councils receive a smaller decrease. Transition Grant Once an authority s new Formula Grant allocation has been calculated its spending power is calculated as discussed. At this stage a second floor damping mechanism is applied by CLG to ensure that no authority receives a spending power decrease greater than 8.9 per cent. Any council whose calculated spending power change is greater than this will receive a Transition Grant in and Is the Local Government Finance Settlement progressive or regressive? Local Government Secretary Eric Pickles has touted the Financial Settlement as progressive and a fair deal for local taxpayers 3, while the LGA and many other commentators have decried it as an assault on Local Government, with cuts targeted at the most vulnerable areas. 4 In reality the Settlement is neither as regressive nor as progressive as it could be. Both the treatment of local authorities funding at the level of spending power and the reformed allocation mechanism for Formula Grant are more progressive than occurred previously, but both could be more progressive still. It is logical to take a holistic view of a council s revenue streams when discussing how much they have been affected by grant changes. However, as has been discussed, the Government s spending power analysis is incomplete, and does not give a full picture of the extent to which local authorities spending power has changed. Similarly, it is progressive to take into account the type of services an authority has to provide, and how reliant it is upon Central Government grant, when determining changes to its Formula Grant. However, there is no reason why authorities should be split into only four groups, and these groups into four bands of grant-reliance. Nor is there an a priori reason why the difference in the floor damping thresholds for the most and least grant-reliant authorities is only three percentage points, as is the case under this year s system. Presumably the number of groups/bands and the spread of 3 CLG press release (13 Dec 2010). Available at: corporate/ LGA Briefing (6 Dec 2010). Available at:

5 thresholds have been determined for financial and logistical reasons, and this has lead to a system of Formula Grant allocation that is not as progressive as possible. The Transition Grant, while it aids a small number of local authorities with very large percentage cuts to their spending power, it does very little for other, more deprived authorities. The most deprived authorities, such as Manchester and Tower Hamlets will receive Transition Grants that make a much smaller difference to their grant allocation than other (less deprived) authorities such as Hammersmith and Fulham. The Government claims the purpose of the Transition Grant is to slow the effects of grant cuts for more deprived areas. However, this analysis suggests that it has been designed more to prevent damaging headlines about double-digit grant cuts, than to direct funds towards the most deprived parts of the country. The Finance Settlement must be understood in the context of other changes in the Local Government field. The Localism Bill, which is currently before Parliament, will grant local authorities and their residents a raft of new powers, including a general competency and the right of residents to veto Council Tax increases. The extent to which these changes will be progressive or regressive will be specific to different councils. Local authorities with good leadership and high levels of human and social capital amongst their residents (as well as good economic capital) may be able to use the powers contained in the Bill to take a progressive and strategic approach to service provision, despite the depth of cuts to central funding. Conversely poorly led authorities, or those with large numbers of deprived or vulnerable residents are unlikely to be able to take advantage of the Bill. The net result could be a widening of the achievement gap between successful and unsuccessful areas, and as such be generally regressive. Another potential change in the funding structure of Local Government, and one which would be very regressive, is de-nationalization of business rates (consultation currently underway). Historically business rates are collected at the local level, passed to the Treasury, and then redistributed according to need via the Formula Grant. Were this to cease or significantly reduce (so that individual authorities kept their business rate receipts) a startling gap could open between areas with high levels of commercial activity (such as Birmingham and Westminster) and areas with little or none (non-se rural district councils for example). Such business-poor areas could then face a substantial funding gap, to the detriment of their residents. There is currently a tension for Local Government between the drive towards implementing the localist agenda, and the necessity of maintaining a progressive system of national public service provision. Any state has a responsibility to provide for its most vulnerable citizens, and this will always involve some level of redistribution of wealth from the more affluent to the more deprived. The question facing local authorities in the coming years is, how do you marry increased local control with the need for redistribution, which must be (at least to some degree) centrally co-ordinated? There is a strong argument for devolving power to local councils and residents. However, there needs to be a careful consideration of the way in which financial autonomy is granted. The Localism Bill, as well as many of the Coalition s other public service reforms (the free school and academies movements, and proposed NHS reforms), should devolve power to local communities much more than occurred under the Labour Government. But there is a balance to be struck between the ability of local authorities to control their own tax revenues and how to spend those

6 revenues. For example, while local authorities need to feel financially incentivised for encouraging local business innovation, full denationalisation of business rates would generate gross wealth inequalities between business-rich and business-poor areas. In the US urban financial autonomy has created vicious cycles of decline in many post-industrial cities, and this can be difficult to address. Britain must tread carefully in the coming years if we are to avoid making the same mistakes.