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Provisional Local Government Finance Settlement for 2006/07 and 2007/08 Response by the Local Government Association Key points:

The LGA welcomes the fact that a settlement for two years has been announced. Multi year grant settlements should give authorities ability to plan ahead.

The LGA acknowledges the additional resources put into formula grant in the pre-budget report. However, despite this being better than was anticipated at one stage, it still leaves authorities facing tough choices.

It is important that the commitment from Government to establish a formal mechanism for managing and fully funding new burdens is carried through and that the agreement to work together results in a real reduction in key spending pressures.

The spending pressures identified by the LGA as part of the joint exercise on pressures in the period leading up to the settlement have not gone away.

In addition, a large number of authorities (for example 70 of the 150 authorities responsible for education and social services) are on the grant floor.

The LGA is disappointed that, with the introduction of Dedicated Schools Grant, the total amount of grant that is ring-fenced has risen to over 50%.

The contrast between the 6.4% increase in Dedicated Schools Grant and the 2.7% increase in formula grant for authorities with education and social services responsibilities is stark.

This will lead to tensions in implementing the integrated children’s services agenda at local level.

The LGA calls on the Government to keep schools funding under review and to retain the option of returning schools funding to the general grant system as part of the changes to local government finance following on from the Lyons Inquiry.

The LGA is opposed to any use of the Government’s capping powers. Council tax increases should be a matter for local decision and local people should hold members accountable through the ballot box.

However if the government insists on exercising its capping powers there should be transparency and a clear explanation of the criteria to be used;

The LGA notes the government’s decision to move to a new formula grant system, despite the near-unanimous opinion in local government that it is less transparent.

It notes that there is more judgement in the new system. In our response to the consultation on formula grant distribution we called for:

A system which was capable of reflecting the diverse needs of local authorities yet be transparent and easier to understand and explain; One where grant calculations where based on objective data, based on the most up to date and robust data with data which is publicly available and grant calculations capable of being replicated;

We consider that the government needs to do more to explain the new system to key stakeholders than it has yet done.

For example, there have been delays in the publication of key data and an analysis of change due to different causes has still not been provided.

The LGA supports the principle that all authorities should have a minimum grant increase through the use of the grant floors element.

It notes that although there are no longer grant ceilings, increases for all authorities above the floor are scaled back to pay for the floor.

This has meant a scaling back factor of 87% for Education and PSS authorities and 97% for police authorities. The LGA asks Government to consider funding the floor in full, moving to this position over a period of years.

The LGA expresses concerns that authorities with Building Schools for the Future programmes do not get full grant support for their capital financing costs.

We call on the government to look at the funding of BSF, and other supported capital, within RSG as a matter of urgency.

The LGA is aware that a number of authorities have expressed concern over unfunded pressures arising from the implementation of free concessionary fares from April 2006.

We call on the government to look again at the adequacy of the mechanism for meeting these pressures and to review the position when actual costs are known.

The LGA welcomes the fact that 90% of specific grant allocations have now been announced. It calls upon the remainder to be announced as soon as possible.

It calls on the government to look again at the decision not to incorporate the Safeguarding Children grant, paid as a specific grant in 2004/05 and 2005/06 into the baseline for formula grant.

The overall settlement

The LGA welcomes the fact that for the first time a local government finance settlement for more than one year has been announced. The two year settlement for 2006/07 and 2007/08 should give local authorities more ability to plan ahead.

At the same time, we consider that the government should maintain a flexible attitude towards the incorporation of new population projections due to be published during 2006.

The LGA acknowledges the additional formula grant of £305m in 2006/07 and £508m in
2007/08, bringing the total increase in formula grant to 3.1% for 2006/07 and 3.8% for 2007/08. This increase is better than the expected below inflationary increase of 1.5% for 2006/07.

The LGA had claimed that the 1.5% increase left a funding gap of £2.8bn. This was based on a survey of council finance directors covering almost 70 percent of local government spending which identified pressures of:

£663m for elderly and adult services
£599m for children’s services
£632m for waste management and street cleansing
£669m for anti-social behaviour, housing and pensions
£292m for transport

The LGA welcomes the £1.1bn package of measures to reduce spending pressures, which also includes:

funding the net cost of new burdens and strengthening the mechanisms to enforce the new burdens procedure;

cost pressures arising from the temporary reinstatement of the 85 year rule in the local
Government pension scheme will not fall on taxpayers;

An agreement to work together to explore ways of managing pressures on pay, waste and adult social care. Progress on the mechanism to promote these work streams needs to be made;

Re-affirmed commitment that costs from new licensing act will be fully met by fees within the national fee regime. The DCMS and the LGA will work with the independent fees review panel to agree the process for verifying costs.

It is important that this commitment from Government results in action to establish a formal mechanism for managing and fully funding new burdens and that the agreement to work together results in a real reduction in key spending pressures.

This is also one of the matters Sir Michael Lyons has been asked to address as part of his expanded terms of reference. Despite the package for 06/07 and 07/08 being better than expected, it still leaves many councils having to face tough choices.

In an effort to bridge the gap local authorities will seek efficiency savings, apply where appropriate reserves and balances, bear down on costs, but for many the choice will be between council tax increases and cutting services.

The LGA acknowledges that this year’s settlement means that since 1997, total grant to local authorities has increased by 39% in real terms but suggests that a real terms measure which uses GDP deflator when cost pressures facing local authorities are significantly higher than this is largely meaningless.

For example, social care contracts are significantly outstripping inflation, with residential care for older people an average annual increase of 6.6% from 2000/01 to 2003/04.

The LGA is disappointed that no progress has been made on an index of local government pay and prices but hopes that the ongoing work, for example that on pay, will lead to more of a shared understanding that it is not appropriate to use a single public sector deflator to measure inflation in local government services.

Capping

In the light of the above pressures, the LGA is against any exercise of the Government’s capping powers in 2006/07.

The LGA seriously questions capping action where, as witnessed in 2004/05 and 2005/06, the estimated cost of rebilling can exceed the saving in council tax.

Furthermore, the existing capping regime is incompatible with achieving greater certainty through three year budgets.

The legislation does not give scope to give assurances on capping criteria over the period. The planning benefits of three year settlements will be undermined if the threat of capping exists.

We called for a discussion on reconciling these conflicting objectives in our response to the 2005/06 settlement.

The LGA notes that in the previous capping regime a de -minimise budget level was applied and suggests that a return to this could be considered.

Authorities will clearly have heard the messages coming from ministers and ODPM officials that average council tax increases in England in 2006/07 should be less than 5%.

However it is ultimately for every authority, which is responsible to its own electorate, to determine its own council tax rise.

Indeed, the ODPM’s summary paper on the Formula Grant Distribution System says that “Government thinks that councils are best placed to deliver services by managing their resources and budgets for themselves”.

The LGA notes that the alternative notional amounts issued by ODPM do not include adjustments for the transfer of Social Services grants into formula grant or for the increase in an authority’s expenditure for the cost of concessionary fares.

Lyons Inquiry

The additional resources for 2006/07 and 2007/08 are a short-term solution. It is essential that we look beyond one-off Government top-ups as a solution to keep council tax low.

The LGA looks to the Lyons Inquiry to recommend real solutions and the Government to act on the strong body of evidence supporting the case for change.

As a longer term solution, the LGA’s combination option provides detailed proposals for reforming local government revenue that reverses the balance of funding thereby reducing the pressure on council tax, and implements a local government finance system that better serves local democracy and accountability.

Reforms to council tax benefit are necessary to reduce the council tax burden, and have the advantage of being able to be implemented in the short term.

Ring Fencing and education funding

The LGA welcomed the Government’s commitment made in the 2001 White Paper ‘Strong Local Leadership; Quality Public Services’ to take the total amount of grant that was ring-fenced below 10% of total grant. We note that this was achieved in 2005/06.

From 2006/07 the situation changes radically with the transfer of schools’ funding to the ring fenced Dedicated Schools Grant. This will lead to pressures within authorities.

This is particular the case when, as is the case for 2006/07, the contrast between the 6.4% increase in Dedicated Schools Grant and the 2.7% increase in formula grant for authorities with education and social services responsibilities is stark.

This will lead to tensions in implementing the integrated children’s services agenda at local level.

Authorities are already reporting particular pressures in children’s services.

As the 2001 White Paper said, ring fenced grants can erode authorities’ discretion to vary their spending to suit local circumstances, can have a high transaction cost and can get in the way of local partnership working.

The LGA calls on the Government to keep schools funding under review and to retain the option of returning schools funding to the general grant system.

This should be considered as part of the changes to local government finance following on from the Lyons Inquiry.

The new formula grant system

The LGA notes the government’s decision to move to a new formula grant system, despite the near-unanimous opinion in local government in response to the consultation on formula grant distribution that this was less transparent than the previous system based on formula spending shares.

The government claim that the new formula grant system gets away from assumed spending and council tax levels. In fact, it is presentational.

The new formula grant system still implies a judgement about the amount of relative needs between authorities and the amount which will be funded through council tax.

In the previous grant system it was possible to see in spending reviews the total spending which the government were prepared to support through grant and the amount of total external support it would give to it.

The LGA notes that there is more judgement in the system and the reasons for the judgements are not always apparent.

For example, it is not clear why the children and adult social services relative needs formulae have been damped, but no other relative needs formulae.

We consider that the government needs to do more to explain the new system to key stakeholders than it has yet done.

For example, there have been delays in the publication of key data and an analysis of change due to different causes, which is important in allowing authorities to understand the underlying reasons for grant changes, had still not appeared at the start of January 2006.

One positive feature of the new grant system is that it is no longer possible to compare spending on services against the formula spending shares for these services. This message has not reached all government departments.

For example, on 4th January DCA wrote to all authorities asking them how much their ‘EPCS formula spending share’ had increased in
2006/07

The LGA considers that the most up-to date data should be used in formulae as long as it is robust. We note that data has been frozen or projections used in the 2006/07 settlement.

There is a particular issue with the use of 2003-based population projections for 2006 and 2007.

These do not incorporate the most recent 2004 mid-year estimates. The LGA calls on the government to maintain a flexible attitude towards incorporating data from new population projections which are expected to be published in mid 2006.

Floors damping and scaling

The LGA supports the principle that all authorities should have a minimum grant increase through the use of the grant floors element. It notes that although there are no longer grant ceilings, increases for all authorities above the floor are scaled back to pay for the floor.

 This has meant that authorities which gained from formula grant changes do not see this reflected in their grant entitlements. There is a scaling back factor of 87% for Education and PSS authorities and 97% for police authorities in 2006/07.

The LGA asks Government to consider funding the floor in full, moving to this position over a period of years.

Capital and Building Schools for the Future

There is a particular issue for authorities with Building Schools for the Future programmes in that due to the floors or scaling mechanism they do not get full grant support for their capital financing costs.

We call on the government to look at the funding of BSF within RSG as a matter of urgency.

Some capital financing has been switched to capital grants as part of the implementation of multi-year settlements and we consider the government should look carefully at the case for adding BSF funding through supported borrowing to this list.

It should also review the position for other supported borrowing.

There is also a related technical issue relating to ensuring that authorities with BSF programmes are not unfairly disadvantaged by the adjustments made to the capital financing relative needs formulae to reflect the switching of funding from supported capital borrowing to capital grants.

Concessionary Fares

The LGA is aware that a number of authorities have expressed concern over unfunded pressures arising from the implementation of free local off peak bus travel for the over 60 and disabled for the whole of England from April 2006.

We call on the government to look again at the adequacy of the mechanism for meeting these pressures.

Specific grants

The LGA welcomes the fact that 90% of specific grant allocations have now been announced.

It calls upon the remainder to be announced as soon as possible. There is a particular issue with the ending of grants without their being incorporated into the formula grant baseline.

This is the case for the Safeguarding Children, paid as a specific formula grant in 2004/05 and 2005/06.

The ending of this grant was one of the pressures the government took into account in determining the increase in the Children’s formula spending share in 2005/06 (reflected in the new formula in the Relative Needs formulae).

However it has not been incorporated into the formula grant baseline.

We call on the government to look again at this decision. Some member authorities have expressed concern that authorities in growth areas lose grant due to growth in their council tax base caused by new properties.

This issue was considered by the Barker Review in 2003, which considered a scheme for council tax along the lines of the Local Authority Business Growth Incentive scheme for business rates.

The Government have now announced their response to the Barker Review’s conclusions and are consulting on a new planning gains supplement. We hope that this will go in full to local government

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