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Area Cost Adjustment (Worcestershire)

Volume 407: debated on Tuesday 24 June 2003

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11 am

I begin by welcoming the Minister to his new role, and I make it clear from the outset that he is absolved of any responsibility for past decisions to which I may refer, and that any criticisms that I make of the Department for which he now speaks do not reflect on him.

I intend to make the case that the lack of any area cost adjustment top-up has a direct and adverse impact on public services in Worcestershire, and that if action is not taken to rectify the situation, the problem will get worse. I will refer mostly to the impact on education, but similar arguments also apply to other services provided by the county council.

I welcome the massive increase in revenue spending since 1997, especially in schools. The past few weeks have been difficult, as school funding became an issue, but it cannot be disputed that there has been a vast increase in education spending since 1997. I also want to place on record my belief that the new formula spending share, which, from April, replaced the old standard spending assessment, is an improvement, because children in Worcestershire are now treated in the same way as children from other parts of England, except with regard to the area adjustment. The basic pupil entitlement is the same wherever a child lives: the deprivation top-up applies to Worcestershire in the same way that it does elsewhere, and the sparsity factor is applied to sparsely populated areas in Worcestershire at the same rate as it is to other rural counties.

However, my welcome of the new system stops there. The area cost adjustment is added to the formula spending share in some areas but not in others. Worcestershire does not receive the area cost adjustment, but our neighbouring councils—Dudley, Birmingham, Warwick and Gloucester—do receive it. For all services in Worcestershire, the lack of the area cost adjustment top-up means the loss of some £10 million.

The area cost adjustment is primarily an adjustment to compensate local authorities that face high labour costs. The new earnings survey of average wage levels is used to calculate those higher costs. The logic applied by the Office of the Deputy Prime Minister suggests that high labour costs in a council area mean that local authorities have to pay more to attract and retain staff because the competition for labour results in high salaries.

However, when I have asked parliamentary questions of the Department of Health, the Department for Culture, Media and Sport and the Office of the Deputy Prime Minister, I have been told that they have no evidence of variations in salary levels among key public sector staff such as social workers, librarians or accountants. Without such evidence, why should those wage supplements be put in place?

Moreover, the new earnings survey is based on wages earned where people work, not where they live, and that leads to a gross inconsistency. The deprivation factor and the sparsity factor are based on where people live, but the area cost adjustment is based on where people work. The flaw in the approach of the Office of the Deputy Prime Minister means that an area that pays workers well, but to which those workers commute, can attract an area cost adjustment top-up for that local authority at the same time as that authority may attract a significant top-up for deprivation because it is relatively poor. The logic that is used does not stand up to scrutiny.

Large urban centres such as Birmingham will always attract higher salaried workers, as does the square mile in London. However, further out from the centre, in the suburbs, the wages earned will be lower, and that also tends to be where the workers live. That scenario applies to the west midlands: Birmingham and Coventry are the centre, whereas people typically live in places such as Worcestershire, but do not earn their living there. The daily traffic flows along the M5 and M42 are testimony to that. In my opinion travel-to-work areas are—[Interruption.]

Travel-to-work areas are more appropriate for calculating the area cost adjustment, but the Office of the Deputy Prime Minister ignores them. Travel time from Worcester city—[Interruption.]

Order. The fire alarm will clearly persist, so I shall suspend the sitting. I assure the hon. Gentleman that I will allow him some injury time.

11.5 am

Sitting suspended.

11.6 am

On resuming

Order. I am reliably informed that the fire alarm has been disconnected, so we can smoulder in silence. We will have one minute of injury time.

Thank you, Mr. Deputy Speaker. I am always surprised at the lengths to which some people will go to stop Worcestershire getting a decent hearing in this place, but that takes the biscuit.

Travel time from Worcester city in the south of the county to Birmingham is about 40 minutes, which is not excessively long by London standards. However, from towns in the north of the county, such as Bromsgrove, it is a mere 20 minutes' commuting time to the heart of Birmingham. That explains why so many people choose to live in Worcestershire but enjoy the higher salaries earned in Birmingham. Places such as Worcestershire have to pay higher salaries to attract key staff because of the easy commute to the conurbation, where people's earnings can be so much higher. Ironically, on the grounds that the ODPM uses to justify its payment to Birmingham, Worcestershire should receive the area cost adjustment.

The area cost adjustment based on the new earnings survey is flawed, and it will get worse. Yesterday, I received a document from Advantage West Midlands, the local regional development agency, which contains some useful statistical information. For example, it gives average weekly wages for areas in the region, based on the labour force survey, not the new earnings survey. The difference between the two surveys is that the new earnings survey calculates wages where they are earned, but the labour force survey calculates wage levels for workers based on where they live. My argument is that the labour force survey fits best with the top-ups that I mentioned earlier, and it would be far more logical to use that.

The labour force survey tells us that average wages are higher in Worcestershire than in all districts of the west midlands conurbation. For the west midlands region as a whole the average wage is £319.03; for Birmingham it is £294.38; for Sandwell £265.47; for Dudley £324.08; for Walsall £283.81; for Wolverhampton £299.95; for Coventry £325.87, and for Worcestershire £341.96. If the labour force survey was used, the area cost adjustment would be paid to Worcestershire and not to the authorities that receive it under the current system.

What other evidence is there to back up that argument? Average house prices are far higher in Worcestershire than they are in the conurbation and only high earners can afford them.

I said that I would not intervene on the hon. Gentleman but I want to reinforce his point by referring to teachers' salaries. The average teacher's salary is £26,940 in Dudley and £26,710 in Gloucestershire, both areas that receive the area cost adjustment, but in Worcestershire it is £27,010. Teachers', salaries bear out what the hon. Gentleman said—that Worcestershire should receive the area cost adjustment.

I am most grateful for the hon. Gentleman's intervention. He and I do not always see eye to eye, but on this occasion we are united with other hon. Members in supporting Worcestershire's case. Although teachers' salaries on their own are not the silver bullet, they add to the weight of evidence for Worcestershire to receive the area cost adjustment.

More expensive house prices would be paid by higher earners. That makes sense. If we compare house prices in Worcestershire with those for the west midlands as a whole, we find that for the west midlands region the average price is £105,645, for Birmingham it is £98,070, for Dudley £89,901, for Sandwell £69,736, for Walsall £87,474, for Wolverhampton £75,691, for Coventry £85,297 and for Worcestershire £130,542. If we add to that the impact of the resource equalisation that took place this year, which reflects the council tax base, which in turn reflects house prices, we find that grant was allocated away from Worcestershire because it was deemed to be a wealthier area. The new earnings survey disadvantages Worcestershire, and the labour force survey better reflects the reality and experience of what is happening in the west midlands.

As a side issue, the Office of the Deputy Prime Minister views Hereford and Worcester as the basis of the new earnings survey, despite the recent divorce that split the two counties again. Worcestershire has a natural tendency to look north to the west midlands conurbation rather than west to Herefordshire; Herefordshire is a lower-wage economy than Worcestershire. Combining them merely lowers the average wage level, making it more difficult for Worcestershire to qualify for the area cost adjustment top-up. I ask the Minister to give me an assurance that in future Worcestershire will be treated separately from Herefordshire for the purposes of calculating area cost adjustment.

Apart from the flaws already highlighted in its calculation, area cost adjustment based on the new earnings survey is applied unfairly even in the west midlands conurbation. I accept that wage levels calculated by the new earnings survey are higher for workers in Birmingham, compared with those in Worcestershire; the same is true for Warwickshire and Gloucestershire. However, according to the new earnings survey, Dudley and Walsall have lower average wage levels than Worcestershire, yet they receive the same area cost adjustment top-up as Birmingham. They earn less, but they are treated as though they earn more. The wage levels in Sandwell are close to those in Worcestershire; yet Sandwell gets the area cost adjustment top-up and Worcestershire does not.

If the Minister were to take just two elements of the FSS formula for primary and secondary schools only, it would add up to some £7 million paid to local authorities, which, strictly speaking, do not earn it, even using the flawed logic of the ODPM's rules. In a former life I was employed to look at cost reduction programmes and I have a quick point for the Minister. He could stop paying £7 million to the authorities that do not strictly earn it: we will have £3.5 million in Worcestershire and his Department can keep the remainder to spend on other areas.

I know that many people view Worcestershire as a leafy and prosperous county, and the labour force survey suggests that it is, but the Minister may not be aware of some other disturbing facts. According to the index of deprivation produced by Oxford university and made available on the website of what was the Department of the Environment, Transport and the Regions, in Worcester city five of the 12 electoral wards are in the bottom 25 per cent. of educational achievers. Rather like a 20 per cent. cut in spending proposed by some politicians, being deprived of the area cost adjustment, in contrast to our neighbours, will not help.

I looked for evidence that Birmingham, Gloucestershire, Warwickshire and Dudley found it difficult to recruit teachers, compared with Worcestershire. If that were the case, it would be manifested in higher pupil-teacher ratios. I have obtained the latest figures from January 2003, supplied by the Department for Education and Skills. The average secondary school pupil-teacher ratio for England is 17:1. The average ratio in the west midlands is 17:1, but Worcestershire has the ninth highest ratio in England at 18.1:1 compared with Birmingham at 16:1, Dudley at 16.9:1, Warwickshire at 17.1:1 and Gloucestershire at 16.8:1. The evidence shows the opposite of what the ODPM believes is happening. If recruitment is difficult, the figures suggest that it is harder in Worcestershire than anywhere else in the west midlands. Can the Minister explain why those named authorities have been given 2 per cent. more funding?

Local head teachers have raised their concerns about a brain drain of teaching staff from Worcestershire to the west midlands conurbation, which was a finding of their recent survey. With that in mind, will the Minister ask his colleagues in the DES to undertake specific research into the movements of teaching staff between local council areas in the west midlands to see precisely how the area cost adjustment is impacting upon recruitment and retention?

Being surrounded on three sides by local authorities that receive area cost adjustment means that staff will be encouraged to migrate away from Worcestershire, attracted by the higher pay levels that can be afforded elsewhere because of the area cost adjustment. In turn, that will widen the average earnings gap measured by the new earnings survey, which measures where people work and not where they live. A vicious cycle will commence in which Worcestershire will lose out. Teachers will be recruited into neighbouring Birmingham, for example, which means that, all other things being equal, the average wage of people working in Birmingham will rise. The gap will widen and when the area cost adjustment is calculated average wage levels will have gone up in Birmingham, which will therefore get a greater area cost adjustment, and so on.

I cannot accept that that is what the ODPM has in mind and I urge the Minister to consider these three options: first, changing from using the new earnings survey to the labour force survey; secondly, some form of taper for those areas that border recipients of the area cost adjustment, which would give Worcestershire some relief—in principle, by acknowledging the existence of fringe and non-fringe parts of south-east England, the ODPM has already partially accepted the logic of that approach—thirdly, using the west midlands region as the basis for calculating area cost adjustment, which would better reflect the realities of travel-to-work patterns. In the short term, that would give the county much-needed respite ahead of what I hope will be a more fundamental review of how the area cost adjustment is calculated.

The area cost adjustment calculation is fundamentally flawed and should be reviewed urgently ahead of next year's settlement. As applied now, it produces perverse results and will in future years make the funding gap worse. Worcestershire is surrounded on three sides by areas receiving area cost adjustment and is therefore disadvantaged more than most. Despite welcome increases in resources, the system used by the ODPM has created a vicious cycle, which, if it is left unchecked, will act against my constituents. I know that the Department wants a period of stability, but it must surely be concerned about the adverse impacts that I have described today.

I do not expect the Minister to make a decision today, but I hope that he will go away and examine what can be done for Worcestershire in the light of one year's experience of the new funding system. I would then like to bring a delegation from the county to meet him, perhaps in September, to examine what progress has been made.

11.19 am

The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister
(Phil Hope)

I congratulate my hon. Friend the Member for Worcester (Mr. Foster) on securing the debate, which has given us the opportunity to discuss the area cost adjustment. I also want him to know that I was not guilty of starting the fire alarm. I am grateful that my first Westminster Hall debate will be a detailed analysis of the complexities of local government finance.

The Government have high aspirations for local government. We continue to match those aspirations with proper investment, as demonstrated by the generous local government settlement that we announced in February. We have also introduced a new funding formula for local government following an extensive review that involved local and central Government.

However, as my hon. Friend illustrated powerfully, the area cost adjustment remains an issue that engenders debate. The area cost adjustment is the element of the local government funding formula that reflects the cost of recruiting and retaining staff in many areas of England and Wales. There has always been controversy about how it is calculated and the geography to which it is applied, and there have been numerous attempts to find a better solution.

I shall return to those difficult issues shortly. First, I shall put the debate in a wider context by referring to our decisions on the local government financial settlement. It is worth reminding hon. Members of the good increases in grant that we have been able to provide to local authorities generally. This year's settlement provides an overall increase in general grant of 5.9 per cent. and has allowed us, for the first time ever, to ensure that all local authorities receive a grant increase that is at least above the rate of inflation. The settlement has enabled us to continue the considerable investment that we have been making in local government since we took office. That investment has meant a real-terms increase in grant of 25 per cent. since 1997. That compares, as I think my hon. Friend acknowledged, with the 7 per cent. real-terms cut in grant that councils saw in the last four years of the previous Government.

None the less, some local authorities have expressed concern, as my hon. Friend has, about the pressures that they face this year. I understand those pressures and am aware that many councils still face difficulties. However, the increase in total Government grant, including special and specific grants, has been £3.8 billion—a cash increase of 8 per cent. this year.

Authorities in Worcestershire have benefited from those extra resources. Worcestershire county council received a grant increase of £15.5 million, or 6 per cent., which is above the average for county councils. Two district councils in the area received grant increases at the 12.5 per cent. ceiling that was set for that type of authority, and one benefited from our guarantee of a grant increase at least above the rate of inflation. I think that my hon. Friend would agree that that is not an ungenerous result for his area.

Since taking office in 1997, we have wanted to ensure that councils have the funds to deliver better services in line with their priorities. We were concerned that the former standard spending assessment system was overcomplicated and unintelligible to local government and the general public, particularly in the case of education, about which my hon. Friend spoke so eloquently. We concluded that that could not be good for central-local relations or local democracy and accountability, so we began the difficult process of formula review. That review dates from September 2000 and the Green Paper entitled "Modernising Local Government Finance", which asked for views on the basic form of the system. Following an extensive period of development and consultation, we have a new formula that is a significant improvement on the SSA system.

One consistent message, to which my hon. Friend alluded, was that local government wanted more stability and more predictability in funding levels so that it could concentrate on medium and long-term planning for improved service delivery.

Yes, but in case the hon. Lady's question is specifically on the area cost adjustment, let me say that I am about to discuss that.

I congratulate the Member for Worcester (Mr. Foster) on the excellent case that he put to the Minister. I am sure that the Minister will consider it in the fullness of time. He rightly points out that his Government were elected with a view to changing local government funding and making it fairer. However, the simple fact is that it is not fairer for children in Worcestershire, and the situation is getting worse. The area cost adjustment, which I am pleased to learn the Minister is about to deal with, could make all the difference to children in Worcestershire getting a fair crack of the whip.

I thank the hon. Lady for that comment. In a couple of years' time, it will be interesting to debate the fairness of increasing investment in local services as opposed to cutting them, as the Conservative party wants to, by 20 per cent.

Let me turn to the area cost adjustment. Over the years, numerous research projects have considered whether a solution can be found to the thorny question of compensating authorities in high-wage areas. We have conducted research openly, and local government has had every opportunity to scrutinise and debate those projects. The most recent example of that is the formula review subgroup, which was set up in spring 2001 to take forward work on reforming the local government grant distribution formulae. Its membership was drawn widely from central and local government. The aim was to allow all interested parties to contribute to the debate. The subgroup met on many occasions and 26 papers on the area cost adjustment alone were tabled by both central and local government. That is all available on the Local Government Association website. In the summer of 2002, we entered into a consultation on options for the new funding formula. In all, five area cost adjustment options were consulted on. Comments on those options were received from a wide range of stakeholders, including Worcestershire county council.

During the formula review, two main ideas for reforming the area cost adjustment were considered: the specific costs approach and the approach based on work by Professor Robert Elliott. The specific costs approach argues that the area cost adjustment should be based only on what authorities in high-wage areas already pay their staff over and above national pay scales. I know that is not what my hon. Friend the Member for Worcester has been talking about this morning. Under that system, payments that are easily measured, such as London weighting or the travel and housing supplements that some workers receive, do not reflect all the costs of being an employer in a high-cost area.

Grade drift or quality drift, by which I mean hard-pressed councils employing less experienced staff in order to fill a post, or moving people up pay scales by inflating their responsibilities, are difficult to put a cost to, as are the increased benefits offered to attract staff, such as more generous leave entitlements. In addition, councils in high-wage areas have higher non-pay costs as a result of their difficulty in recruiting and retaining staff. Rapid staff turnover and problems filling vacancies translate into increased agency fees, higher advertising costs and more staff training. Finally, if we based the area cost adjustment on what councils paid last year to recruit and retain staff, we would create an incentive to bump up the budget this year in order to obtain more grant next year. That would clearly be unacceptable.

For all those reasons, the specific costs approach was not taken forward. The second approach explored was the Elliott approach. Indeed that approach, researched by an independent review in 1997, forms the basis of the present area cost adjustment. Under that approach, detailed information from the whole labour market, together with information about employees, is used to establish local labour cost factors. Those reflect how much more, or less, people in one area are paid in comparison to another, purely as a result of local area characteristics.

We use new earnings survey data as the basis of that calculation for many reasons, including the fact that it is the largest source of information on wage levels across the United Kingdom, and the fact that it contains much detailed information on all workers who take part, such as their industry and occupation, their age, sex, and whether they are a full-time or part-time worker and in what area they work.

Although the labour force survey to which my hon. Friend referred contains much the same information, we do not use it in our area cost adjustment calculations. That is because the labour force survey is much smaller than the new earnings survey. We look at wages where people work because we want to gauge wage pressures in the labour market in which the local authority competes. We take account of wage pressures that councils face measured through local wages because councils are competing in that local labour market. Commuters' wage pressures are already accounted for in the local going rate. The Elliott approach is an enormous improvement on the old area cost adjustment, which, as my hon. Friend knows, used crude average wages calculated for a handful of occupations in crude concentric circles around London, to take account of increased wage costs.

One of the most frequently raised questions in the ACA debate concerns geography—by that I mean which authorities receive an adjustment and where the boundary lines are drawn. As my hon. Friend has said, some authorities, such as Worcestershire, have complained about being grouped into their pre-reorganisation counties for the calculation of the ACA. Worcestershire has also complained that it is just outside the boundary for the west midlands ACA area and faces the same wage pressures as its better-off neighbours, a point made by my hon. Friend this morning.

First, it is fair to say that the new geography for the area cost adjustment is a vast improvement on the old. Until this year, no council outside the south-east of England received an area cost adjustment, no matter how high its wage increases. Authorities within the south-east received an adjustment calculated using a very crude geographic approach using concentric rings radiating out of London, which did not reflect the geography of underlying wage pressures. When calculating the area cost adjustment now, we look at wage pressures throughout England and Wales. We have split the counties bordering London into fringe and non-fringe areas, reflecting the higher wage pressures that are associated with proximity to London. In that way, we have extended the coverage of the area cost adjustment beyond the artificial confines of the south-east to areas such as Cambridgeshire, the west midlands and Warwickshire, whose wage pressures previously went unrecognised.

I understand that, as my hon. Friend said, Worcestershire would like us to calculate an area cost adjustment value for it alone, instead of combining Worcestershire with Herefordshire. However, the difficulty is that in reforming area cost adjustments we have had to strike a balance between calculating the ACA on an ever-finer geography and producing factors for the formula that are reliable and stable over time.

The new earnings survey is the biggest wage survey in the country, but with a very fine geography its sample sizes can be quite low and the area cost adjustment factors in those areas can jump around unacceptably from year to year as a result of people moving into or out of the survey in that area. However, it is worth noting that if we had treated Worcestershire as an area cost adjustment area in its own right in the most recent 2003–04 local government finance settlement, it would not have received a higher area cost adjustment. Wages in Worcestershire are simply not high enough to lift it out of the lower limit floor mechanism within the ACA. It makes no difference whether Worcestershire is grouped with Herefordshire because its area cost adjustment remains unchanged. Competition from firms in higher-wage labour markets is already taken into account in the wage evidence that we use to calculate the area cost adjustment.

I understand my hon. Friend's concerns, particularly about funding education in Worcestershire. However, it is worth noting that Worcestershire received a 6 per cent. increase in its education formula spending. We have worked hard to improve the local government funding formula. I know that my hon. Friend would like to have a meeting with me and I am happy to respond positively to his request to discuss those matters further, but we are keen to maintain stability for local government funding for the next three years. I hope that he appreciates the importance of that for local government generally.

11.31 am

Sitting suspended until Two o'clock.