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Local Government Finance

Volume 531: debated on Monday 18 July 2011

In the interests of delivering greater transparency I am today making available the written representations received by the Department for Communities and Local Government from local authorities during the consultation period on the 2011-12 provisional local government finance settlement. Copies of all written representations from local authorities received can be found at:

www.local.communities.gov.uk/finance/1112/consultreps/index.htm

This opening up of this year’s local government finance settlement is provided in the context of the announcement we are making today to change the way local government is funded through the local retention of business rates from 2013.

The new system should reduce councils’ dependency on central Government and ensure they channel their energies into investing in local growth, rather than, as now and as illustrated in these written representations, focusing on lobbying for more resources at the expense of other local authorities.

This statement updates the number of responses given in the written ministerial statement of 31 January 2011, Official Report, columns 26-28WS, about the consultation on the provisional local government finance settlement for 2011-12. Responses were received from 230 local authorities.

Background

The last Government left the biggest budget deficit in our peacetime history—with the state forecast to borrow £146 billion a year in 2010-11, or £400 million being borrowed every single day. The coalition Government’s savings will help eliminate the structural current deficit by 2014-15. This will help keep interest rates down, restore economic stability and reduce the amount of taxpayers’ money that would otherwise be spent on debt interest. As with a credit card bill, the longer one leaves to pay the debt off, the worse it gets. If a Government live beyond their means, it will mean higher taxes or deeper spending reductions in the future.

Councils account for around a quarter of all public expenditure, so they must play their part in the coalition Government’s determination to tackle the deficit. Even so, Ministers made several changes to the way central Government grant is shared out between authorities to achieve a fair and sustainable settlement.

The coalition Government took into account that some councils are very dependent on central Government grant. The weight given to levels of need in the formula was increased, so that more money follows socio-economic indicators. Four different bands were set for damping purposes for authorities in different circumstances, reflecting their relative reliance on central Government grant. These banded floors ensure that the most dependent authorities get the smallest reductions.

Ministers also smoothed the impact of the reductions and limited the need for councils to front-load their spending reductions. Reductions in overall spending power were limited to no more than 8.8% for all councils in 2011-12. The transition grant funding provided to limit losses—some £96 million this year—is going to the most dependent areas.

Taken together, these actions mean that those areas which are more reliant on central Government grant are protected from the greatest reductions in grant in the local government finance settlement for 2011-12.

Furthermore, Ministers have removed many costly burdens on local government such as comprehensive area assessments, and have removed ring fencing around all revenue grants except simplified schools grants and a new public health grant to provide the maximum local flexibility to allocate funding efficiently. These freedoms are accompanied by £300 million of capitalisation in 2011-12 to help early restructuring. The main application deadline was 12 May. It is intended to issue capitalisation directions in July, nearly six months earlier than in previous years, to provide early clarity to authorities.

Changes in the final settlement

The local government finance settlement for 2011-12 was approved by the House of Commons on 9 February 2011. Following consultation Ministers made a number of changes. Key amendments arising out of the consultation were:

£10 million was added to district formula grant to compensate for concessionary fares changes;

Transition grant increased so that no council faced a reduction in their spending power of more than 8.8% (from 8.9% before consultation), based on spending power figures as set out at the provisional settlement;

Spending power calculations were revised to exclude parish precepts, and to reflect local allocations of Local Economic Growth Initiative, Housing Market Renewal and Eco-Towns grants where one local authority acts as an accountable body for several local authorities;

A £1.9 million reduction was made to the quantum of the adjustment for the South Downs National Park;

The base position for Bury and other Greater Manchester authorities changed to reflect that Bury are no longer lead authority for staff transferred from the Learning and Skills Council, and;

The spending review announced that £200 million of capitalisation would be available in 2011-12. Following representations from authorities, the Government decided to increase the amount to £300 million, which was announced on 3 March.

Common themes raised by local authorities

Councils believe the current system is far too complex and lacks transparency, making it very hard for local communities to understand.

Councils frequently called for changes to be made to advantage their council at the expense of others. For example, Barnsley metropolitan borough council argued against the large proportion of floor damping that goes to local authorities in London and the south-east. By contrast, Basingstoke and Deane borough council argued against authorities above the floor having to fund floor damping, calling for a reduction of the scaling factor used for district councils and opposed the increase in weighting for relative needs.

The Association of North East Councils argued that the north-east received a worse deal than the south-east, and that deprivation had risen more in the north-east than London since 2007.

Brighton and Hove city council disagreed with the area cost adjustment for Cumbria, Wolverhampton, Wigan, Liverpool and Oldham, but not to its area. London councils contended that London has faced particularly tough settlements over the last five years, and that the area cost adjustment system penalised councils in high-wage labour markets like London. Southampton city council objected to being scaled back in the damping mechanism in order to fund inner-London boroughs. Ashford borough council asserted that district councils and south-east councils were being treated less favourably than other parts of the country.

Councils frequently maintained that they were so deprived that additional funding and weighting should be given to them, or that the measures of deprivation did not properly reflect their real level of deprivation.

The representations, taken together, illustrate the need for reform of the local government finance system. At present, the massively complex and opaque system encourages local authorities to argue for more money at the expense of other local authorities, and to champion their particular circumstances and downplay their locality rather than seize the opportunities for growth and success.