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Local Government: Finance

Volume 723: debated on Monday 13 December 2010


My Lords, with the permission of the House, I should like to repeat a Statement made in the other place by my right honourable friend the Secretary of State, Eric Pickles.

“The spending review set out how the Government would tackle the catastrophic levels of public debt by delivering necessary reductions in public spending to accelerate deficit reduction and put the public finances back on a sustainable footing. This has involved difficult, but essential and responsible, decisions. Every part of the public sector needs to do its bit to help reduce the highest deficit in the United Kingdom’s peacetime history and rapidly rising national debt that this Government have inherited.

Last year, the Government borrowed one pound in every four that they spent. That was entirely unsustainable and risked our economic credibility. In contrast, our plan to eliminate the current structural deficit over five years has won the backing of the IMF, kept our credit rating steady and held interest rates down. The Office for Budget Responsibility’s latest forecast confirms that we were right to take these steps. Its message is that Britain’s economic recovery is now on track.

I have sought to achieve a fair and sustainable settlement for local government by listening to what the local government community has asked for. This will be a progressive settlement and fair between different parts of the country. First, we have focused resources on the most vulnerable communities with significant social challenges. These are often the areas that are most reliant on government grant, so equal grant reductions would leave the poorest places worst off. We have insulated them by giving more weight to the levels of need within different areas and less weight to per capita distributions. We have also grouped councils into four bands, reflecting their dependence on central government. More dependent places will therefore see proportionally lower falls than more self-sufficient places.

Secondly, we have listened to concerns about the front-loading of the reductions. The Local Government Association asked me to focus on local government’s total spending power. That includes not just grants but also income from council tax and the National Health Service funding to support social care and benefit health. It said that reductions in spending power should be limited to 8 per cent. So far as possible, I have given the Local Government Association what it asked for. I have made sure that no authority will face more than an 8.9 per cent reduction in spending power in either 2011-12 or 2012-13. In fact, the average reduction in 2011-12 is 4.4 per cent. To fund this, I have transferred an extra £30 million of my department’s budget to local government for 2011-12. I am also providing a grant of £85 million in 2011-12 and £14 million in 2012-13 to fund councils that would otherwise have seen sharper falls.

The spending review also announced that the Government will protect the public from excessive council tax rises. We have set aside £650 million so every council can freeze council tax next year without hitting local services. We will provide councils that freeze council tax with the equivalent of a 2.5 per cent increase in funding instead. This will provide real help to hard-working families and people on fixed incomes, such as pensioners. The Government also want to ensure that council tax payers are protected against any authorities that reject the offer and impose excessive council tax rises. We will introduce a power for residents to veto excessive council tax increases through a referendum. In the mean time, the Government can take capping action against councils that propose excessive rises.

When the House debates the final local government finance report next year, I will set out the capping principles. I will also shortly publish details of the figures that will be used to compare authorities’ budgets between years, should capping be necessary. The previous Government had planned to cap the police authorities of Greater Manchester and Nottinghamshire after they set excessive increases in 2010-11. Subject to challenge, we will ensure that, should they decide not to freeze, neither can impose an increase of more than 2.5 per cent in 2011-12.

This settlement also supports the Government’s commitments to adult social care, providing councils with sufficient resources to protect people’s access to care and deliver improved quality and outcomes. This includes £650 million of National Health Service funding in 2011-12 to support social care services, promoting integrated working between primary care trusts and local authorities, and benefiting the health system. The settlement directs more formula grant to authorities that deliver social care.

Despite all the action we have taken, I recognise that local government still faces significant challenges. The vast majority of councils have been making sensible plans to address these. To support them I am restoring real power to councils—ending Whitehall interference and cutting red tape and the burdens of inspection and regulation. The localism Bill, published later today, will deliver a new democratic settlement to councils, overturning decades of central government control. For too long, councils have been barred from using their initiative and creativity to improve services. The limited power of well-being acted as an obstacle to cost savings, such as mutual insurance companies. Today’s Bill will fundamentally change councils’ freedom to act in the interest of their local communities through a new general power of competence. This will give councils the legal reassurance and confidence they need to innovate, drive down costs and deliver more efficient services.

I am also giving councils much greater control over their budgets. With very few exceptions, we have ended grant ring-fencing so that councils can decide for themselves how their money should be spent. We will also allow them to borrow against future business rates receipts. Councils now have the freedom and responsibility to concentrate on what residents want: protecting front-line services. To support them, we have set aside £200 million to help councils modernise and reduce back-office costs. Councils can protect front-line services by sharing services and back-office functions, improving procurement to get more for less, bringing escalating senior pay under control, and using transparency to cut waste.

Proactive councils are already taking the opportunity radically to rethink and transform their services. There are also substantial incentives available for councils to invest in longer-term projects. These include the new homes bonus and £1.4 billion for the regional growth fund over three years—a fund which goes well beyond the working neighbourhoods fund. There will now be a statutory consultation on the settlement for 2011-12 and I look forward to hearing representations from councils.

Finally, this is a transitional settlement, using an inherited system. That is why we have set out details only of the next two years to strike a balance between the need to help councils plan and the need to reform the system. This system, based on redistributing business rates, makes councils heavily reliant on handouts from central government. Some depend on us for up to 75 per cent of their spending power. It is part of the trend that has led to some areas of the country becoming almost completely dependent on the public sector. It makes planning difficult, weakens local accountability, stifles local innovation and there is no incentive for councils to invest in their local economy since they will see most of the proceeds disappear. That is why I have set up a review of business rates, with the intention that in future local government will be able to keep more of what it collects. Ultimately, those councils which invest and support the local economy will be better able to finance themselves. The local government resource review will begin in the new year. I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating the Statement with every apparent evidence of conviction. This Statement, like most ministerial Statements these days, began with evidence that the Government have succumbed to a new medical condition—deficit attention disorder. There is, of course, a deficit, but the Government have misdiagnosed the cause, which was not government spending—until December 2008, they had pledged to equal it—and they have prescribed the wrong treatment: they have prescribed too much of it too quickly and it is too toxic.

In interviews and Statements, the Secretary of State seems to pretend that cuts of unprecedented magnitude can be achieved relatively painlessly. He cites, for example, the use of reserves. If this were true, he should perhaps have a word with the Mayor of London, who is sitting on, to use the Secretary of State’s phrase, £1.5 billion of reserves—about 15 per cent of the total—or, indeed, with the leader of the council of which the noble Baroness was herself a distinguished leader some time ago, Kensington and Chelsea, which has the second highest reserves of any other authority, at £100 million. It is not true that these reserves are available. Most of them are earmarked and cannot be used except for prescribed purposes, as I pointed out in a debate last week. The amount of unallocated reserves is a mere £3 billion out of a £68 billion spend.

The Secretary of State has some other ideas—for example, that councils should jointly employ a chief executive or a finance director. These are facile and ridiculous suggestions. Of course, sharing services is important and it is taking place. Procurement needs to be shared across local government and shared services and joint procurement could, indeed, be extended across the public sector, but local government has demonstrated significant improvements over the past few years.

The Statement makes it clear that there is to be a council tax freeze, but there is no freeze for council or social housing tenants, who face an increase of 6.8 per cent next year, nor is there a freeze for those people who will lose 10 per cent of their council tax benefit— £450 million is being taken from those people, despite the fact that £1.8 billion of council tax benefit goes unclaimed. The freeze lasts for two years at a cost, I think, of £1.3 billion. That leaves councils ultimately with a reduced tax base, which will have to be made good, but what will happen then? In any case, this comes from money that could be used to protect services now.

The Statement makes no reference to the issue raised here and in another place about the capitalisation of redundancy and severance payments, which will be a significant burden on many local authorities. In a debate last week, I asked the noble Baroness how these payments could be made without affecting services if capitalisation was limited to £200 million nationally. I do not know whether she has briefing on that.

The Statement is also silent about capital, where the reduction is 45 per cent and has potentially significant implications not just for councils and their services but for the private sector and jobs within it, particularly, though not exclusively, in the construction industry.

There have been interesting comments in the run-up to this Statement from a variety of sources. A distinguished academic, Professor Tony Travers, in advance of the Statement, called it the harshest settlement since 1945, if not ever. He said that it was apocalyptic in the first year. Some movement has been made at the last minute to reduce the front-loading, which is welcome. It is, however, pretty limited. It may be not “Apocalypse Now” but “Apocalypse Not Just Yet”, foreshadowing serious difficulties for many councils.

In the very limited time that was available to my right honourable friend Caroline Flint and me to see the Statement, which we received only an hour ago, and to glance—it was impossible to do more—at the many tables appended to it, I applied my mind to the situation in the north-east of England, to which I am sure the noble Lord, Lord Shipley, will refer. A quick calculation produced a figure of £215 million of cuts in the next year, after the modest softening of the front-loading. However, in addition, there are the cuts that have already been sustained. This raises serious questions about what will happen. Perhaps the Minister can indicate whether she and the Government agree with Tony Travers’s description of this as the harshest settlement of the post-war period.

Can the Minister also say what impact the settlement will have on the voluntary sector? The noble Lord, Lord Shipley, and I returned home to a letter from the Newcastle Council for Voluntary Service, in which I declare an interest as an honorary vice-president. It had met the city council and had been apprised of the fact that the budget for supporting voluntary organisations—stemming in part from the working neighbourhoods fund—is to be reduced from some £10 million to £2.5 million. That is, in other words, a 75 per cent reduction for the Government’s proclaimed partners in the big society—partners with which the city council, under different administrations, has for many years been pleased to work. Is there an estimate of the impact on the voluntary sector of the reductions?

How do the Government and the Minister react to Birmingham’s proposals to cut £70 million from its budget for carers, notwithstanding the provision made for supporting social care through money from the National Health Service, albeit that that programme would have to be agreed with the NHS and may represent continuing expenditure?

Does the noble Baroness agree with her noble friend, the noble Baroness, Lady Eaton, who said:

“These cuts will hurt. We know this means that there could be fewer libraries, more potholes going unrepaired … and youth clubs closing”?

Surely the tide of reductions in service across the country will be extremely significant.

Finally, can the Minister confirm the statement made by the Prime Minister earlier this year which clearly indicated that the cuts being contemplated under the spending review would not be restored, even when the economy improved? Does that not reveal the real nature of the Government’s agenda?

My Lords, I thank the noble Lord for his response. I cannot say that it was much different from what I would have expected, particularly from someone from the north-east who therefore knows how to call a spade a spade.

No one is denying that this is a very tough settlement and, as we discussed briefly last Thursday, any Government were going to have to make substantial reductions in budgets across government because of the deficit situation. I do not think that either side, even the Government who caused it, has said that there was no deficit. There was always going to have to be a way of dealing with it. The noble Lord opposite says that we have chosen the wrong way of doing it. There may be 50 ways of dealing with the situation and some, if not all, will affect some, if not all, of the services which are provided to the community and which defend our country, including social services. There are some ways in which you can cut it and some ways in which you cannot; we have decided to cut our cloth in this way and we are dealing with the situation in what we believe is an appropriate manner.

I shall try to go through the noble Lord’s comments in order. He suggests that we have made particular play on the use of reserves. In the consultations that have taken place on the settlement, it is true that the Local Government Association was extremely concerned about front-loading and its impact. Indeed, it was its own suggestion that this should be based on a spending formula. That would mean that not only the government grant but also reserves, council tax and other grants would be taken into account. Where it has been estimated that councils have reserves that can be used, clearly there will be a reduction in the amount of grant. As the noble Lord said, some reserves are earmarked and some are not. However, it is anticipated that those who have reserves ought to be able to employ some of them as well.

The noble Lord made some play on the changes to services that it is suggested should come about, such as the sharing of services, the sharing of chief executives and the sharing of human resources—in other words, changes to the organisation of councils. Huge sums may not be saved initially but there is no doubt that useful savings are to be made through councils sharing such services. As the noble Lord indicated, some councils have started to do that and others are looking to see how they should do it. My council, to which the noble Lord referred, is one of the pioneers in doing so. The sums saved will not be insignificant—they will make an impact—and, I am afraid, they are the future way forward.

On the capitalisation of redundancy payments, yes, there will be a contribution of £200 million towards it. Councils will be able to ask for capitalisation and, if the amount that they require is not covered by the amount of their grant, there will be other ways, I am afraid, of finding the money.

Tony Travers said that this is the harshest settlement since 1945. I do not know whether it is, but it is a difficult settlement for local government and we understand that. We understand, too, that different parts of the country will fare slightly less well than others. The north-east comes into that category, as the figures show.

The Government very much support the voluntary sector and its work in the community. We believe that the voluntary sector has real attributes and we hope that local government will not target it with excessive reductions, as it will need to co-operate with the voluntary sector in the future. These cuts will hurt and will not be easy—no one will pretend otherwise—but I am sure that the noble Lord will tweak us about that in the future, if not today.

I warmly welcome what the Minister says about encouraging local authorities to share back-office functions and services and to join together in reducing procurement costs. That is challenging and I hope that the Government may assist local authorities as far as possible. Does the Minister recognise that, if youth services are cut and the number of youth clubs is reduced, that may severely impair Her Majesty’s Government’s determination to reduce prison numbers? The devil certainly makes work for idle young hands. As research evidence clearly shows, it is hugely costly to lock up young people and, once they have been locked up, 70 per cent will return within two years. Can she offer any comfort as regards youth services? Are the Government considering models of good practice in the area to give to local authorities?

My Lords, youth clubs are invaluable and are run by the voluntary sector. Some of the other aspects that noble Lords have raised will come out of Home Office funding, not from local government. Nobody would disagree with a word that the noble Earl says. One wants to prevent people from going into prison because, once they are in, we all know that that just leads to further problems. The aspects that he raises are not really for the local government settlement.

My Lords, I declare an interest as the other half of the “Likely Lads” from Newcastle City Council, on which I am a councillor. I thank my noble friend for repeating the Statement from the other place. There has been some listening to local government and, indeed, the settlement is, I think, a little better at first glance than what we had feared. I declare an interest also as vice-president of the Local Government Association. On the issue of front-loading, it wanted a limit on loss of spending power of 8 per cent, and the Secretary of State has agreed on 8.9 per cent.

The word “progressive” was used. I have three questions on which I should like a response. First, is this not a progressive settlement in the sense that there has not now been a reallocation of grant from poorer to richer councils? Secondly, reference was made to the grant of £650 million to keep council tax increases at zero in the next financial year, but there is a question about that sum being built into the baseline for many years to come. If council tax is raised by 2.5 per cent, it is always in the baseline for the future. However, if the Government give the equivalent of 2.5 per cent, will that stay in the baseline? That matters. Thirdly, for further clarity on the capitalisation limit and the cost of redundancy, it is probable that the capitalisation limit will not prove sufficient. If it is not, councils will be required to reduce revenue and spending in the next financial year, which will in turn produce further cuts and redundancies. My noble friend referred to other ways in which that might be done; I was wondering what those other ways were.

My Lords, the noble Lord, Lord Shipley, asked three clear questions. Is it a progressive settlement and reallocation? I think that we will take it year by year. This is a two-year settlement; whether it progresses on, I do not know. Whether it progresses in terms of how the grant is dealt with, we will have to wait and see. The £650 million is the repayment for 2.5 per cent of council tax if it is frozen. The question of whether that will be carried on next year will have to be decided. If it is, that will determine whether it is part and parcel of the baseline. As the noble Lord knows, capitalisation is treated as revenue by the Treasury, so whatever is spent goes back on to the revenue expectation. If that proves not to be sufficient, it will be a matter for each local authority to deal with.

Will the Minister confirm that areas of deprivation have lost out from more than just today’s settlement, because other grants such as the working neighbourhoods grant went directly to the most deprived and vulnerable people? What will the Government do to make sure that some of those communities do not sink further away from being able to turn themselves around? That is what that money was used for. Where is the money coming from that is being used to dampen the worst excesses of the settlement? Which other areas in the rest of the department are losing in order to make sure that the dampening effect can be exerted on the settlement?

My Lords, we should be clear that the working neighbourhoods grant was just a three-year fund. There was no expectation—and no money was put aside—for it to continue for longer than three years. The noble Baroness shakes her head, but that is the situation. The previous Government could have decided to continue it, but they did not make that decision; they left it as a three-year grant.

The noble Baroness asked where the other money will come from. We have set up a £1.4 billion regional growth fund, which will be administered by the noble Lord, Lord Heseltine. Councils and local enterprise partnerships will be able to bid for money from that fund, which will be available in particular for private sector-led growth. The expectation is that local councils will work closely with the private sector, not only in local enterprise partnerships but in general, so they will be able to lean on that sector for additional assets.

My Lords, I was delighted to hear the noble Baroness encourage local authorities not to target voluntary organisations because of the work that they do to enhance the concept of the big society. Many of them were excited by the idea that the work that they do in communities would be increased. However, as the noble Lord, Lord Beecham, mentioned, many of them are finding already that their grants are being reduced and that the money that the Government say they have set aside for a transition is totally inaccessible. What will the Government do to ensure that groups that provide things such as visiting services to the elderly and mentoring services to the young—volunteer bureaux of all sorts—will be maintained so they can play their part?

I have a second brief question. How will the Government ensure the maintenance of quality in care services when local authorities are trying to drive down pay levels and numbers of staff, in particular in areas where there are extremely vulnerable residents? I would be grateful to know this.

My Lords, I have already indicated this Government’s strong support for the voluntary sector and their belief that the sector has a major role to play in the future. Indeed, the noble Baroness will see that in the Localism Bill, which has just been published, a big emphasis is placed on the need for local authorities to work with voluntary organisations and, indeed, for voluntary organisations and community associations to have a greater say in how things are run in conjunction with, or independently from, the local government sector. Therefore, there is no disagreement between us about that or about the value of the voluntary sector. The noble Baroness is right: there is a transitional fund of £100 million to help voluntary organisations. I think that the volunteer centres will fall into that, and that will help them to withstand some of the reductions in grant.

I was asked about the care of the elderly. The work that is done will be very carefully monitored; we had some discussion about this on Thursday. It has to be made clear that the quality of the care is extremely important. It is not currently brilliant across the country, and we are very aware that efforts need to be made to ensure that it is universally good.

My Lords, does my noble friend agree that the party opposite had planned cuts of £52 billion to tackle the deficit? If they, as we have done, had ring-fenced the National Health Service and schools budgets, then it was always going to be a tough settlement, whoever was in power. Is it not also the case that this Government are reducing top-down bureaucracy through the comprehensive spending and performance reviews, freeing up councils from ring-fencing and giving them the potential to earn greater sums through business rates and the new homes bonus?

My Lords, I thank my noble friend for that question and I agree entirely with what he has said. It is correct that, with the removal of ring-fencing—I am sorry that the party opposite finds this so hilarious—councils will have access to a greater tranche, if not the entire tranche, of money regarding which they can make their own decisions. They have their own priorities in using the money. Except for the schools grant and the grant from the health service, there is no limitation on how they spend that money, and that will be of great benefit as they go forward. When the noble Lord opposite was the leader of a council, I was also the leader of a council and I am sure that he, like me, would have given his eye teeth to get his hands on the entire budget.

My Lords, does the noble Baroness agree that, as local government funds the voluntary sector—what the Government may want to call the big society—to the tune of £4.5 billion, the kinds of cuts that she has announced this afternoon cannot do anything but make the big society smaller?

I do not agree with that. I think that we all have an aspiration to see the big society. We all want to see communities working with each other; we want to see charitable and voluntary organisations working better and doing more; and we want to see neighbourhoods and communities getting together to help each other. Therefore, I do not accept what the noble Lord says. I think that this philosophy will work with a reduction in resources because it will gain in momentum.

My Lords, did the Minister notice that the Government were accused by the noble Lord, Lord Beecham, of suffering from a serious medical condition called “deficit obsession disorder”? Has she also noticed that a new disease is now prevalent on the Benches opposite? As my noble friend pointed out, the previous Government, when in government, had planned to make substantial reductions. However, now that they are in opposition, they have a serious medical condition called “ignore the deficit disorder”. I listened carefully to the noble Lord and did not hear a single suggestion as to any reduction that could be made. Everybody knows that this has to be a very tough settlement. It is not the end of local government as we know it.

A thousand years ago I was Minister for local government. I sense that over the years the constraints on local government and how it has to vie between different expenditures have grown and grown with greater Treasury control. The best hope and a big help for local government going into this difficult time is maximum flexibility so that it can use its funds in ways that make most sense within its own area. I hope that that will be possible within this settlement.

I thank my noble friend for that. He will also recall that thousands of years ago I knew him when he was Minister for local government. I am not quite sure what that says about either of us.

I accept what my noble friend says. First, the Opposition have not offered anything by way of a useful contribution to how this deficit will be dealt with. We have had considerable carping but no ideas have been offered as to what they would have done instead to deal with the deficit that they caused. Of course, the flexibility needed to deal with budgets, policy and organisation is absolutely essential. That will come directly out of the Localism Bill and how we look forward to local government working in the future.

My Lords, in thanking the noble Baroness for repeating the Statement, I deprecate the very last minute at which the data came forward. It is a bit like the late arrival of the Localism Bill; it shows a Government not quite in control of their agenda.

We reject the assertion that these are necessary reductions in public expenditure, just repeated by the noble Lord. Of course, the deficit must be dealt with and, of course, we, as an opposition, have set out credible means of dealing with it. One example is that we would not be spending £2 billion to £3 billion on unnecessary top-down reorganisation of the National Health Service. Even if we were to accept the programme of overall expenditure set out by the Government—which we do not—how do they justify local government having such a savage component to deal with? It is worse than for any other department. What is the justification for that?

The noble Baroness spoke of the focus on the most vulnerable, and I understand that the Government have come up with this revenue spending power comparison—looking at like for like in the current year and next year. I understand that it includes council tax potential and grants. Incidentally, I have a question for the noble Baroness along the way. When is a transfer from central government a grant and when is it a handout—an unfortunate term? To get back to the comparison on revenue spending power between authorities, taken with the assertion that we are focusing on the most deprived, why is it, when comparing the current year with next year, on the Government’s own figures, that Hackney loses 8.9 per cent, or £33 million, and Kensington and Chelsea loses 5.5 per cent, or £11 million? How is it that Tower Hamlets loses 8.9 per cent, or £34 million, but Barnet loses 2.6 per cent at just £7.7 million? How can Hartlepool lose 8.9 per cent, or something like £10 million, and Rutland 2.2 per cent? How does the noble Baroness justify that within the parameters of the settlement?

My Lords, first, perhaps I may remind the noble Lord, the former Minister, that I sat on that Front Bench all the way through the previous Government and I always complained about the lack of time that one was given for dealing with a Statement. Never ever did I receive a Statement more than about 40 minutes before I was due to answer it. So there will be no lessons from across there with that complaint.

The necessary reductions come about because of the deficit. I cannot keep on saying that—we must all deal with the deficit and deal with it we will. We will reduce the deficit more quickly than the party opposite ever indicated it would do.

As regards the reductions in grant for Tower Hamlets, Kensington and Chelsea or wherever, their spending power, which is how the Local Government Association wanted to present it, means that reserves and council tax are taken into account. The reductions of 8.9 per cent will depend on how much they can contribute to that, how much council tax they get, how much revenue can come from elsewhere and how much comes from government. The reductions would have been higher all round if extra money had not been made available for the transitional period. However, now no council will lose more than 8.9 per cent. It has been done on a very fair and measured formula to ensure that people do not have big swings within their council tax settlements across the country. They should not be too great.

My Lords, the next Statement not yet having started in the other place, I beg to move that we adjourn during pleasure for 10 minutes.

Sitting suspended.