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Local government

A new three year settlement - analysis and interpretation

Date of speech	11 December 2007
Location	Congress Centre, London
Event summary	LGA Annual Local Government Finance Conference 2007

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Draft text of the speech - may differ from the delivered version.

It may be Yuletide but I fear that I am not necessarily bringing tidings of great joy.

There is quite a strong temptation to use this speech to do a Willie John McBride. I don't know if many of you remember the 1974 Lions tour to South Africa in which the Lions swept all before them. And Willie John's cry to his team was "get your retaliation in first".

This is familiar territory and looking round the room, nobody knows better than you how complex the local government settlement is. I thought the spending reviews were a complicated process and I was involved in the Treasury team preparing two of them for the current Comprehensive Spending Review. But I have to say my experience over the last two months is that the local government finance settlement is uniquely complex. 

What I discovered is that each one of the 388 local authorities we have in England is uniquely disadvantaged by Government funding decisions in the past, so has a special case to argue for extra Government funding. Many of you, I expect, will be coming individually over the next few weeks to make just that case to me and Ministerial colleagues. I look forward to seeing you on that basis as we discuss the provisional settlement, before Parliament finally debates and then, I hope, approves it.

There is also something of a temptation to be rather political, given that Alistair Burt and Vince Cable are following me. There is almost a recurrent choreography to the local government settlement and we find that the figures tell almost any story that they want to tell. In many ways we could all make the same or similar points that we made last year and the year before. But I do have great respect for both Alistair and for Vince - and I am going to resist that.

So what I propose to do is not make it a political knockabout this morning. I don't think it would be in the interests of local government at this point, nor would it be in the interests of the local communities and people you serve.

So let me try to concentrate on the facts. Because while much of the rhetoric around the settlement is similar to previous years, the context has changed in some significant ways.

It has changed in two ways, in particular. First, we are entering a tight financial climate, not just for local government but for central government and the whole of the public sector too. And second, local government now has many of the flexibilities and freedoms that it has, for some time, been asking central Government to give it.

Now, as you will see from the programme, the title of this session asks if the settlement is 'good news for local government'. I would not claim that. But I would argue that, taken as a whole, it is fair in the circumstances.

All parts of the public sector are facing some strong financial challenges. Not just to deliver the current standard of service, but also the improvements people expect. I have to say some are facing real terms cuts each year during the Comprehensive Spending Review period.

Until six months ago I was the Departmental Minister for the Office of National Statistics, the Office of Government Commerce, the Treasury itself and Customs and Excise - OGC and HMT are both facing real terms cuts of 5 per cent each year through the CSR period. Department of Work and Pensions, the same. There are seven central Government department areas facing real terms cuts, not real terms rises, over the next three years.

So since the CSR, what we have been doing is pressing for the final decisions of other Departments on specific grants they have to pay to local authorities. My aim was always that at the point of the traditional settlement I would be able to lay out for you - in local government - the allocations you get from all the specific grants from different sources in Government for each year of the three-year settlement period so you have the fullest possible picture of the financial pressures you face.

So on Thursday in the House of Commons I didn't just announce the formula grant, or core grant if you like, for local government, I was able also to announce the allocations for local authorities in each year for the next three years, 61 specific grants from 8 different departments.

Total increases to local government, if it's confirmed, are 4 per cent, 4.4 per cent and 4.3 per cent over the next three years.

That means local government revenue funding for the next three years of £70.4 billion, £73.5 billion and £76.7 billion.

The local government settlement, particularly in comparison to some other parts of the public sector, and especially combined with the cut in targets and the new local area agreement framework that we are putting in place, I regard shows central government's increasing confidence in local authorities to deliver. A confidence that in my experience and my judgement is well placed. But a confidence that will place an onus and responsibility on you over the next three years.

I recognise there are areas of particular service pressures. Pressures on councils that almost certainly are going to increase. We must find better ways of disposing of waste and we must develop better ways to care for and fund our increasingly elderly population needing more and more social care. We have worked very closely with local government over the last two years on those pressures. Those pressures are reflected in the settlement.

Therefore, for example, the PFI support for waste doubles over the next three years. The Department of Health is providing extra funding of £300m over the CSR period for adult social care. In other words an average increase of around 8 per cent per year over that period.

I also accept that other pressures may over the coming years become more prominent, like the need to tackle climate change and deal with its consequences. As Flood Recovery Minister, I have seen first hand in many areas of the country, what these might be. Added to this - and you know this better than I do - year on year, people expect their services, their area and their quality of life to continue to improve.

Some of these pressures can be met and offset through finding efficiencies. Local government already has a good track record here. We expect the sector as a whole to achieve the same three per cent annual efficiency gains as the rest of the public sector. That would give, in aggregate, councils an extra £4.9 billion over the next three years not only to improve frontline services but also to reduce council tax pressures. And we are providing an extra £150 million in this period specifically to support and help you do just that.

There are some other changes in the announcement I set before Parliament on Thursday and there are also some measures that local government wanted - and we have delivered. Measures that will help you deal with financial challenges and pressures ahead.

We can sum these up in three areas - certainty, equality and flexibility.

On certainty, first and foremost, this is the first ever three year settlement. That is not just for the core formula grant, but for those 61 other government grants that I mentioned earlier. That range from the new regeneration funds to funds for covering the cost of concessionary travel and its extension nationwide.

So for the first time councils have the stability and predictability of funding in order to plan sensibly ahead. While it may not be as much funding as you wanted, you do know now what you have to work with, in advance, over the next three years.

Now consistent with the concern for certainty and stability, I have rejected some changes that would have caused more turbulence than benefit within the geography of the Area Costs Adjustment. It seemed to me unsatisfactory that we were looking at so few areas. So what I propose to do now as part of the debated and agreed settlement is to begin a full review of the ACA system. I hope all of you will contribute to that.

The main way we secure stability of funding is through grant floor damping. There are some who argued we should end this, there are some who argued against retaining any form of grant floor damping. But I decided we would continue because it does ensure and it will ensure over this CSR period that every authority receives a formula grant increase in every year of the period.

In setting the floors, the balance of judgement I needed to strike was between ensuring that increase and also allowing some of the formula changes to come through.

Those formula changes are what will help us to secure that second feature - more equity - wanted from the system. If you think back to the major review we were able to introduce in 2006 a new and improved formula in each of the three areas of social care.

For the last two years, we have been damping the formula in two of those areas. That is the formula damping I now propose to end and I propose to implement these formulae changes. However within the overall system of grant floors this means that formula will unwind quite gradually throughout this spending review period and the next.

I also propose to make the system fairer to authorities with a relatively low council tax base. They will clearly have more difficulty in coping with spending pressures. I intend to achieve this by increasing by 2 per cent the proportion of the blocks for relative needs and relative resource within the total available.

Another important aspect of equity is the challenge to turn around some of our most disadvantaged areas. We are making significant progress but there are still deep pockets of deprivation and entrenched worklessness. The new £1.5 billion Working Neighbourhoods Fund will now replace the Neighbourhood Renewal Fund (NRF) and, for the first time, will build in Work and Pension's Deprived Areas Fund so we have a single fund at local level.

This funding will focus on tackling worklessness in the most deprived areas - the aim I set out in the Sub-National Review. A total of 66 local authorities will receive the new funding for the next three years. The 21 authorities that were eligible for the NRF but are not eligible for the Working Neighbourhoods Fund will receive two years' transitional funding.

Finally, on flexibility. I would argue there is good news. We have certainly done what local government has been pressing us to do for some time. We have pooled the new regeneration fund and 37 of those 61 specific grants into the new area based grant - worth £4.7 billion by 2011. This is unringfenced, compared to three-quarters of the specific grants going into that fund which are currently ringfenced. Instead of separate payments for each of these grants, each council will now get a single payment, monthly, for area based grant.

Now you also wanted us to cut bureaucracy. The new performance framework will be much more proportionate and include a single set of 198 national performance indicators, as promised, rather than the current total of around 1200 in some places.

In the future local government may also be able to secure funding from sources such as business rate supplements, the proposed community infrastructure levy and transport charging. Particularly to help secure investment for economic development and for new homes, new growth and new services.

In the White Paper on business rate supplements published alongside CSR we set out the proposed parameters for this intended new power. For somewhere like the West Midlands, with its seven authorities, this could mean a potential revenue of £27.5 million a year. For the five authorities of West Yorkshire, over £20 million, and for Bristol nearly £5 million.

The community infrastructure levy, a proposal we will legislate for in the Planning Bill, a proposal that was urged on us as an alternative to planning gain supplement by local government and by the development industry, designed in order to raise finance for the infrastructure needed to support growth.

To help local authorities plan for capital expenditure we announced, for the first time, provisional capital support to local authorities alongside the provisional local government finance settlement. This support totals around £29bn over the next three years and includes revenue support for borrowing and capital grants.

While we are on that, of course local authorities can use the prudential borrowing regime which we introduced in April 2004. This amounted to nearly £6 billion by the end of the last financial year. A council with a reliable revenue stream of £1 million a year say, could borrow up to £10 million. Horsham has borrowed over £4m for a new health centre, for example, and Kent £2.5 million for a purpose built registered care home.

A facility for local government with freedom and flexibility to raise investment for priorities you judge are right for your needs in your areas.

I have mentioned efficiency gains already but there are other freedoms and flexibilities local government have to relieve some of the pressures, including powers to trade.

A recent report showed councils are generating about £1 billion a year in trading income. It shows councils are trading in a range of services these days like legal, financial, security, IT, construction, property, sports and leisure, vehicles and highway maintenance.

But only a quarter aim to make surpluses that could be used to improve services.

The report also suggested that the main barriers are cultural and also lack of skills and capacity.

It is interesting to recall that Joseph Chamberlain's Victorian era of new civic pride was built on enterprising leadership developing trading surpluses and taking advantage of long-term loans at favourable rates. Perhaps we might see the recovery of just that sort of spirit.

The point is that with more freedom and flexibility the onus has to be increasingly on local government not central government to come up with your own solutions and create some of your own financial headroom.

There is no reason why local authorities cannot secure 3 per cent around efficiency. The best are already doing better. For my own constituency in Rotherham it would mean more than £5m to improve services or relieve council tax pressures.

The new relationship between central and local government is one of partnership and discussion, not direction. We may not always agree but we will talk it through in a mature way. Devolution is about less dependency on the centre and more focus on finding the best way, using their own and partners' resources, to meet local priorities.

Keeping council tax under control remains a high priority for the Government. We made clear, I made clear, the Chancellor made clear in the announcement of CSR that we expect the average council tax increase in England to be substantially below 5 per cent next year.

Let me be clear, we will use our capping powers as necessary to protect council tax payers from excessive increases.

So this is a tight settlement but it is fair and, I would argue, it is affordable.
It delivers the certainty and stability, flexibility, and the equity that local government has urged.

We know councils are capable of innovating, managing change and improving efficiency without a disproportionate impact on council tax payers. The challenge and the onus now is on councils to demonstrate the leadership to deliver just this.