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Local Government Finance
3.31 pm
The Secretary of State for the Environment (Mr. John Gummer): With permission, Madam Speaker, I should like to make a statement about the local authority finance settlement for England for 1996-97.
In forming my proposals, I have listened carefully to the views of local authorities and their associations, and I have considered fully the demands which will be placed on local authorities in the coming year.
I have also given weight to the interests of the economy as a whole, and in particular the Government's objective of reducing the public sector deficit. Local government accounts for around a quarter of general Government expenditure and has been rigorously examined, as have all other spending programmes. It is clear that many authorities continue to have scope to increase their efficiency.
I have also taken into account our policy that increases in pay and prices within the public sector must be offset, or more than offset, through efficiency savings or other economies. Within available resources, our approach to public sector pay is flexible enough to allow pay to be set to reflect the circumstances of individual groups.
That is the background to the aggregate figures that I published on 28 November. The Government's view is that the appropriate level of revenue spending for local authorities in England--the total standard spending or TSS--in 1996-97 will be £44.92 billion.
My right hon. Friend the Secretary of State for Health will be making a separate announcement on resources for community care, which are included in the figures that I have just quoted. The figures also reflect the transfer of waste regulation to the Environment Agency from 1 April 1996 and certain other minor changes in local authorities' functions next year, and include provision of
£100 million for the transitional costs of local government reorganisation.
The figures do not include resources to compensate local authorities for lost income from community care charges, arising from capital disregard changes announced by my right hon. and learned Friend the Chancellor of the Exchequer on Tuesday. A special grant report will be laid before the House in due course to authorise an additional grant in 1996-97 for that purpose.
My proposal, including provision for community care, reorganisation costs and the police, provides for a 3.3 per cent. increase in local authority spending year on year. In allocating these resources, we have reduced provision for capital financing to bring it more into line with authorities' need to spend.
The Government have to decide what local government expenditure the nation can afford, because the national taxpayer foots most of the bill. Last year, we decided on
£43.5 billion. This year, it is £44.9 billion. Of course, every year some local authorities spend more than under this system. They have their own resources: council tax, interest, fees and charges. So every year, on top of what the Government allow for, they budget to spend more. That is what we all expect. However, every year they use that difference to try to confuse the electorate. They take this year's spending, which includes all their resources, and compare it with the Government's settlement, which,
of course, excludes much of their resources. As a result, even though the Government provide for them to spend
£1.4 billion more, they claim it as a cut.
I dwelt on that, because the confusion reaches even as far as the House of Commons. It is very important that at least we start by getting the facts straight.
I am comparing--[Interruption.] I am pleased that Labour Members think that, because it will be the first time--for any settlement under the Government--that they have bothered to think about the facts at all. I have to tell the House that the Labour party circulated a note before the Budget statement, saying that, whatever the settlement was, Labour Members had to say that it was inadequate. That shows how interested the Labour party is in the facts.
I am comparing the Government's settlement for last year with that for this year. Last year, local authorities spent more than the settlement, and they will do exactly the same this year.
As for local authority services, we have decided to give the main priority to education. My proposal is that, after adjusting for changes in function, education standard spending should increase by 4.5 per cent. I must emphasise that the amount spent on schools is a decision for the local authority concerned, but no doubt parents, governors and teachers will wish to ensure that the whole of that increased funding feeds through into school budgets.
The provision that I have announced for the transitional costs of local government reorganisation in 1996-97 will need to cover both a further tranche of transitional costs in the areas where reorganisation takes place on 1 April next year, as well as costs where reorganisation is not due to take place until April 1997. Orders have not yet been placed before Parliament to implement all the changes that the Local Government Commission recommended as part of its main county reviews. In addition, we must await the commission's final recommendations on the fresh district reviews; these are due later this year. We envisage a staging of the implementation of reorganisation in England which takes account of the resources available.
Central Government grant and the distributable amount of non-domestic rates in support of TSS will be £35.62 billion, a year-on-year increase of 2.8 per cent. I announced on 28 November that the distributable amount of non-domestic rates in 1996-97 should be £12.74 billion, and I am today publishing the detailed basis for the distribution. I propose that the revenue support grant for distribution should be £18 billion. In addition, some £4.88 billion of specific and special grants would be available. The total of revenue support grant for England, on which I am consulting, may need to be altered slightly if the balance of the police funding formula as between Welsh and English police authorities changes as a result of consultation.
I turn now to the means of distributing revenue support grant. At its heart is the standard spending assessment for each authority.
Standard spending assessments are never likely to be popular, but they must be fair. More SSA for one authority means less for everyone else, because the total is fixed. We are continually discussing with the local authority associations how the SSAs might be improved. I am sure that it would be helpful to the House if the Labour party also discussed that with the local authority associations. They certainly think that they are fair, even
though the counties would like more for the counties and the metropolitan authorities would like more for the metropolitan authorities. It is very difficult, when one has an objective system, that the only people who do not think that it is objective are the official Opposition--in this House, but not outside. We share with the local authority associations all the detailed data and analyses that might form the basis of changing the SSA formulae.
The system is as open and objective as we can make it. Those who claim otherwise simply do not understand the SSA system. The formulae we use are not applied selectively to achieve a particular result for a particular authority--[Laughter.] If Opposition Members wish to press me, I will give them figures that will be very embarrassing to them. I shall be happy to show that the authorities about which they complain got more proportionately under Labour Governments than under Conservative Governments--[Hon. Members: "Westminster."]--and one of them is the very authority they mention.
For each local authority service, the same formula is used for every authority that provides that service. If the formula specifies £2,000 per pupil or per kilometre of road, that is what the authority's SSA is.
All the local authority associations understand the need for a SSA system. The differences between them are about the indicators that they believe are important and the ways in which they should be weighted. We have no choice but to assess the strengths of the conflicting arguments when deciding what changes to make.
For 1996-97, we have brought up to date the data on SSA indicators, such as population and pupil numbers, wherever that is possible. It is right that we should reflect changing circumstances.
We propose only limited changes in the method by which we calculate SSAs. Authorities will generally welcome relative stability in their SSAs. We have, therefore, made changes only where we were satisfied that there is a sufficiently strong case for doing so. Most of the changes have been the subject of representations from authorities. The arguments for and against change have been discussed at length with the local authority associations.
There are, therefore, six main changes. We have responded to suggestions that the allowance for special educational needs and support services should be based on the number of pupils attending maintained schools, rather than the total number of children living in an area.
We have responded to requests that we make distinct provision for local authorities' contributions to the cost of rent allowances, over which they have limited discretion. We have also responded to those who wish a distinct element of the SSA to be allocated to authorities that pay the levies of the national parks and the Broads.
We have responded to those who believe that a larger proportion of the SSA for the police should be related to the cost of pensions and a lesser proportion to the police establishment.
We have followed up the Audit Commission's report entitled, "In the Line of Fire", introducing a distinct element in the formula relating to pensions and a new element relating to the work of the fire service on fire prevention and fire safety. And we have brought up to date the basis on which we allow for district councils providing some county council services and vice versa.
One controversial part of the formula in which we have retained the existing methodology is the area cost adjustment. We have agreed with the local authority associations that we will set up an independent review, which will report in June 1996. The aim will be to identify a way of calculating the area cost adjustment that is conceptually sound, achieves a wide measure of acceptance among local authorities in all parts of the country and is practical to apply, year by year.
Meanwhile, the area cost adjustment for 1996-97 will reflect the narrowing of differentials in earnings between London and the south-east and the rest of the country. Compared with the adjustment made for 1995-96, SSAs in London and the south-east will be more than £150 million lower, and those in other parts of the country higher by a similar amount, through using the more recent figures on earnings.
I therefore propose that authorities should receive a special grant to damp the effects on council tax of changes in the method of calculating SSAs. I stress that that applies only to changes in the method. Changes in data have their full effect, without being moderated through damping, as is our usual practice.
That means that the change in the area cost adjustment, which I have just mentioned, comes through in full because it arises from changes in the data on earnings. That is even-handed; when the earnings data were changing in a way that was favourable for London and the south-east, London received the full benefit without damping.
The damping grant will operate at a threshold of 2 per cent., taking account both of the change in the SSA and of any damping grant being paid in the previous year as a result of earlier changes in SSAs. In the case of police authorities, the damping arrangements will also take account of the police grant. I know that that will be widely welcomed.
The council tax is now well established as an equitable means whereby local residents contribute to the cost of local services. Council taxes will vary widely, depending on the spending decisions of each local authority and its performance in collecting the tax, on the circumstances of each household, and on individual entitlement to exemptions or benefits.
However, I am required to identify notional taxes for each valuation band, for a standard level of spending-- the so-called council tax for standard spending, or CTSS. My proposals incorporate a CTSS for band C of £505. I emphasise to the House that that is merely an element in the grant distribution formula. It is neither a prediction of individual council tax bills nor a national average.
I believe that we have now fully met our commitment to help those facing the largest increases above their community charge bills when the council tax was introduced. I therefore do not propose to continue the scheme of transitional relief in 1996-97. However, I do propose a scheme to protect council tax payers in areas to be reorganised from 1 April 1996 from unacceptably large increases in council tax if those are a direct consequence of reorganisation.
Local authorities need to make a full contribution to the control of public expenditure and to set budgets that their local taxpayers, and the country as a whole, can afford. I am today announcing my intentions for capping criteria.
First, however, I shall draw attention to a technical change in the capping rules. Billing authorities have until now been required to include in their budget requirement, on which capping bites, a proportion of the income forgone in granting certain discretionary non-domestic rate reliefs. I propose to remove those reliefs from the scope of capping. I am sure that billing authorities will welcome that change. Decisions on the granting of relief are entirely for them, but I hope that the change will encourage greater consistency of policy in that area--for example, towards village shops suffering financial difficulties.
I am issuing today proposed notional amounts for authorities whose boundaries or functions will change from 1 April 1996, including the reorganised authorities in Avon, Cleveland, Humberside and North Yorkshire.
In addition, the provisional capping principles make allowance for a number of changes since last year, such as in the funding of rail services in metropolitan areas. That is necessary to allow a fair year-on-year comparison of budgets. Subject to those and other technical adjustments affecting individual authorities, my proposals for capping criteria are as follows.
As in previous years, when authorities set budgets 12.5 per cent. or more above their SSAs, the proposed criteria will not permit any increase over their 1995-96 base budget. However, I do not intend to seek reductions from the few remaining authorities that set budgets substantially above their SSAs.
In this year's settlement we have given priority to the police, to education, to personal social services, including care in the community and to the fire service. I propose to reflect these priorities in changes that I am introducing into the capping system; changes which will allow those authorities that are local education authorities, police, or fire and civil defence authorities, a greater measure of flexibility.
County councils and the Isles of Scilly, new unitary authorities, metropolitan districts, London boroughs, police and metropolitan fire and civil defence authorities will benefit from the new approach. For authorities budgeting up to 12.5 per cent. above their SSA, there will be two capping criteria. The increase in their budgets will be limited to whichever gives the greater increase.
Under the first criterion, the increase in an authority's budget will be limited to an amount calculated by adding together the increases compared with 1995-96 in the authority's SSAs for education, for personal social services, for fire and--in the case of police authorities-- the increase in their police SSA and their principal formula police grant. The second criterion will limit an authority to a flat-rate year-on-year increase compared with its 1995-96 base budget.
The second criterion will give permitted increases as follows--for county councils and the new unitary authorities in Avon, Cleveland, Humberside, York, and the Isle of Wight, and for the Isles of Scilly, I propose that the year-on-year increase should be limited to 3 per cent. For metropolitan districts, outer London boroughs and the London and metropolitan fire and civil defence authorities, I propose that the increase should be limited to 2 per cent. For inner London boroughs and the City of
London, I propose that the increase should be limited to 1.5 per cent. For police authorities, I propose that the increase should be limited to 3.5 per cent. These percentages will be used if higher than the figures arrived at by adding relevant SSA increases, as I explained earlier.
For shire districts, I propose that the criterion should be the same as last year. That is, any increase of 0.5 per cent. over last year will be considered excessive if it gives a budget requirement above an authority's SSA. These criteria are necessarily provisional, and I cannot take my decisions on capping until authorities have set their budgets. When I come to take those decisions, I shall of course take into account all relevant considerations.
The new approach that I have outlined will allow individual authorities greater flexibility to adapt their budgets to local circumstances. Authorities have repeatedly said that they would use such flexibility in a responsible way, and would not take this as a licence for a general increase in spending and taxes. The Government, and council tax payers, will watch with interest how authorities respond to the greater responsibility that this places upon them. We shall see where their true instincts lie.
Alongside this new approach to capping, the Government are also proposing an expansion of challenge funding in local authorities' capital programmes. Challenge funding is one of the greatest successes of this Government. Earlier this week, the Environment Select Committee reported that the single regeneration budget challenge fund has already demonstrated its potential to achieve excellent value for taxpayers' money. The SRB challenge fund supports the regeneration of cities, towns and smaller communities throughout England. It is also and increasingly promoting genuine community and private sector involvement, integration of different Government programmes and a new sense of partnership between local authorities, training and enterprise councils and others.
The challenge fund is therefore a proven concept, demonstrated by a substantial programme which is making a very noticeable impact. We are already building on it by applying the challenge approach to the housing investment programme and other initiatives, including the new deprived estates challenge fund.
The Government have been enormously encouraged by the imaginative and constructive way in which local authorities have so far seized the opportunities the fund presents. They have found that challenge funding stimulates a new approach to priority setting. Separate service departments come together to co-ordinate an approach which best suits the authority as a whole. The contributions levered in from the private sector enable them to increase the total spend to the benefit of local people, businesses and competitiveness.
We believe that we should build on that progress, and pilot approaches which would accelerate the drive towards challenge funding beyond the relatively small proportion of public spending to which it applies at present. I will therefore publish a discussion document shortly, which will set out options for a pilot scheme for introducing challenge funding for an element of local authority capital programmes. I want to hear from those with further experience of the benefits of challenge funding, and I hope that we will be able to move forward very quickly.
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