Area cost adjustment is regarded as a somewhat esoteric subject. However, it is not esoteric in its effects--they are very real and are felt by my constituents in the amount of grant distributed to Cambridgeshire and, indeed, to South Cambridgeshire district council. The area cost adjustment substantially reduces the amount of grant that would be available under a different system of distribution to support local government services. I hope to demonstrate during my introduction that area cost adjustment is important both in its financial effects for local government and its impact on local government services and also because of what it tells us about the way in which the Government have dealt with their election promises during this Parliament.
Immediately before the previous general election, on 30 April 1997, the Cambridge Evening News published an interview with the then Leader of the Opposition--the present Prime Minister. The right hon. Gentleman was rightly asked about area cost adjustment because of its impact on Cambridgeshire. He said:
Unfortunately, in the space of two months, the Government had already found that it was not as convenient to deal with promises two months after the general election as it was to make them two or three days before. At that time, the Minister for Housing and Planning, then Under-Secretary of State, Department of the Environment, Transport and the Regions, said that a review would take place, but that the matter would be very difficult and he could make no promises about the outcome.
The story has continued in much the same way--with expressions of concern, references to technicalities and so on. Those technicalities will have to delay us for a few moments, because it would be unfair to Ministers if they
In November 1997, the Government showed that there had been problems with the Elliot review. That review advocated a general labour market approach to setting the area cost element in the distribution of grant--thus the grant would be varied by reference to the general labour market in which local authorities were expected to hire staff. There were several problems--for example, with the data to be used for such calculations in the standard spending assessment. There was potential for overcompensation: many local authorities were employing staff on national pay rates, so to compensate such authorities through the grant distribution as though they were simply buying their labour in the marketplace might overcompensate them if the difference between authorities was not so great because of the impact of national pay rates. However, it was always clear that local authorities were employing staff, using national pay scales and their discretion within pay scales in a way that tried to adapt to the labour market and the pay costs in their area.
Geography also posed problems. Cambridgeshire offers a good example. To operate at county level, as the Elliot review proposed, would not necessarily have correctly compensated for the cost of providing a service in all parts of the county. For example, in south Cambridgeshire, there is, in effect, a London labour market as regards not only costs, but some pay and recruitment pressures, whereas in Peterborough, or other parts of the county, the pressures on costs and pay are different. That illustrates the desirability of operating below county level.
That is why I have no substantial problem with the Government's attempts to pursue what was known as the specific cost approach--looking below county level and considering the way in which authorities adapted in practice the use of national pay scales to their labour costs. However, although--in the Government's view--that necessitated a delay in the implementation of a review for the period beyond 1998-99, the specific cost approach led to the publication, in summer 1998, of 21 options for reform of the area cost adjustment. It would have been perfectly possible--if difficult--to settle on one of those options in time for the 1999-2000 financial year.
At this point, I have to depart from the Government's approach because they failed to deliver on their election commitment. In December 1998, the Deputy Prime Minister said that he was not proposing to make a change; he proposed to change some aspects of the SSAs, but not the area cost adjustment. Indeed, he said that he would impose a three-year moratorium, which would take us up to the financial year 2002-03. He did so based on the fact that local government had been consulted about the 21 options--even though it might be argued that such a large number of options precluded meaningful consultation--and there was no consensus.
It is not only that the Government have delayed and, by so doing, have failed to meet the Prime Minister's election promise to review the area cost adjustment in time for the financial year after the previous general election; the date has been moved five years on--with every prospect that the Government will continue to fail to meet their commitment. That, in a sense, is the injury. However, the insult as well as the injury is that not only have the method and data used continued to change in the most recent local government financial settlement, but the consequences are hitting authorities such as Cambridgeshire.
I shall give three specific examples. First, the differential between those authorities that receive the area cost adjustment and those that do not--Cambridgeshire is just off the cliff edge in that respect--has increased because new data have been incorporated into the financial settlement. However, people do not agree about that data, because hourly rates of pay, without overtime--not total weekly earnings--are used in the area cost adjustment. That apparently recondite difference has a significant impact on authorities outside the area cost adjustment, such as Cambridgeshire.
Secondly, the change in the area cost adjustment must be financed by others. Not only is the differential greater so that Cambridgeshire is more disadvantaged relatively, but it must finance the cost to the tune of £1.6 million in this financial settlement. Other authorities are in a similar position. Thirdly, the Government have proposed to try to offset some of the consequences, so floors and ceilings have been introduced in the percentage change in SSA. Those mechanisms do not benefit Cambridgeshire, as it did not have an abnormally low or high percentage increase.
As a consequence of the compensation offered, Cambridgeshire suffered an additional loss of £300,000 in its financial settlement because that money was used to finance the floors and ceilings. So there has been a £2 million overall reduction in the grant available for Cambridgeshire. Alongside other authorities, Cambridgeshire has had to compensate for the alterations in the benefits derived from data changes for other authorities--principally those that benefit from the area cost adjustment.
Far be it from me to say that the Government should not consider reality, and I do not dispute that, in reality, changes in relative labour costs impose costs on local authorities. If the Government are to deal with reality, however, they must consider the changed labour market circumstances outside the area cost adjustment
Have the Government simply moved the goalposts? Back in 1998, the SSA, on which all this hangs, was viewed as a mechanism for assessing how much councils needed to spend to provide their services. Indeed, the plain English guide to the local government finance settlement--clearly, an heroic task for the Department of the Environment, Transport and the Regions to undertake--stated, in February 1998, that the SSA assessed how much each council would have to spend to provide its services. Therefore, the cost of providing those services formed an essential part of the SSA calculation.
Interestingly, without any announcement or song and dance at DETR, the SSA was not defined in that way by February 1999. It was defined as being the Government's way of dividing up total standard spending between local authorities. In effect, the Government have shied away from the SSA calculations representing a realistic effort to measure what it costs a local authority to provide its services in the light of its costs and needs. So the Government have compounded their inability to reach a decision on the area cost adjustment, and the unfairness continues.
There is absolutely no logic in trying to divide the cake--the grant available to local authorities--without reference either to what it costs them to deliver services or to the needs that must be met. I shall not go too far down that path, but the Government have elevated local authorities' needs, as they have defined them, above costs. It is therefore easier for the Government to justify diverting money away from shire districts into metropolitan areas for their own political purposes.
The consequences can be seen in Cambridgeshire. My constituency includes the border between Cambridgeshire and Hertfordshire and that between Cambridgeshire and Bedfordshire. Both of those authorities receive the area cost adjustment. Hertfordshire is the best funded local education authority. Cambridgeshire is among the worst funded, with the lowest SSA per head of population for education. If Cambridgeshire were to receive the area cost adjustment on the same basis as Bedfordshire, about £20 million would be added to its SSA, which would have a beneficial effect on the grant. In Cambridgeshire, that represents additional resources for schools of more than £200 per pupil.
Those of us in Cambridgeshire know perfectly well that a comparison of the labour market shows that it is nonsense to suggest that Bedfordshire has higher labour costs than south Cambridgeshire. In fact, the reverse is the case. So, year after year, Cambridgeshire has to spend more than its SSA, which suggests that it is a higher spending authority; but, in fact, its services are being chronically unfunded because of the SSA's departure from reality.
On Saturday, 27 January, the Cambridge Evening News reported the fears of parents with children at St. Alban's Roman Catholic primary school in Cambridge that the school may not be able to continue to provide the same service and may consider reducing its staff. The chairman of the governors is reported as saying:
"The decision by Government to divert £2 million from Cambridgeshire's funding to support other local authorities-- the combination of factors that I have mentioned--
"has meant schools are getting less growth this year than planned." That shows the direct impact on schools.
I am a vice-president of the Local Government Association. I value what the LGA does in many ways, but I continue to be disappointed that the creation of a single, national voice for local government has not enabled it to cross the bridge and reconcile the different views on the issue among its membership, although it has tried heroically. In a letter, dated 19 October, to DETR officials, Mr. Kinghan, the LGA's director of local government finance, wrote:
We want the system to be not only fair, but simple and predictable. It is certainly possible to do that, but it is impossible to do so while we continue to have an area cost assessment that is so obviously perverse in its effects. Despite what the Government have said about a moratorium, the way in which they tinker with the system year on year and introduce new data exacerbates the unfairnesses that derive from the present position.
When the Prime Minister was the Leader of the Opposition, he did not feel so constrained. He felt that he could make promises and try to gather votes in Cambridge, Peterborough and elsewhere on the basis of them. However, he has failed to deliver on them. The responsibility for that cannot be shuffled on to local government by claiming that councils should have mysteriously arrived at a consensus. The formula for distributing grant to local authorities from Government will essentially be a Government responsibility until we arrive at the day, fondly to be sought, when local government to a much greater extent raises and spends its own money according to its priorities. I hope that day comes.
Mr. Lansley: My hon. Friend and I perhaps recognise that that day is some way off and may be difficult to arrive at. However, until we get to that happy day, the Government must take responsibility for the manner in which they support local government and the fairness or otherwise of the system. The responsibility cannot be shirked, but it has been. We shall arrive at the election with a Government who have broken their promises. As at the beginning of this Parliament, I return to an issue that is vital to my constituents. It illustrates the prevarication and broken promises that have characterised so much of the Government's activity.
For as practically as long as I have been the Member of Parliament for Ludlow, I have campaigned against the formula that determines the amount of money that goes each year to our shire hall. As my hon. Friend said, the formula causes his county similar problems.
To put the issue into perspective with regard to Shropshire, I shall give the House the figures that I obtained in November 1999 and that have not changed substantially in the meantime. The standard spending assessment per pupil means that a primary pupil in the London borough of Southwark attracts the sum of £3,396 while a primary pupil in Shropshire attracts only £2,220. The figure for a secondary pupil in Southwark is £4,377, but for Shropshire it is only £2,837. The differences are dramatic--a 50 per cent. difference in the standard spending assessment for pupils in Shropshire and Southwark.
In a letter to me of 15 December 2000, the Minister for School Standards said that the main cause of the differences in funding per pupil between Shropshire and other authorities was the area cost adjustment. She added that
It is not an excuse for the Government to say that they inherited the problem from the previous Government. They came to power promising to put right all sorts of things that, in their estimation, the previous Government had got wrong. They stand indicted by the fact that they have failed badly to do that.
"replacing the existing system with a better system is not straightforward. We have tried reviewing the ACA in isolation--in 1998 we considered 21 different options. But local authorities were unable to agree on the best way forward.
The problem is not new. As my hon. Friend the Member for South Cambridgeshire conceded, it was identified in the previous Parliament. The Prime Minister picked up on it before to the election when he said:
I want to remind the Chamber that, as my hon. Friend said at the beginning of this debate, the incoming Labour Government undertook to review the workings of the SSA. We all knew that and hoisted it on board. However, at a meeting with the Minister in her office on 28 June last year, I and many other Members of Parliament from all parties heard her say that it was unlikely that anything would be done in this Parliament. That has been confirmed subsequently and we have been told that nothing will be done this side of 2003-04. That is in spite of innumerable letters, speeches, questions and deputations that I have led to Ministers. No one can pretend that the problem does not exist or has not been identified.
Why have the Government not acted? As my hon. Friend rightly explained, there is a total lack of political will to correct the obvious deficiencies of the system. I am not interested in hearing the Minister say that she recognises the problem and that something should be done, because we have heard that before. I hope that she will say when the Government will correct what is, by anyone's standards, a most unsatisfactory situation.
Mr. Malcolm Moss (North-East Cambridgeshire): I shall be brief. I congratulate my hon. Friend the Member for South Cambridgeshire (Mr. Lansley) on raising the issue of area cost adjustment. As my hon. Friend the Member for Ludlow (Mr. Gill) said, this is not the first time that it has been raised. I have been a Member of Parliament for nearly 14 years and the thorny issue of area cost adjustment has been debated every year.
People in Cambridgeshire are severely disadvantaged by the disproportionate way in which local government finance is apportioned. For the past decade, it has been one of the fastest--if not the fastest--growing counties in the United Kingdom. The pressures on the local authority budget have been immense. Despite representations to do something about the area cost adjustment, the situation has become more perverse because the differential between the funding to Cambridgeshire and those counties over its border--Bedfordshire, Hertfordshire and Essex--has worsened.
At one end of the spectrum, there is pressure on our schools. Only last week, my local newspaper reported that six schools were bursting at the seams and that there was no money to accommodate the rising number of children who were entering primary classes at those schools. At the other end of the spectrum, there are phenomenal pressures on our social services, which has a significant knock-on effect on the health service because it causes bed blocking. We do not have the resources to give proper community care to our people or to ensure that the elderly can move from hospital into residential or nursing home care.
It is also unacceptable that, despite representations, the Minister has ignored our pleas. In fact, she turned down a meeting with Members of Parliament for Cambridgeshire constituencies and county council officials. It is unacceptable that we cannot put our case on behalf of our constituents to the Minister responsible. The Government's arrogant refusal to face up to the problems and issues that people want to put to them is another sign of the way in which they treat local authorities and Members of Parliament.
We have said that the system is totally unfair. Despite the Prime Minister's assurances and promises when he came to Cambridgeshire, we have made no progress. The Government might be hiding behind the excuse that consensus is necessary, but we know that it will never occur because it requires political will on behalf of the Government to impose a settlement that is deemed fair. That might mean robbing Peter to pay Paul, but it cannot be right that, within 10 miles or less, children at some schools in Hertfordshire receive hundreds of pounds more per pupil than we do over the border in Cambridgeshire.
Another perverse outcome of the area cost adjustment is the inexorable rise in council tax--one of the Government's stealth taxes. That means that we have to put our hands in our pockets to fund the services that are essential for our people in Cambridgeshire.
It behoves the Government to address the problem of the area cost adjustment. I look forward to what the Minister will say, but I suspect that nothing will happen before the election and that the promises that were made before the last election will prove empty and worthless.
The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Beverley Hughes): I congratulate the hon. Member for South Cambridgeshire (Mr. Lansley) on securing the debate. I thank him for his courtesy in indicating that he would use the debate to attack the Government--I would have expected nothing less from him.
We have had an interesting debate about the area cost adjustment and local government settlements more generally. The hon. Gentleman argued that his constituency should receive the area cost adjustment as long as it exists. He said that it is unfair that his constituency does not receive it at present because it puts his constituents and his council at a disadvantage compared with neighbouring authorities that do receive it.
The hon. Member for Ludlow (Mr. Gill), however, said that we should not have an area cost adjustment because it is totally unfair to councils in the north that there is a mechanism that takes account of extra cost pressures on councils in London and the south-east. We also heard from the hon. Member for North-East Cambridgeshire (Mr. Moss), whose constituency borders only places that do not receive the area cost adjustment. I am not sure what his argument is. I do not know whether he wants the area cost adjustment or whether he agrees with the hon. Member for Ludlow that we should scrap it altogether.
Mr. Gill: Let me get one thing straight--I did not say that we should scrap the area cost adjustment. I said that the present formula is grossly unfair, and the whole formula must be revised. Does not the Minister accept that it works perversely against counties such as Cambridgeshire and Shropshire because the amount paid is top-sliced against the money that would otherwise be shared equally among local authorities throughout the country?
Ms Hughes: I should have thought that the hon. Gentleman understood that any system that distributes money is a zero sum game, and compensation for higher costs in some areas comes out of the total pot. That is the way in which previous Governments have handled the matter, and it is the only way in which it can be handled.
Mr. Lansley: If it is always a zero sum game, will the Minister remind us who has paid for the increase in the area cost adjustment in this financial settlement? In the past week, the Government have provided between £150 million and £160 million in additional financing for authorities that might otherwise have lost out under the settlement, so who has paid for that? Who has lost out as a consequence?
Mr. Moss: I am interested in the Minister's argument about higher costs. In education, for example, the bulk of costs for local authorities, particularly the shire counties, are teachers' salaries, which I understand to be the same throughout the United Kingdom. Likewise, local government employees' salaries are the same throughout the country. What, then, are the massive additional costs that mean that Hertfordshire, Bedfordshire and Essex receive huge sums above those received by Cambridgeshire?
Ms Hughes: I am surprised at the hon. Gentleman's question, as I am sure the hon. Member for South Cambridgeshire is, because the subject of the debate is the area cost adjustment, a mechanism introduced by the previous Government to recognise the higher costs to local authorities of many of their employees in London and some of the south-east. I cannot in this debate go back to the basics of why that mechanism was set up; I should have thought that whatever the hon. Member for North-East Cambridgeshire thinks about the current system, he had greater knowledge of the arguments and principles that underpin the recognition that the costs, particularly of employment, to local authorities in some areas are higher than elsewhere.
Distribution is important, and it exercises many councils, which are as interested in what other authorities are getting as in what they themselves are to receive in any individual settlement. However, most important is the amount of investment given to local authorities to improve services and to meet needs in their area. In that regard, the big picture since the last general election is very different from that before the election, and I speak from personal experience in local government at that time.
I remind Conservative Members of the figures. In this year's settlement, the Government grant and business rates will increase by 7.2 per cent., compared with a 5.8 per cent. increase last year. There is an additional £3 billion in the Government grant to local authorities, an 8.3 per cent. increase for education and a 6.2 per cent. increase for social services. We have also announced additional neighbourhood renewal fund money, and yesterday my right hon. Friend the Secretary of State announced £52 million to help education authorities that are under pressure.
In the past three years, the real-terms increase in investment in local authorities is almost 14 per cent. That compares with a real-terms cut of 7 per cent. in the three years leading up to the election. There has been a massive change in the experience of local authorities and in the investment given to them. That demonstrates the importance that we, unlike the Conservative Government, attach to local authorities and the extent to which we recognise their needs and the pressures on them.
Ms Hughes: The hon. Gentleman knows well that as the investment in local authorities increased over that period, the increase in council tax has been reduced from 8.6 per cent. to 6.1 per cent. last year. We expect that, as a result of this year's very generous settlement, the increase will be further reduced. Cambridgeshire county council has done rather well out of this year's settlement, with an increase of 4.1 per cent., which is well above the rate of inflation.
I want to scotch one of the political points that the hon. Gentleman made, which is that the settlement has been tinkered with to ensure that additional money goes to metropolitan authorities at the expense of the shire counties. In the past two years, the increase in the standard spending assessment for metropolitan authorities was 3.8 per cent; it is 3.9 per cent. in 2001-02. The increases for the shire areas were 4.7 and 5.1 per cent. Within those shire areas, the counties did much better, with increases of 5.1 and 5.3 per cent.
Those figures are entirely the reverse of the hon. Gentleman's contention, and settlements for shire areas have been significantly higher than those for metropolitan areas in the past three years. That is because we have not manipulated SSA methodology, as the hon. Gentleman contended. We said that we would introduce data changes, and we have done so, but the methodology remains largely the same.
Over the years, numerous projects have tried to find a better method of recognising that there are higher costs in some areas. As Conservative Members said, the previous Government commissioned research from Professor Elliot of the University of Aberdeen. He worked out a model for calculating regional pay based on labour costs for all employees in the local economy. That research was undertaken in July 1996, so there would have been plenty of time for the previous Government to introduce the new method if they had demonstrated the political will to reform the whole system that this Government have shown. However, the Conservative Government balked when it came to implementing Professor Elliot's review. They prevaricated for so long that they were still dithering and deciding that they could not do anything when they lost the general election.
Ms Hughes: The hon. Gentleman should recognise that the Government have been dealing with a wealth of neglect and dithering that is the legacy of the Conservative Government. We are systematically working through all policy areas, not only local government finance, to put things right. I shall outline what we have already done and what we intend to do.
The Government, too, have conducted research openly, and with local government, about local government finance settlements, and especially about the area cost adjustment. As promised by my right hon. Friend the Prime Minister when he visited Cambridge in 1997, we have conducted a thorough review of the calculation of the ACA before the 1999-00 settlement.
The contention of Conservative Members that a promise is not being delivered is inaccurate. We promised a thorough review, one much more extensive than that which Professor Elliot undertook, and it was undertaken. That review produced a range of different options in the form of models and generated a great deal of debate. Unfortunately, there was no consensus on the preferred option. However, it is interesting that this morning three Conservative Members cannot arrive at a consensus in a debate that was supposed to be about attacking the Government. The three of them cannot get their act together. The chances of local authorities arriving at a consensus were probably much more remote.
The hon. Member for South Cambridgeshire referred to the specific cost approach, which featured in several of the models that were the result of research. As he knows, some of the models would not have helped South Cambridgeshire. At least he acknowledged that the outcome of the review was possible if difficult to implement. I shall pick up that comment and explain why implementation is difficult. I shall explain also why we are taking the route on which we have decided, which is to examine the entire local government finance system and the role that the Green Paper, and events subsequent to it, will play in dealing with the issue that is before us. As the hon. Member for Ludlow rightly said--it is the one point on which I agree with him--the entire system needs reviewing, not only the ACA.
The system has become outdated and it is opaque. Local authorities and members of the public cannot understand how they end up with the settlement that applies to them. The system is intricate and complex and it is impossible for the average person to understand the outcome of the settlement for his or her council.
As for the ACA, one of the issues is geography. Difficult issues arise. Where should boundaries be drawn for any mechanism that recognises higher costs in certain areas? The hon. Member for North-East Cambridgeshire said that ACA should apply to the area that he represents. However, that area is in the middle of an area that at present does not have ACA. It is some distance away from councils that some would argue face the most pressures as a result of higher costs.
As we could not proceed on the basis of the review, we published the local government finance Green Paper. Conservative Members will be pleased to know that our review of the distribution system that that document catalysed is making excellent progress. We shall not make hasty solutions. As Conservative Members have said today, these are extremely important matters for councils and local people in terms of the money that is made available to provide services and meet needs. We are taking a long and hard look at our shared objectives for the system and the best way in which to deliver them.
The issue goes much further than fighting about slicing the cake. We need to build into the mechanism the right sort of support for local democracy and for front-line services. We need to ensure, as set out in some of the
We do not expect consensus, but working and moving along with the local government community on these matters is critical if we are to arrive at a system that has enough support for it to be sustainable for a reasonable period. The last thing that we want to do is constantly to change the mechanism. Local authorities have said that they appreciate the stability that we have introduced into the system. There have been broad parameters of settlement for three years. We said that we would not tinker with the system.
There is still a great deal of work to be done and we are eager to press ahead. That is why we are proceeding with a provisional work programme for developing further the Green Paper proposals with the central-local partnership. We are working towards a White Paper that will explore the issues in some detail by the end of the year.
The hon. Member for South Cambridgeshire said that the Green Paper did not discuss specifically the area cost adjustment. In reforming the grant distribution system in a much broader way, we shall need to reflect the fact that some areas need to pay more to recruit and retain staff than other areas. The precise calculation of the pay cost top-up, as it were, will be considered as part of the overall system. Despite the considerable body of research findings that has been amassed on ACA alone, no robust solutions emerged from Professor Elliot's review or our review. That is why we decided that it would be wrong to change only the ACA element. There was an insufficient consensus among local authorities. On that basis, we felt that we were unable to proceed in the way that we are now proceeding.
We are not rushing to make hasty solutions, but I want to assure all hon. Members that we are working as fast as we can. We want to see the process concluded. The next stage will be a White Paper, which will appear towards the end of the year. Unlike the hon. Member for South Cambridgeshire, I am sure that the outcome of the next general election will enable us to bring forward that White Paper.
The local government finance system deals with huge amounts of money and supports vital public services. It is important that in any significant change to the area cost adjustment, let alone to the whole system, we get things right. It is important also that any change commands sufficient support so that the mechanism is sustainable for the foreseeable future. That is why we have returned to some first principles in our research for a better system, and why we were keen to carry out the review in partnership with local government and other stakeholders or other interested parties. We are conscious of the need to move as quickly as we can, but we should not rush and make mistakes or set in place a system that is not sustainable.
Mr. Gill: In the few moments that remain for the debate, will the Minister assure us that, in examining carefully the formula that governs settlements, she will take real cognisance of the sparsity factor that affects counties such as mine, where the population is spread over a wide geographical area?
The big picture is the amount of investment in local government, and that has increased significantly. For all their political reasons, Conservative Members have none the less raised some important issues. The Government are taking those issues seriously and we will reform the system as a whole.