Select Committee on Treasury Minutes of Evidence

Annex C

Allocation systems

  1.  There is a wide range of differing funding systems used by Government departments to allocate resources. Some of the main ones are described below.

Local government funding in England

  2.  For England, the Government starts by deciding how much spending by local government as a whole it is prepared to support through grants. This amount is known as "Total Standard Spending".

  3.  Central government helps meet the cost of about three-quarters of Total Standard Spending by distributing to local authorities grants and business rates collected centrally. Together this funding is known as "Aggregate External Finance". The difference between Total Standard Spending and Aggregate External Finance is the approximate amount local authorities would need to raise locally through Council Tax if they spent at the level of Total Standard Spending.

Specific and special grants to local authorities

  4.  The Government covers another part of Total Standard Spending through "specific and special grants" that fund particular services. For example, there is an Under Five Education grant for which local authorities can apply if they plan to increase the number of places for children under five year-olds in pre-school education in their area.

Sharing out resources between authorities—the Standard Spending Assessment

  5.  To work out each local authority's share of Total Standard Spending (apart from specific and special grants), the Government calculates a "Standard Spending Assessment". The total of all local authorities' Standard Spending Assessments, plus special and specific grants, makes up Total Standard Spending.

  6.  When working out Standard Spending Assessments, the Government takes account of the population, social structure and other characteristics of each authority. The Government, in consultation with local government, has developed separate formulae covering the following major service areas:

    —  education;

    —  personal social services;

    —  police;

    —  fire;

    —  highway maintenance;

    —  environmental, protective and cultural services; and

    —  capital financing.

  7.  The Standard Spending Assessment blocks are split into sub-blocks. For example, the education sub-block comprises funding for pre-school, primary, secondary, post-16 year-olds and adult education. As an example, the formula for secondary schools takes into account pupil numbers, free meals, sparse population, additional educational need and area cost adjustment. These formulae are based on research and analysis of statistics. They apply to all authorities providing a particular service.

  8.  In practice, local authority spending levels can vary for three reasons:

    —  a local authority may take a conscious decision to aim for a high or a low council tax or to give one service a higher priority than another, reflecting the judgement of local politicians about what local people want from their council;

    —  some authorities are more efficient than others; and

    —  there are factors beyond the control of any individual authority.

  9.  Standard Spending Assessments seek to identify this last group of factors. It does this primarily by looking for statistical correlations. It assumes that, if there is a strong correlation between the amount that different local authorities spend on a service and a given variable, this suggests that the variable has a real impact on the cost of providing the service.

  10.  A three year programme of research is currently being carried out to see if a fairer, simpler and more stable way of distributing grants can be found. During this period, the Government does not expect to make changes to the way it distributes grants except, for example, where there are changes in the functions of local authorities or in the way particular services are funded. The Government is committed to introducing new grant formulae, replacing SSA, from 1 April 2003, as described in the DTLR White Paper on local government in December 2001.

  11.  The total that the Standard Spending Assessment formulae give for each major service area is usually slightly different from the amount the Government allocates to each major service area (the "control totals"). To make the two figures match up, the Standard Spending Assessments for each major service are scaled up or down as appropriate.

Revenue Support Grants

  12.  Every year the Government provides a "Revenue Support Grant". The Grant is simply the part of Aggregate Exchequer Finance that is not provided from business rates (or non-domestic rates) or from specific and special grants.

  13.  Broadly speaking, the Government distributes this grant so that if every local authority set its budget at the level of its Standard Spending Assessment, the Council Tax would be the same for all properties in the same valuation band throughout England.

  14.  The amount of Revenue Support Grant a local authority gets is:

    —  its Standard Spending Assessment; less

    —  the amount it will get from the national pool of business rates (or non-domestic rates); less

    —  the amount it would get if it set its Council Tax at a national standard rate.

Regional Development Agencies

  15.  The budgets from the various Government departments that fund the Regional Development Agencies were merged into a Single Budget from April 2002, enabling the Regional Development Agencies to target their resources more flexibly and effectively. This Single Budget is allocated between the nine Regional Development Agencies (including the London Development Agency) primarily by formula.

  16.  The allocation formula includes a number of indicators: unemployment, deprivation, Gross Domestic Product per head; research and development expenditure per head; population of Rural Priority Areas; amount of derelict land and pre-used land with planning permission, and proportion of the working age population classed as partly skilled or unskilled, as well as a flat and population-based element. A floor of the previous year's budget is incorporated into the mechanism, to ensure that no individual Regional Development Agency receives a cut in its budget as a result of applying the formula. In 2002-03, 98.5 per cent of the Regional Development Agencies' total Single Budget of £1.55 billion will be allocated by this formula. In 2003-04, this figure by formula falls to 95 per cent of the £1.7 billion total, with the remainder as a performance element and a reserve.

National Health Service resource allocation

  17.  Since the abolition of regional health authorities in 1996, NHS allocations have not been made to regions as such. The existing formula has been used to inform the allocations to 95 health authorities. From April 2002 these have merged to form 28 health authorities. From 2003-04 the intention is that, subject to the passage of legislation through Parliament, allocations will be made direct to some 300 primary care trusts. Main revenue allocations to health authorities are determined annually by the Government taking account of health authorities' baselines, capitation targets and how far each health authority is away from target. The Government decides the pace of change each year; how quickly to move authorities to capitation targets. Over the past few years, most health authorities have moved within 5 per cent of their capitation target.

  18.  The capitation target for each health authority is calculated by weighting resident populations for age, additional health needs of the population, and unavoidable cost variations, mainly the "market forces" factor.

  19.  The age weights reflect greater use of services by the elderly and younger age groups. The needs indices reflect the underlying health needs of populations with high morbidity and deprivation. These are proxied by indicators taken from the 1991 Census and other sources, such as (self-reported) limiting long-standing illness, unemployment, elderly living alone and premature mortality. There are separate age weights and needs indices for hospital services, community health services, mental health services, prescribing and parts of general medical services. In each case, the age and needs weights are derived from statistical analyses of existing utilisation of health services.

  20.  The market forces factor identifies the premium that has to be paid to recruit staff in different parts of the country. This is derived from a statistical analysis of the New Earnings Survey.

  21.  The existing formula has been derived with the underlying objective of equal access for equal need. The Government announced in 1998 that there would be wide-ranging review of the formula, with the aim of "contributing to reducing avoidable health inequalities". This review is being taken forward by the Advisory Committee on Resource Allocation. The intention is that, following the review, the new formula will be ready for 2003-04 allocations.

Assisted Areas

  22.  The Assisted Areas are those areas of Great Britain where state aid may be granted under European Union law for regional development purposes. The legal basis for designating Assisted Areas in Great Britain is Section 1 of the Industrial Development Act 1982, which requires that in designating Assisted Areas Ministers have regard to "all the circumstances, actual and expected, including the state of employment and unemployment, population changes, migration and the objectives of regional policies". In practice, selection of Assisted Areas in Great Britain is largely governed by the European Commission's regional aid guidelines. In Great Britain, the Assisted Areas are divided between Tier 1 and Tier 2, with an additional Tier 3 area that is governed by the European Commission's Small and Medium Enterprises guidelines. Tier 1 and 2 areas were decided in 2000 and are likely to remain in place until 2006.


  23.  These are co-terminous with the Objective 1 areas under the Structural Funds, and are areas with low GDP per capita relative to the European Union average. The current Tier 1 areas are Cornwall and the Isles of Scilly, Merseyside, South Yorkshire, and West Wales and the Valleys.


  24.  These are effectively agglomerations of wards into compact contiguous areas with a population of over 100,000. They are not synonymous with Objective 2 areas, although there is a substantial overlap.

  25.  Each European Union Member State designated the regions which are disadvantaged in relation to the rest of that country, subject to a population ceiling and other constraints determined by the European Commission (in Great Britain the ceiling was 28.7 per cent of the population for Tiers 1 and 2 combined). The statistical indicators used in Great Britain to decide areas eligible to be proposed for Tier 2 were the employment rate, residential unemployment, work-force unemployment, and dependency on manufacturing. In drawing up its proposals, the Government's aim was to combine areas of need with major areas of opportunity for employment creation, investment and regeneration.

  26.  The European Commission's guidelines on regional aid set limits on the level of aid, measured as a percentage of net eligible project costs, which may be granted in the Assisted Areas.


  27.  In the re-drawing of the Assisted Areas map in 2000, the Government also introduced in England a new Tier 3 of additional Enterprise Grant Areas where assistance is available to small and medium-sized enterprises employing below 250 people. Tier 3 is a flexible measure to aid regional development. For this reason, Tier 3 areas will be periodically reviewed in conjunction with regional partners, including the Regional Development Agencies.

Regional Selective Assistance

  28.  Regional Selective Assistance is currently the main form of Assisted Areas state aid in Great Britain, and is granted to secure employment opportunities and increase regional competitiveness and prosperity, particularly in areas of deprivation. Regional Selective Assistance is a discretionary scheme that provides grants in support of investment projects that will create or safeguard jobs, generate benefits for the wider regional economy, and helps to attract and retain internationally mobile investment. In England, responsibility for RSA casework below £2 million grant has been delegated to the RDAs (and LDA) with effect from 2 April 2002. Cases of £2 million and above continue to be appraised centrally by the Industrial Development Unit of the DTI. In England, the Regional Selective Assistance budget currently stands at around £100 million a year.

  29.  On 1 January 2000, the Enterprise Grant Scheme replaced "smaller case" Regional Selective Assistance in England; Enterprise Grants are available in all 3 Tiers of the Map. The budget for Enterprise Grants is £45 million over the first three years of the scheme.

Neighbourhood Renewal Fund

  30.  The Neighbourhood Renewal Fund in England is allocated to the 88 most deprived local authority districts, primarily by reference to the Indices of Deprivation 2000 (ID2000). Any authority which appears within the top 50 most deprived districts on any of the six district level measures in the ID2000 are eligible for the funding from the Neighbourhood Renewal Fund. The six district measures of deprivation used are:

    —  local concentration;

    —  extent;

    —  employment scale;

    —  income scale;

    —  average of ward scores; and

    —  average of ward ranks.

  31.  On these criteria, 81 local authority districts would be eligible for the Neighbourhood Renewal Fund. There are also transitional arrangements for those areas that would have been eligible under the Index of Local Deprivation 1998 (note there were only four measures, rather than six for the ID2000), but are not included in the 50 most deprived authorities on the district measures in ID2000. Under these arrangements, an additional seven areas are eligible for the Neighbourhood Renewal Fund.

  32.  The Neighbourhood Renewal Fund was allocated £200 million, £300 million and £400 million for 2001-02, 2002-03 and 2003-04 respectively. The sum allocated to each local authority is based on a standard amount per head of population in those wards in the local authority that are in the most deprived 10 per cent of all wards nationally. The minimum allocation is £200,000 for the first year for any eligible local authority. This relates the level of funding to the severity of deprivation within an authority, measured by the number of their residents living in particularly deprived areas.

New Deal for Communities

  33.  To select the eligible local authority areas for the 17 pathfinders and the 22 Round 2 areas, two broad criteria have been used. First, the focus was on those districts with the highest levels of deprivation. The 1998 (for 17) / 2000 (for 22) Index of Local Deprivation was used to establish this. Secondly, a good spread of neighbourhoods across England was wanted. At least one eligible local authority area was identified in each region of England, more in areas where there are particularly high concentrations of deprivation. The Government wishes to use the New Deal for Communities to test different approaches to tackling deprivation across as wide a range of deprived areas as possible.

  34.  For the further 22, the quota has been based on "rolling out" selection to districts that were not included as Pathfinders. However, the Department of Transport, Local Government and the Regions, in consultation with Government Offices, has considered the scope for a second New Deal for Communities within larger Metropolitan Pathfinders, because these contain large populations living in deprived neighbourhoods.

EU Structural Funds

  35.  The European Union allocates Structural Funds to the UK, including European Regional Development Funds, which promote economic development. Funding provided by the European Union under these schemes require co-financing contributions from the relevant Member State.

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