Transparency over the basis of
funding decisions
52. The Committee also received evidence about the
lack of transparency in the current grant system: including the
way in which the level of the formula spending share is determined
for each of the service blocks, the Government's assumptions about
the effects of inflation, and the effects of changes in demand
for service.
Evidence from Wandsworth Borough Council argued that:
"[
] the Government should provide full
transparency about its planning assumptions for inflation and
growth in local authority expenditure and provide matching support
by government grant".
They also called for the creation of an independent
commission to promote improvements in simplicity, certainty, timeliness,
transparency, accountability and intelligibility for all kinds
of government grant.[50]
53. The evidence from the Audit Commission similarly
called for more information about this process:
"Clarity and openness about the basis of national
funding systems, and acceptance that these are not subject to
short-term manipulation, are key to acceptance of outcomes from
funding decisions. In our report on council tax increases in 2003/04,
we suggested the government should be more transparent about the
basis for funding decisions. A more radical option to increase
transparency would be for an independent grants commission to
allocate resources - after government had determined the total
amount to be allocated"
They also said that accountability would be improved
if there was clarity from national government about what it had
allowed for in grant settlements.[51]
54. The so-called 'funding crisis' in education in
2003-04 was a particular example of a situation where, due to
lack of clarity around the process, there was a heavily polarised
debate between local education authorities and the Government
about the generosity of the settlement. Peter Kenway, a Director
of the New Policy Institute told the Committee:
"[
] The point I would stress is that I
think the thing one is looking for is clarity, which is not easy
to achieve, but when I think back to last year and the business
around the shortage of funding to schools, who was to blame? Was
it the school, was it the local authority or was it central government?
We were asked this question. We are experts and I do not know
the answer. The real issue is where you go if you are unhappy
with an outcome."
The Minister for School Standards was asked about
this and replied:
"I think I am right in saying that there was
universal agreement that the increase in funding of about £2.7
billion exceeded the increase in costs by about £250 million.
I do not think there is a dispute between central and local government
about that. What was the case was that there were significant
changes in the cost structure, notably in relation to pensions
for example which ate up £500 to £600 million of that
increase. I think that the diagnosis of what happened, the narrowness
of the gap between costs and investment, is not actually very
strongly disputed."[52]
55. However, taking £250 million as the 'real'
increase in funding (after education specific costs) gives an
increase of less than 1% across the country. This is much less
than the 5% 'real' increase (compared to general inflation) in
per pupil funding across the country set out in the Department's
2003 Annual Report.[53]
56. Lindsay Bell, the Director of Local Government
Finance at the ODPM, confirmed that inflationary pressures are
taken account of:
"[
] the totals are negotiated as part
of the spending reviews individual departments look at the costs
that they think will fall as a result of policies to local government,
and inflation and pay and things are one element of what we look
at for that."[54]
The Minister for Local and Regional Government explained
how this system operates:
"We do operate the new burdens principle. I
police it as best I can. I am well supported by the Treasury who
support it. Our objective is to ensure that if additional burdens
are placed on local government then an appropriate financial allowance
is made in the spending review and that has been very much part
of the work going on in the current spending review. This is something
which involves the Local Government Association. We do involve
them in it and I believe that is an entirely appropriate and constructive
way of going about it. I would not like to say whether we could
be more transparent than that."[55]
He went on to say:
"I could not possibly say it is adequately publicly
available, because a lot of it is very arcane and involves lengthy
and detailed discussions between technical experts and central
and local government about the impact of particular new burdens.
A lot of that would be very, very complex indeed to try to get
into the public domain."[56]
57. Information about the cost pressures faced by
local authorities in providing their local service would add an
element of transparency to system of local government finance.
This information is used at present within government to make
vitally important decisions about local funding. It is not acceptable
that the Minister for Local and Regional Government gives himself
the role of 'policeman' over his own decisions. At present the
complexity of the system and lack of this type of information
means that it is perfectly possible for local authorities and
central Government to make statements about the generosity of
annual settlements that are diametrically opposed, without the
public being about to judge which is more accurate. We are not
suggesting that this lack of information always hides reductions
in the real level of funding; only that simply comparing funding
changes to general inflation is inadequate. In 200203 employment
costs made up 60% of local authority service expenditure.[57]
Average earnings are currently running around two percentage points
above the Retail Price Index and public sector earnings are increasing
faster than in the private sector.[58]
These factors together mean that it is reasonable to assume that
the costs of providing local services are increasing faster than
the Retail Price Index, and make comparisons to general inflation
unreliable or misleading.
58. Information of the sort we seek is only likely
to be the starting point for debate about cost pressures between
local and central Government; but it would be a better informed
and more productive debate than at present. It would give council
tax payers a better idea of why their bills have changed and who
is responsible. We recommend that the ODPM publishes details
of the estimated cost pressures for each local authority service.
We accept that much of the detail is likely to be technical, but
summary information could spell out at a national level what funding
had increased by, what servicespecific inflation was predicted
to be, what assumptions about efficiency improvements have been
made and hence what remains for actual service improvements.
Three year budgets
59. On 3 May 2004 the Prime Minister made a speech
to the National Association of Head Teachers announcing the Government's
plan to introduce three year academic year budgets for schools:
"[
] One of the greatest difficulties for
schools, as the last two years has shown, is to plan ahead not
knowing year on year what the school budget will be. Subject of
course to the proper financial systems and accountability, and
as a result of this year's spending review settlement for education,
I can tell you today that it is our intention, in the education
department's future programme in July, to set out a move to three
yearly, not yearly, budgets for schools, with assured funding
to underpin them. And we would like these budgets to be aligned
to the school year, not the financial year, reflecting the way
you do business as school managers."[59]
On 8 July 2004 the Secretary of State for Education
and Skills announced to the House his plans to introduce "guaranteed
three-year budgets for every school from 2006" as part of
the Government's five-year strategy.[60]
The Minister for School Standards told the Committee that the
benefits of this would be "huge":
"When head teachers say it is very difficult
for them to plan with confidence on the basis of year on year
changes to budgets, they are absolutely right. So the benefits
are obvious, the benefits to local government as well as to central
government are obvious. We are now working with colleagues in
government and around the school system, including local government,
to put it into practice and we are determined to do so. The current
spending review runs up to 2005-06 and we are working hard on
an implementation timetable which meets the need, but is also
practical and prudential."[61]
60. The Minister for Local and Regional Government
said:
"This was a general wish and it is not limited
either to schools or to local government, to try to move towards
greater financial certainty. The institution of the spending review
programme with three-year indications of funding is part of that
process."[62]
He also listed some of the potential problems:
"[
] there are problems, particularly in
areas where there are fluctuations in either pupil numbers or
in other demographic trends which impact on the cost of delivering
local authority service. If you lock people in to particular levels
of funding for a three-year period, without the scope to vary
to take account of significant rises in cost pressures, driven
by demographics which are entirely outside the authority's or
the school's control, you could be creating a different problem.
There are issues there which need to be addressed, but the concept
and the principle of a greater degree of certainty, so that people
can plan ahead, whether it is at the school level or the local
authority level, must be right."[63]
61. There was also support from the Local Government
Association for this proposal. Sir Jeremy Beecham said he welcomed
the proposal so long as it was extended to the rest of local government.
He added "There will need to be an element of flexibility;
a minimum guarantee, as it were, should be available to councils
and within that context it would be feasible to plan for schools
and other services."[64]
62. There would be obvious advantage in a three
year rolling programme of grants for local authorities. It would
enable authorities to publish at least indicative budgets for
the same period, and associated local tax rates. The Spending
Review system in central Government already provides this element
of certainty and predictability. A similar scheme already operates
in Scotland. We would in principle like to see the practice of
three year assured funding proposed for school budgets extended
to all local service funding. If this is not done it is important
that the ODPM and Dfes explain the relationship between education
and other local authority spending and whether all education funding
is effectively going to be ringfenced. We recommend that ODPM
inquire into the lessons to be learned from Scotland, and investigate
appropriate safeguards for its introduction in England.
7 www.local.odpm.gov.uk Back
8
Ev 43 HC 402-II [Somerset County Council] Back
9
Ev 35 HC 402-II [Chartered Institute Public Finance and Accountancy] Back
10
Ev 40 HC 402-II [Special Interest Group Of Municipal Authorities] Back
11
Ev 1 HC 402-II [Office of the Deputy Prime Minister] Back
12
Budget returns data 2004-05, ODPM. These figures are not consistent
with the usual national balance of funding ration of 75:25 because
they exclude specific grants. Back
13
Ev 119 HC 402-III [Policy Exchange] Back
14
Q 71[Professor Travers, London School of Economics] Back
15
Audit Commission 2004 'Council tax increases 2003/04 Why were
they so high?' Back
16
Q 150 [Mr Shostak, Public Services Directorate, HM Treasury] Back
17
Q 517 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City Council
and Finance Officer, Association of North East Councils] Back
18
Q 543 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City Council
and Finance Officer, Association of North East Councils] Back
19
Q 199 [Cllr Bakewell, Leader, Somerset County Council] Back
20
Q 226 [Mr Bilsland, Corporate Director (Treasury), Somerset County
Council] Back
21
Q 5 [Mr Corry, New Local Government Network Back
22
Ev 23 HC 402-II [Local Government Association] Back
23
Ev 63 HC 402-II [Association of London Government] Back
24
Ev 14 HC 402-II [Local Government Information Unit] Back
25
Audit Commission 2004 'Council Tax Increases 2003-4:
Why were they so high?' Back
26
Ev 56 HC 402-II [Audit Commission] Back
27
BoF (02) April 2003 'Issues for the Review' ODPM Back
28
Ev 2 HC 402-II [Office of the Deputy Prime Minister] Back
29
Q 136[Mr Allberry, Head of Taxation, Valuation and General Policy
Division, ODPM] Back
30
Qq 139, 140 [Mr Allberry, Head of Taxation, Valuation and General
Policy Division, ODPM] Back
31
Q 796 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
32
www.local.odpm.gov.uk Back
33
Ev 63 HC 402-II [Association of London Government] Back
34
BoF (14) October 2003 'Balance of Funding and Gearing -exploring
options for improving the current system' Steve Freer, Chief Executive,
CIPFA Back
35
Qq 55, 56 [Professor Bramley, Heriot Watt University] Back
36
Q 798 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
37
Q 676 [John Healey MP, Economic Secretary to HM Treasury] Back
38
Q 11 [Mr Boles, Director, Policy Exchange] Back
39
Q 195 [Cllr Bakewell, Leader, Somerset County Council] Back
40
Q 5 [Mr Corry, Director, New Local Government Network] Back
41
Qq 513, 532 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City
Council and Finance Officer, Association of North East Councils] Back
42
Ev 56 HC 402-II [Audit Commission] Back
43
Ev 52 HC 402-II [County Council Network] Back
44
Q 803 [Sir Jeremy Beecham, Leader of Labour Group, Local Government
Association] Back
45
Q 828 [Sir Jeremy Beecham, Leader of Labour Group, Local Government
Association] Back
46
Q 826 [Cllr. Clarke, Local Government Association] Back
47
Q 653 [John Healey MP, Economic Secretary to HM Treasury] Back
48
Q 659 [John Healey MP, Economic Secretary to HM Treasury] Back
49
Q 792 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
50
Ev 18, 20 [Wandsworth Borough Council] Back
51
Ev 55, 57 HC 402-II [Audit Commission] Back
52
Q 728 [Mr Miliband MP, Minister of State for School Standards] Back
53
DfES Departmental Report 2003, Table 3.5 Back
54
Q 112 [Ms Bell, Director of Local Government Finance, ODPM] Back
55
Q 789 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
56
Q 790 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
57
www.local.odpm.gov.uk Back
58
Monthly digest of statistics May 2004, National Statistics Back
59
www.number-10.gov.uk/output/pages5730.asp Back
60
HC Deb, 8 July 2004, cols 1011 ff Back
61
Q 736 [Mr Miliband MP, Minister of State for School Standards] Back
62
Q 776 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
63
Q 777 [Mr Raynsford MP, Minister of State for Local and Regional
Government] Back
64
Q 847 [Sir Jeremy Beecham, Leader of the Labour Group, Local Government
Association] Back